Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Thank you for joining us for the third day of the 2021 Morgan Stanley Healthcare Conference. I'm Cecilia Furlong, medical device analyst and a member of the health care research team here at Morgan Stanley. It's my pleasure to have Edwards' CFO, Scott Ullem, with us today. And really quickly before we begin, I'll run through our disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. [Operator Instructions] And with that, Scott, thank you for joining us today.

It's my pleasure. Good morning. A pleasure to be here.

And I wanted to start off with the focus topic among everyone these days, COVID, what we're seeing today. A lot has changed from a COVID perspective since the time of your 2Q print in late July. And the updated guidance you provided at the time incorporated expectation for more pronounced summer seasonality, still has some OUS caution around COVID. I'm just curious, are you seeing a magnitude of seasonality expected or of rising COVID cases in certain geographies and regions altered expected seasonality trends?

Yes. Well, you're right. We did anticipate back in July that we're going to see a summer holiday season. We sure did. Of course, in the U.S. and Europe, elsewhere, there was, I think, just pent-up demand for vacation. I think there were staffs at hospitals that were trying to balance workloads and -- so we certainly saw that, but I'd say it was typical, right? We see that holiday effect, the August effect, every year, and we saw it this year as well. Delta, back in July, had just started to rear its head. And so we've all watched the headlines and see how that is unfolding. We're continuing to watch it very carefully. We've seen interruptions in specific sites due to ICUs getting filled up again. We're seeing pressure on certain hospitals where they're just -- there are COVID patients coming in again. And so we're watching that very carefully as well. I'd say there's not a blanket comment that you could take away from Delta over the last couple of weeks. I think it's more just we're watching specific sites, specific regions and various different places around the world. Obviously, in the third quarter, we've got this interruption from the holiday period that we always have. And then we come back after Labor Day, and we've got a few important weeks here in September that ultimately end up driving a lot of how the third quarter turns out. And so we're just watching that carefully here as we get into September.

I wanted to ask, too, your competitor highlighted procedure pressure really starting end of July that could have an effect through price of September. I'm just curious, would you -- as you think about the trends you're seeing, is that fairly in line with what you've seen to date?

Well, again, as I mentioned, we saw Delta starting to rear its ugly head back in July at our second quarter earnings call. And so we expected that there was going to be continued interruption, sporadic flareups and that sort of thing that would impact different hospitals, different regions, different countries. And we're seeing that. So I think that we're continuing to watch very carefully and to help our teams out in the field balance requirements of hospitals as they're trying to treat both COVID patients and non-COVID patients, like patients suffering from structural heart disease.

Can I ask, too, are you seeing any differences in terms of the impact on TAVR versus your SAVR procedures? And if you look back to kind of earlier waves during the pandemic, is there anything -- any nuances that you would call out this time relative to what you've seen previously?

I think it's probably too soon to tell this quarter whether there are any nuances or differences between TAVR and SAVR. We'll obviously talk about that in detail when we get to our third quarter call next month. But what's interesting is, even during the depths of COVID back in 2020, surgery held up really well. There are surgeons who are still finding ways to treat their patients who needed surgical interventions, and TAVR patients got treated as well. But I think there's this concept that surgical patients just would not get treated, and that was not the case. It's one of the reasons why just longer term we are pretty positive and optimistic about our surgical business and the market continuing to grow in the mid-single digits through 2026.

And for 2Q, you talked a little bit about the impact of procedures coming back. As you think about kind of what's played out in 3Q that you're willing to talk about, but how do you think about that benefit showing up in 4Q, either as you thought about guidance or how you've seen the quarterly trends play out so far?

Yes. Well, we haven't thought about guidance for Q4 yet, and it's a little premature to get there just because we're still in the middle of Q3. And as I mentioned, this month of September, the third month in Q2 -- or excuse me, the third month in Q3, September, ends up being pretty influential on the overall quarterly results. And so we sort of want to see where we are and what -- how things are trending here as everyone gets back from the summer holiday and the Labor Day break, and then we'll know a lot more about what to expect in the fourth quarter both for surgical and TAVR and the rest of our business.

