Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Well, thanks, everybody, for joining. I'm Lee Hambright, U.S. Medical Devices Analyst at Bernstein. We're really thrilled to have Mike Mussallem from Edwards today. Mike is going to start us off with a few opening remarks, and then we'll jump into Q&A. Mike, thanks very much for being here.

Okay. Yes. Thanks, Lee. Thanks all for your interest in Edwards. I just thought I'd start out here for those people that aren't so close with a quick overview of the company, include -- let's see here, there we go. I'll be making some forward-looking statements that, of course, involve risks and there's lots -- all those risks are listed on our website and in the SEC, and we all see some non-GAAP financial measures to make ourselves a little easier to understand. And there's a reconciliation of all those that are also available on our website and on file with all of our financials. So I always like to start out talking about culture and probably gets dismissed more than it should. It's a really powerful part of our company. It's how we end up recruiting people and getting people that are really dedicated to this. We have a short credo. It's prominently displayed in every one of our facilities. One of the things we say is through our actions, we'll become trusted partners with customers, colleagues and patients. We were kind of born -- and this has been in place for 22 years. We were born with this multi-stakeholder model. And we really do think about all the stakeholders involved. And you can imagine if you're a company like us that makes things like heart valves that keep you alive every day, you better be people that we could trust, right? They're always going to tell me the truth or I can always count on and it's an important part. It ends with helping patients is our life's work, and life is now -- we have totally a patient focus. And it doesn't matter whether you have an hourly job in our company or at the top of the house, we remember that it's one reason we exist. If we're doing good things for patients, we're probably doing okay. And if we're not, we probably have issues. And we do our own surveying. One of the things that we survey is we ask a question that says, "I think about patients each day when I make decisions." We have over 90% of our employees that say yes. And so that's very gratifying to us. And it's the foundation that we're built on. Maybe one way to say where are you going or who are you trying to be when you grow up, we use these aspirations. And this is something we talk about continuously. Starts out with transforming patients' lives with breakthrough medical technologies. Really easy to say, really hard to do, but that's what we do. And that's part of the selling point. If you want to come and work at Edwards, we're going to go after big, bold breakthrough innovations. We say excel as a trusted partner through distinguished quality and integrity. And again, when you think about what we do, that better be the case, and that's what we constantly strive to do. Obviously, having this inclusive culture where every employee can grow and thrive is important. We like to be a generous member of our community. We like communities to say, "Well, we're glad Edwards is there. They're givers to the community and not be takers in the community." And we believe that seriously, and we've got an employee population that agrees. And finally, the thought is, if we get all that right, then the stock price takes care of itself. And we can be an exceptional shareholder value. And so that's the way that we try and define what success looks like at Edwards. Just to give a quick snapshot of the company. We are a little over 16,000 employees around the world at this point, about 5,000 on our Irvine campus, a lot of engineers, a lot of really smart people in the company. It's an interesting mix. We have a lot of very experienced people that stay with the company for a long time, but well over half of our employees are millennials and Gen Z. So we have a lot of fresh ideas. And it gives me a lot of confidence we've got a nice balance going ahead. We're successful, almost everything that we sell are in #1 global positions. And we're very global in our supply chain, we try and put in places that are truly resilient and if it's never been a good pressure test, the last 2 years have been that, and we've just had incredible performance of our supply chain where people showed up every day and made things happen. We're very proud of that. We also tend to be a pretty charitable organization. We ask every people -- not only do we do some nice things with our foundation, but we ask our employees to be charitable. And over 80% do something for something that they care about every single year. So one of the things that I think distinguishes us is our strategy. And it's made up of these 3 components, this patient-focused innovation strategy. First is big, bold innovations, change the practice of medicine, not just small line extensions. That sounds good. But the problem with big, bold innovations is they're risky, right? They -- all those great ideas that you draw up on a napkin don't necessarily work. And also, do the big ideas get adopted? No, not without big evidence. And so we know when we sign up for innovation that we're signing up for a long-term commitment, but we think it's worth it. We like to go first. Leadership is important to us. Frankly, that's also a risky thing to do. It's way lower risk to go second or third and watch the mistakes that somebody else makes. But when you go first, and we believe in going first, you learn faster than others. And it also puts you in the room with the decision-makers when you're actually shaping how therapy is going to be delivered in the future. You're with the regulators, you're with the