Okay. So I'd love to turn to your underlying business. But turning to TAVR, low-risk adoption, pre-COVID, it was pronounced just coming off of the data at ACC 2019. And at this point, notwithstanding COVID's continued impact, how would you frame TAVR's position on the low-risk adoption curve at this point in time?

Yes. It's early. We're early in the adoption curve. It's tough to distinguish low-risk adoption from high-risk or intermediate-risk adoption. But I'd say it's early in the evolution of adoption since the low-risk data was presented. So you're right. Remember, the data came out in the first half of 2019. We got approval for SAPIEN 3 to be used with low-risk patients in the second half of 2019. But then all of a sudden, in the back end of the first quarter of 2020, COVID emerged. And so we haven't really even started to scratch the surface of getting to this broader patient population that this low-risk approval will enable. And so we're enthusiastic about really the long-term prospects for what this broad indication can mean for patients in the U.S. And of course, we just got it in Japan as well. And so I think we're still in the very early innings of being able to treat these patients who are suffering from severe symptomatic AS.

I'm curious too, and it may be too early just given COVID's overhang, but what have you seen from a risk stratification or kind of removing that from the decision-making process? And it hasn't been very long we've seen COVID, but just curious how that's trended. And then as you think about 2022 and this low-risk opportunity that you talked about, you really haven't had the chance to penetrate. So how much kind of upside as you think about coming out of COVID, breaking down risk stratification, can you see out of TAVR before you get your additional market-expanding opportunities, asymptomatic, moderate risk?

Yes. Well, it's a really good question, and we're positive about the opportunity here even before we get to moderate and asymptomatic. And we can talk about those as well, if you'd like. But one of the reasons we're positive is because remember, before the low-risk indication in late summer of 2019, TAVR was still viewed as an experimental or a high-risk procedure that was only reserved for patients who are too sick to get surgery. And so there was this stigma around TAVR as kind of a special therapy that just was not necessarily appropriate for all patients. It may not be appropriate for all patients still. However, that stigma has been removed. Now any patient with severe symptomatic aortic stenosis can get either TAVR or surgery or -- and so that opportunity and the more level playing field is really a game changer in terms of the dialogue that a patient (sic) [ physician ] has with their patient. That's even more pronounced because in the low-risk trial, it was -- TAVR showed statistical superiority over surgery. So it's actually a better therapy for patients who are eligible for TAVR. So we're pretty optimistic and positive about the long-term prospects that this broad label indication brings both in the U.S. Again, we've seen it -- we're seeing it now in Japan as well, where we've got low-risk approval and reimbursement. And so that's one of the reasons why we're excited about this $7-plus billion opportunity for the market by 2024. And then as you mentioned, there are some other market expansion indications that we can foresee after that.

As you think about percentage of SAVR patients, potential candidates for conversion to TAVR, how have you factored this both into your near-term outlook but also your long-term structural heart outlook? Talked about mid-single digits through 2026. Just kind of the puts and takes of those different factors playing out and how you came to that mid-single-digit growth number through 2026?

Right. So there are a couple of pieces of that question. Let's just take them apart one by one. First, in terms of, I'll say, conversion of patients from SAVR to TAVR, I think over time, our expectation is that patients with isolated severe AS, so the only real issue that needs to get addressed is replacing the aortic valve. Those patients are more likely going to get TAVR. There are a lot of patients who come into the system who have more complex needs. Let's say CABG patients, for example, who are patients who need to undergo surgery and as part of that can also get their aortic valve replaced. There's going to be an important role for surgeons to play and for surgery to play for those patients. But I think most of the growth for TAVR and for surgery that we foresee is new patients coming into the system. Because remember, there's only about 10% of the patients today with severe symptomatic AS who are getting -- or severe AS rather, who are getting aortic valve replacement. And so it's such a huge opportunity. The patient population is so undertreated that we think there are opportunities for both TAVR to grow and surgical to grow in that mid-single-digit range going forward.

Okay. And as you think about to the longer term, I did want to get into your pipeline opportunities, specifically early TAVR. You've talked about enrollment likely to end, end of 2021. But I'm just curious kind of what you've seen with COVID, especially recently, from an enrollment standpoint. And then as we think about this, I think it's -- and please correct me if I'm wrong, but 2-year follow-up. So as we think about the opportunity to really start expanding this market, is it kind of a 2024 time frame as you think about it today?