payers, you're with the leading docs and you have a chance to have a real influence on that. And the way that we manage all the risk with that bold innovation and going first is to stay focused. We're a company that doesn't aspire to just get bigger with the idea that bigger is better. We think better is better. And we say, right within structural heart disease and critical care, there are so many unmet needs that we do not need to diversify, and we don't plan to diversify into other areas in cardiovascular medicine or outside. And that's not it. Our deal is get better and better within that space. There is an enormous number of patients that are not treated today. And we think that just staying focused is the most important thing that we can do. And we think when we transform care, that's when we create the big value. And that's worked out pretty well. We've been growing at a very strong pace for more than a decade. We're very proud of that. We know that our success this year is not based on things that we did in the first quarter or last year. They're are often seeds that we planted 10 years ago and 5 years ago and the things that we're going to succeed on in the future based on those seeds that we're planting today. We go for the triple win, which is really hard to do, but super fun. And that is, if you can extend life and improve the quality of life and save the system money, do it cost effectively, okay, now you've rung the bell. And that's what we constantly strive to do with our advancements. I'll quickly go through each of the businesses, but I won't explain them extensively. The biggest business of Edwards Lifesciences is replacing your aortic heart valve with a catheter-based approach. And this has turned out to be pretty remarkable. It's been a heck of a journey. It's 20 years since the first case. There's a lot of celebration going on at meetings this year in 10 years since it was introduced in the U.S. But now in a procedure that's typically well under an hour, patient not even anesthetized, they have their heart valve replaced, and they're going home in a day or 2, right? And this is a game changer compared to having your chest open, going through open heart surgery or heart stop, cut out the old heart valves, sew in the new one. So really big deal. But the penetration rate is still relatively low because people are not diagnosed well. And so we believe that only 10% in the United States, which is a very sophisticated -- so 10% of the people with severe aortic stenosis actually get treated, 90% don't. And that's why we think this market opportunity by itself is probably going to double between now and 2028, and probably average a low double-digit growth rate. We think the time is now to take some of these kind of learnings and apply a catheter-based approach to the mitral and tricuspid valve. So TMTT is our acronym for the business, Transcatheter Mitral and Tricuspid technologies. These are complex diseases, dramatically undertreated, only treated with surgery today, and we believe that we can treat them with a catheter in the future. We think it's going to take a toolbox. We have a lot going there. We have very little sales, but we have a lot of research and development, including big pivotal clinical trials that are on their way. We think this, today, if you call it a market, is about $1 billion. We think it will be more like $5 billion by 2028, and it will just be getting going at that stage. We still -- and the birth of our company was to be the leader in surgical heart valves, and these are the valves that get implanted by surgeons on a routine basis. Even though we've had all the success with catheter valves, there's going to be an important place for surgery in the future, this continues to be a growth business. We continue to innovate in this space, and we're very proud this will be a grower for some time to come. And we also have a legacy business called Critical Care Medicine, where we do the monitoring of patients that are going through really serious surgeries or in an ICU. And we're noted for having the most accurate monitor. Once again, a global leader in this space. We're transforming this space from somebody who is just accurate and looking backwards to somebody that's going to be predictive. So we're using artificial intelligence and some really cool algorithms to be able to predict things that might happen in the future based on the results that you're seeing in the past. So truly an interesting and transformative opportunity. So overall, we think what's probably around $10 billion today, we think, has a potential marketplace of being around $20 billion by 2028. So even though we've enjoyed a lot of success in the past, we feel like we're just getting started. And if I were to just summarize the things that I'm most proud of and why I'm confident about the future, it starts out with this patient-focus culture. And it's real, and it's one that's tangible inside our company. There's big populations of people with unmet needs. We don't think we need to diversify to be able to be successful. We have enough track record of credibility and trust that the people we work with, the leading docs, the regulators, the payers, they -- we can have a very accurate and active dialogue with them about creating the future. We have a very impressive R&D team that really cranks out some stuff, and we don't count on the new ideas coming from elsewhere. We have a lot of new ideas come from inside, but we also have very active external effort, but powerful R&D. And we think that, that means that we'll end up with sustainable organic growth. Our growth in the past has always come from growth from the inside. We expect that to be primarily the case for the future as well. So enough of me talking and we'll get into a dialogue now. So I'm happy to go.

Excellent. Well, thanks Mike, that's a helpful introduction. Maybe starting a high level on strategy. You talk about focus in structural heart therapies as being a key element of your strategy. Got a room full of a lot of generalist investors, but I wonder if you could explain why focus is really a driver of your success at Edwards?

Yes. So in my first 20 years of my career, I was with Baxter, it was quite diversified at the time, and I was very practiced at saying, "Hey, we have 200,000 products. We can cover all your health care needs," and so forth. But one of the things that I learned is it's very difficult to be truly excellent about. And it's one thing if you're in more commodity type spaces, but when you're in specialty spaces like we're in, to be really focused and really deep, really gave you an advantage. And we felt like this idea of staying focused in the space and really trying to serve that group of patients was meaningful. So in the case of structural heart, we're not even talking about coronary artery disease. We're talking about the valves of the heart. We're talking about the structures of the heart, which is a relatively new field. It's the -- consequences of letting that disease progress are serious. It's deadly. But it's probably underappreciated. And so we believe that if we just stay focused on that space that we can be more expert that we can be a little better than anybody might be at assessing opportunities, assessing risks and being truly responsive to the needs of that patient. And if we are forced to diversify that we just simply couldn't be as good.

Got it. I wonder maybe on the other side of the coin, if you could talk about some of the costs or trade-offs of that approach. You're going up against a competitor, who is very broad and can go in and sell a bundle of products. In some markets, maybe more price-sensitive markets that can be appealing. What are maybe some of the costs or trade-offs?

Yes. I mean, we're cool with the trade-offs, like we're good with it. As you said, somebody that's able to bundle and say, "Hey, I can give you a much better deal on this. That's great. And if you want to buy your heart valve from the lowest possible person, then we're certainly subject to that. But what we're talking about are very serious important products. The heart valve open and closes a billion times over a 15-year period and it better be right every time and there's an awful lot at stake. And so if you're in a commodity kind of product, yes, the idea of having these great big portfolios and bundles are really powerful. But when you're in the specialty space, and I learned this early on in my career, the docs would say, "Don't -- no, no. I want to use the best one", right? And I really feel like I owe it to my patient to use the best. And so we've been strong believers in that and we think it's been borne out in our performance and in our market share and everything else. And we still have a lot to do, yes.

Speaking of your performance and your market share, you own about 2/3 of this global market. So the innovation-focused approach is working, but all medtech markets go through cycles of innovation and maturity. Maybe can you -- I think maybe some investors might look at different devices and say, "Wow, this heart valve doesn't look all that different than the coronary stent." Maybe can you just talk about where we are in treating structural heart conditions?

Yes. I can't tell you how many people came to me and said, "That transcatheter aortic valve thing, that's pretty interesting." But let me tell you what happened in stents. And you know what the prices did and so forth. It's just different. Stents are relatively simple devices compared to a heart valve, probably the best analogy to our transcatheter heart valves are our surgical heart valves. And so the first surgical heart valve we launched in 1960. Has it been commoditized and "Oh, I'll just take any heart valves, they're all the same?" No. They are as differentiated today as ever. The products that we have, the probably the highest price on, are the market leaders because of performance. And so there are some places where you say, "You know what, this isn't about trying to get as low a price as possible. I actually care about performance. I actually care about quality. There actually is a difference, and it's going to change my life based on how that happens." And we happen to be in those kind of spaces where we think it's matter. And it's not so simple. I mean if we got together and went in my garage and say, "Well, let's go make some really cool heart valves." How long would it take us before somebody actually believed this that we had a better heart valve that you'd be ready to implant in chest of people and so forth? Yes, maybe a decade or 2 right now.