Yes. Well, to your first question, yes, our clinical trial enrollment was certainly interrupted by COVID. We saw it in TAVR. We saw it in TMTT as well, where we actually paused enrollment in our clinical trials for a while just in the depths of COVID mid last year. As COVID became more manageable and as hospitals were able to better balance treating COVID and non-COVID patients, we saw clinical trial enrollment improve earlier this year. But certainly, with these flareups, it impacts clinical trial enrollment, both because hospitals have challenges in balancing patient requirements and patients have reservations about going into hospitals either for commercial procedures or for clinical procedures. And so that presents a headwind. But as it relates to the early TAVR trial, we're still confident we're going to be -- we're going to get it enrolled here in the foreseeable future. Our aspiration is to try to complete enrollment by the end of this year. And sites who are participating in early TAVR share that same desire, and so there's a lot of focus around getting this enrolled. We made a shift in the enrollment plan that was uploaded to ClinicalTrials.gov last week. So it's now going to be a 900-patient trial, and we'll follow these patients out for 2 years. If you just assume that we're fully enrolled by, say, 12/31 of this year, add 2 years, so you get to the end of 2023. So in 2024, during the course of 2024, we'll be assembling that data, evaluating that data, submitting that data. FDA will do the same. And so it's difficult to predict what the time line and process looks like as we get out into 2024, but that's the timing when we'll start seeing data and deciding where to go with it.

Okay. Understood. And a few last questions just on the TAVR market as you see it today. But curious kind of how you saw the market overall evolve following the withdrawal of LOTUS from the market, one? And then second question is really just center expansion, where you are as you think about potential target centers for TAVR in the U.S. and the outlook through 2022 and beyond for further areas to continue to penetrate.

Sure. Well, so first, I'll talk about our centers and then we can talk about LOTUS. In terms of active sites for Edwards, we're around 800 right now and growing. We continued to add TAVR sites every quarter during COVID. And so our teams in the field were hard at work getting new hospitals up and running. There's still a lot of interest among non-TAVR hospitals and potentially becoming TAVR hospitals. Under the current NCD, we expected that number of sites that could self-certify as eligible TAVR sites is something like 850. It's not a precise number but in that range. And so we're nearing what we think is probably the neighborhood of number of sites will be TAVR centers under this current NCD. And we'll continue to work with sites who want to get activated. I will say while new site activation is really important for reaching patients who are further away from existing TAVR sites, most of the growth that we're going to see will come from the existing sites, the already active TAVR sites. As it relates to LOTUS, I guess they left the market sometime late last year, sometime in second half of 2020. It was still really early in Boston's launch, and so we have not seen a big impact from LOTUS' launch. And similarly, we didn't see a big impact from when they stepped back. So I'm not sure I have much commentary to add. It was quite a while ago at this point.

Okay. No. Understood. Turning to OUS markets, Japan, wanted to ask on low risk. I think you had targeted reimbursement this quarter. I believe you received that. So I just -- as you think about 4Q and then again, really the 2022 opportunity, removing risk stratification, how big can this market be for you as a growth driver going forward for your TAVR franchise?

Yes. We think it can be big. I mean Japan is 1 of our big 3 regions, of course, across Edwards. And TAVR, we see a big opportunity. If you just look at the per capita elderly population, the patient population in Japan is even more undertreated than the undertreated patient populations in the U.S. and Europe. And so Japan is a real opportunity for us long term. It's one of the reasons why we're excited about this low-risk indication and the reimbursement that followed. And like the U.S. and Europe, it's going to take a while. I mean this market is going to continue to evolve. It's going to continue to expand. And the growth curve here is going to go on for quite a while. And so we're continuing to invest in Japan. We're continuing to train up doctors at sites, and we're excited about the prospect of more patients suffering from severe AS being able to be treated.

What about China, too? I know that's an early-stage opportunity, but could you just provide an update where you are today and how you think about opening up that opportunity over the next several years?