Excellent. Good. Okay. So let's shift to the macro topics that are on people's minds. It's hard to believe we're still talking about COVID. But on your Q1 call 5 weeks ago, it sounded like U.S. hospitals had not fully recovered, still some lingering impact on TAVR procedures from protocols and staffing shortages and labor churn and all those things. Just curious whether you've seen any improvement in those frictions in the U.S.?

Yes, thanks. It's not my intention to do an update on the quarter we're sitting here in June at this point. So I hope you excuse me for that. So I'll more put it in the context of where we were at the end of the third quarter and sort of comment in general. So remember, the beginning of Q1, we were still in Omicron in a pretty serious way. And so we saw a nice recovery from January to February to March, which gave us confidence that things were going to improve. We also said be careful, I'm not sure that they're going to improve overnight because you have some new phenomena going on like the staffing challenges, particularly in the U.S. that we thought were going to be persistent ones. And then no one knew for sure exactly what the virus is going to do as well. And we said, we think our guidance accommodates the probable range of possibilities. And so we weren't changing our guidance, and we feel pretty comfortable with that approach. So I mean, you've got all the realities that are going on in the world today. The staffing challenges, we believe, will get resolved over time. And I think it will probably be gradual. I don't think there's going to be a light switch and, all of a sudden, they're behind us, might take all year and so. We saw an interesting phenomenon in 2021. I don't know if you guys recall, but we saw the biggest quarter we had ever seen in Q2 of 2021, where there was kind of this big catch-up. And we weren't expecting that to be such a big catch-up because we say, "Hey, typically, Edwards' patients, they don't store very well." You don't just have them sit on the sideline because it's such a severe disease. But there had been probably a year, 18 months of pent-up demand back before second quarter 2021. So it will be a tough comparison for us with this year. But we think we said Q2 of 2022 will be bigger than Q1 of '22, and it will also be bigger than last year. So that's how we think it's going to turn out. That's the way that we were projecting it. But the staffing shortages are real, but you can see them being addressed. There are some really talented people, and I have conversations with the CEO of big hospital systems in the U.S., they all have their plans. They're very thoughtful. You see things like the strikes that have happened at the Stanfords of the world or Cedars-Sinai and so forth and those get resolved. And so all -- many steps forward and all this. So I think that will all be addressed, but it will just take some time to work through the system, yes.

Got it. You alluded to backlog a little bit and the backlog that sort of played through around this time last year. I think on your Q1 call, you said you don't see a very large backlog right now, maybe a few months that might have built up during Omicron. Is that still where your thinking is on backlog?

Yes. And I think it's a good way to say it, Lee. So the backlog that we experienced in Q2, which kind of surprised us was probably a backlog that had accumulated over a number of quarters, whereas Omicron came and left in a pretty short period of time. I mean it hard in December and January, but it was pretty concentrated. So although there's a backlog, it just wasn't nearly the same sign. So I don't expect the same kind of impact as we saw last year.

Got it. Supply chain pressures have posed problems across many sectors, including medtech, but your supply chain is fairly simple relative to some other medtech players. I wonder if you can maybe talk a little bit about supply chain risks that you're seeing right now?