Yes. No, it's an opportunity. It's something that we're working hard at. We're taking a deliberate and a methodical approach, really focused on patient outcomes. And that includes making sure that physician teams are well trained, making sure that patient selection is appropriate and really making sure that we're building the foundation for a long-term practice in China that can really support patients and making sure that we're delivering safe and effective procedures to patients in areas where -- in China where they really have access and where TAVR is becoming available. So we're taking a focused approach to it, but we're excited about the long-term opportunity in China.

Okay. Got it. I wanted to turn to TMTT kind of next growth driver behind TAVR. But with your updated guidance, it's -- your entire TMTT business really on pace to potentially more than double versus last year. As you think to 2022, I'm just curious, is doubling again or getting close to that level reasonable as you think about kind of the puts and takes what you have in your basket in Europe? And I'm just curious kind of as you think about whether it's on the mitral side, the tricuspid side, what are the main drivers near term before we really get U.S. and that starting to contribute to your overall business?

Yes, sure. So I mean the main driver short term, of course, are going to be just edge-to-edge repair for patients suffering from both mitral and tricuspid regurgitation. And that's really going to be the main driver of our revenues. Our real focus is in continuing to make sure that this therapy is being delivered safely and effectively. And then we're still continuing to advance our investments in our new product pipeline as well. Overall, it's premature to talk about what the sales might look like for 2022, although we'll talk about that, of course, at our investor conference in December. But there are 3 key value drivers that we're really trying to focus on for TMTT. One is just a portfolio of differentiated therapy. So we've got therapies for repairing diseased mitral and tricuspid valves, and we've got different innovations focused on replacing the mitral and the tricuspid valves. The second one is just favorable results from very rigorous pivotal clinical trials that will support approvals and adoptions of these new therapies that we're working on. And the third one is favorable real-world outcomes, which means not just having great clinical results, but also results when these therapies become available to a broader group of physicians and a broader group of sites in Europe and in the U.S., yes.

Can I ask, too, just -- as you think about PASCAL, the opportunity for edge-to-edge repair, either mitral/tricuspid, but then the replacement opportunity that -- we look back at 2015, that time frame, everyone was really focused on replacement, specifically in mitral. It's definitely been a field that's evolved in terms of how people think about the different contributions to the overall TMTT platform. But I'm just curious, as you think about it today, looking out longer term, obviously, edge-to-edge is kind of in the lead, if you will, but how does that -- as you've seen this field evolve, how in your mind -- if we look out 3 to 5 years, kind of what does the portfolio look like in terms of contributions from either repair, replacement? Just curious kind of how you're -- how you've seen that evolve and your current outlook.

Yes. It's a great question. It's one that we talk about a lot internally and speculate a lot internally and -- with our physician partners. It's going to be interesting to see how this unfolds. Clearly, edge-to-edge repair is the leading therapy for patients suffering from mitral and tricuspid regurgitation. But it's also clear that it's unclear what the longer-term technologies are that can really benefit these patients. And we think that because these diseases are heterogeneous and you've got degenerative mitral regurgitation, you've got functional mitral regurgitation, for example, this is going to take a toolbox of therapies to treat patients. Fast forward a couple of years down the road, and we've got broader indications for edge-to-edge repair as well as the prospect of approvals for things like EVOQUE, our tricuspid replacement valve. We're going to see -- it will be interesting to see the development of these therapies and where they are most appropriate in terms of treating different patients. But it's just -- it's too early to call repair versus replacement and within those, which are the therapies that are really going to be most appropriate for patients. It's one of the reasons why -- it's really the reason why we're making pretty aggressive investments across the board in our TMTT business because if you look at the patient population, it's estimated that these patients suffering from regurgitation have much bigger patient populations than even aortic stenosis, and we all know how big the aortic stenosis market has become. So it's a big opportunity. There are a lot of patients in need, and we're going to bring multiple different therapies to try to address those needs.

As you think about the biggest barriers, I guess, to faster growth, faster adoption of PASCAL in Europe, just curious what you would highlight specifically? And then as you think about precision, how can that really help address maybe some of the limitations you've had in terms of being able to scale this faster?