Yes. So I mean supply chain, obviously, it's a risk for everybody. We feel all the same things than others. We've been very deliberate because of what we do, where we put our locations to be -- to try and put them in pretty robust locations. We've had an incredible dedication from our employees in the supply chain and say, the world is counting on you, you need to be in every day. And they showed up in a big way. We stood behind them, and they definitely stood behind us. So we've been very fortunate to avoid a really serious supply chain interruptions at all. And some of that is because we've just designed redundancy into the system. And we've been fortunate enough to try and stay ahead of supplier issues, but those are still out there, and we battle them every day like other people battle them. We play the card like, "Hey, I don't know if you knew this, but life-saving products that we need from you, so don't let us down." And so we -- our team is pretty expert at it, but we've been very fortunate to be able to handle the supply chain issue so far. But they're not behind us, but we feel pretty good about it.

Got it. Up the chain a little bit from you. There's a supply chain concern about contrast dye. These lockdowns in China have caused a shortage of this dye, which is used in echocardiograms and other vision procedures. Wonder if you're seeing any impact from that dye shortage?

Yes, without getting into like a mid-quarter update kind of thing, yes, we definitely have felt that. So contrast media gets used in many of the Edwards' procedures like TAVR. We probably have seen a more pronounced and smaller hospital systems than in larger hospital systems, they seem to have done a better job of securing their supply. And this also tends to look like one that's pretty temporary in nature and not one that's very long-lasting. So I don't expect this to be very meaningful in part of the total scheme of things or from a strategic point of view.

Great. Thanks, Michael. Recession. A lot of investors are thinking about how various businesses might fare through a recession. Your structural heart therapies are treating very deadly diseases and your payer mix is heavily skewed toward Medicare. Can you just help us think about what kind of impact the recession would have on Edwards?

I love when your question has the answer. You just said it, right? Because our diseases are so deadly, this is kind of thing that regardless of whether I'm in a high spend environment or in a recessionary environment, people are more likely to get treated. Obviously, there is some of that that's on the margin. You take a place like the United States. And most of the -- because we have a Medicare system that pays for everybody over 65, most of our patients by far, are over 65. So they're insured and they have a system that pays for it. So we're less likely to be impacted by a recession. I don't know about recession proof. But we're probably much less likely to be impacted by recession than many other businesses.

Great Okay. Let's turn to TAVR. So global TAVR penetration in developed markets is still, like I said, only about 10%, and it's lower than that outside the U.S. You've had strong TAVR growth outside the U.S., around 20% for a few quarters in a row now. Maybe could you tell us -- you're clearly investing to go after that big OUS TAVR opportunity. What does that investment look like? And how sustainable is that kind of 20% OUS growth rate?

Yes. I mean it's a good observation that TAVR, we're growing outside the U.S. faster than the U.S. And it's been dramatic in the last couple of quarters. Some of that is COVID driven comparisons and so forth. But to your point, if we look at our strategy over the next 5 years, 10 years, we expect OUS to grow faster than the U.S. because there's just less penetration outside the U.S. A lot of that is because you have socialized health care systems. And so for governments to step up and reimburse, they tended to be slower outside the U.S. than the U.S. has been. And so that's a lot of a ground game. We have teams that do health economics, that do a lot of studies to make our case with these health systems that they should be reimbursing for TAVR. We've had success with that. And as that success takes place country by country, it just adds to that momentum outside the U.S. In some cases, outside the U.S., they like to see local data. And when we need to do that, we supplement it. So many of our resources go into sort of this area of health economics where we have people that are able to do it, more people able to have direct dialogue with ministries of health rather than the conversation just with the position on the ground because that's what it ends up really opening up the international opportunities for us.

Right. Great. Makes sense. The U.S. TAVR growth rates have been a good bit slower than OUS growth rates for a few quarters. Sometimes it's difficult to parse out how much of that is COVID impact. Some investors worry that U.S. TAVR growth could slow as your penetration of a low-risk population starts to reach a certain point. What's the right way to think about the U.S. TAVR growth opportunity within the current indication?