Yes. I mean I don't know that there are a lot of limitations to growth other than making sure that we're doing what we always do when we introduce new technologies, which is focus on training, focus on support of physicians who are delivering safe and effective procedures and making sure the patient outcomes are just absolutely excellent across the board. Right now, we're in over 10 countries in Europe with PASCAL. And so we are growing rapidly. We're pleased with the performance and have high expectations about continued growth opportunities in Europe and then, of course, in the U.S., when we expect to get approval for CLASP -- for PASCAL in patients with degenerative mitral regurgitation by the end of next year. So we're pretty excited about where things are going right now. And like I say, I don't know that there are impediments to growth as much as it is just executing our plan, continuing to advance our innovation pipeline and continuing to see this business grow. We expect it's going to be a $3 billion total addressable market by 2025 and then continuing to grow well beyond that.

And contributing to that growth, U.S. approval, you talked about kind of end of next year and really starting to contribute the year after. But as you think about the infrastructure you have in place in the U.S. today versus as you tried to launch PASCAL initially in Europe, how do you think about the potential relative ramp rates? Just curious kind of what's in place in the U.S. and potential as you think about it today to ramp faster than what you were able to do in Europe, whether it's awareness, whether it's where the market is. Just curious your thoughts today.

Yes. Well, we're expecting a pretty attractive ramp and growth opportunity in the U.S. We've learned a lot from our launch and introduction of PASCAL in Europe. We've learned a lot from the last 10 to 15 years of growing our TAVR business as well. And so we're going to incorporate all those learnings and experience into the activation plan in the U.S. once we get approval for PASCAL and degenerative patients. And we're going to be investing in field teams, in clinical support. We'll be doing a lot of training at sites as they get activated in the U.S. on PASCAL. And so it's -- I think there's a -- it's a really favorable growth environment, and we're going to be going after it.

Okay. And last few minutes, I wanted to touch back on your Surgical Structural Heart franchise. But you had a strong 2Q performance. I'm just curious how much do you think is driven by deferred procedures versus really just underlying market strength that you've seen.

Yes. It's a good question. We don't have a perfect lens into how many patients would have otherwise been treated earlier were it not for COVID. We do think there are patients who got treated in the second quarter who normally would have been treated earlier. This applies not just to surgical, which is your question, but also to TAVR and other therapies. And so it's -- this is a disease where for patients who have it that's reached a severe stage, patients really need to get treated quickly. And we're pleased that we were able to treat some of these patients who should have been treated earlier. Unfortunately, some patients just don't survive without getting treated. And so it's one of the reasons why we're really working with physicians and hospital sites to help them be able to treat the non-COVID patients that need to get care.

As you think about your surgical business longer term, kind of just closing on, as you think about geographic opportunities for further expansion, just curious if there are key regions you'd highlight that are top of mind for potential expansion. And then second, HARPOON was an asset in your portfolio. I'm just curious, we haven't heard a lot about that recently. So just if you could provide an update where you are with HARPOON and how you're thinking about that over the longer term.

Sure. So for the first part of your question, yes, I think growth opportunities for our surgical business outside of the U.S. and outside of our traditional developed regions are pretty exciting. And one of the reasons is because there are a lot of regions where historically, patients have not had access to tissue valve technology. And so they've had to rely just on mechanical valve alternatives. And so especially with our new RESILIA family of products in our surgical business, there are some really exciting opportunities for bringing these therapies to patients in need. And so that's going to be a big driver of growth in our surgical business. It's one of the reasons what I mentioned earlier, being able to grow in the mid-single digits through 2026. A lot of that is going to be driven by support from regions outside of the U.S. as they adopt tissue valves and RESILIA technologies. As it relates to HARPOON, yes, we're enrolling the trial in HARPOON -- for HARPOON here in the United States. It's still pretty early days. We're learning a lot. We think the therapy has real benefits for certain patients, and we're going to continue to learn and grow as that trial enrolls.

Okay. Great. I know we're out of time, but Scott, I wanted to thank you for the time this morning. It's great getting to just discuss what's going on in the underlying business.

Yes. It's our pleasure. Thanks a lot.

Thanks. Have a good day.

Take care.