Yes. I mean, we really like the U.S. TAVR growth opportunity. When COVID hit, we had just a few quarters earlier, got the approval of these patients that are low risk for surgery. And what people still misinterpret is when we have these trials that were high risk, medium risk and low risk, that was the trial to patients that were at a risk of dying from the surgery, not of the risk of dying from AS. You are going to die from AS, there's no doubt about that. And that's the more serious risk. And so all these trials ended up doing was building this body of evidence that, "No, this is really good therapy and this can correct the notion." We have turned our attention much more from just focusing on the clinician. And frankly, the conversations you have with most of our clinicians right now, they'd say, "Oh, boy, I'm treating everybody that shows up." But one of the things we've learned is how amazingly many patients don't ever make it to the treating physician. And we believe that it's 90%. Part of this is just an upside down way of thinking about cardiovascular disease, I think, in many cases. And I'll draw the analogy to cancer. If somebody in the audience were diagnosed with cancer or a loved one, you'd immediately snap into action, right? Let's -- what therapy? When? Where do I go? How do I do it? In cardiovascular medicine, often when we say, "Well, no, we'll keep an eye on that. And if it gets worse, then we'll do something about it." And I think much of that is because our early therapies like open heart surgery were so onerous the idea of, "If that's the fix, okay, I think I'll keep an eye on it." But now if you have procedures like Edwards is pioneering where you can go in, in an hour, do a procedure that's relatively safe and potentially be home in a day, now it changes your math substantially. And so there's a bunch of structural stuff in the cardiovascular space that needs to change. So right now, what the guidelines say, even after all of our trials is if you have this narrowed valve, severe AS, and symptoms, then you treat; but until you have symptoms, don't treat. We think that's a completely wrong notion. And that's what the early TAVR trial is about, is to demonstrate, "No, actually just watching, that's bad." So you got 50% of the patients that are getting watchful waiting and 50% are getting TAVR, and we'll see the results of that trial in a couple of years. Same thing with these patients that have moderate aortic stenosis, right? Should you wait until it's severe or should you treat it when it's still moderate? We strongly believe that there's going to be a great case to treat it when it's moderate. And so we just got a lot of mindsets to change. We'll do it with data and persistence, but there's also a system just with a lot of leaky buckets just because it complicates things when you add symptoms to the requirement to have a procedure.

Yes. Great. Thanks, Mike. A couple of things I want to pick up on in that answer. The first one is about indication expansion. Obviously, a really important driver for TAVR. When you got the low-risk approval a few years back, you started treating relatively healthier patients, and there were some people who were a little bit concerned about valve durability. And then now as you go into healthier populations who don't have symptoms yet, who are still at the moderate AS diagnosis, wonder how do people think about durability? And how has the data and the thinking evolved on that front?

So the durability has indeed become a hot topic among a lot of our docs and maybe investors as well. And I think part of the notion is that, "Boy, we have to get into younger and younger patients to have the therapy grow." Based on our analysis, most of the patients that need their aortic stenosis treated, probably over 80 years old. And they still don't get treated. They're relatively healthy. They get dismissed because they're old. Well, of course, they're slowing down. And well, of course, they can't do what they did last year. And the reality of it is they have reduced blood flow through aortic valve and then it's having an impact on their entire life. So we think that there's sort of an outdated notion and that's where these trials are going to end up making a difference. So the durability is an important factor. We don't dismiss that at all. Though the naysayers would say, "Well, transcatheter valves, they haven't been out there long enough. So how do we know if they're going to last 20 years when they've only been out there for 10 years or 15 years?" And that could be a fair analysis. We do all the work in surgical heart valves as well. So we have a pretty good idea how long surgical heart valves last. So we're optimistic about TAVR valves. One of the things we'll do with our next-generation X4 valve is to put our newest generation RESILIA tissue on it, which we think will have a substantial impact on durability as well. But durability is going to be an important factor, but just one of the important factors because the thing that probably people care about most is "How do I get this person a good long run on life? If they're 60 years old or 70 years old, how do I get them another 30 years, 40 years? What should be my treatment?" And durability is part of that. It meant more when you're only alternative was to have open heart surgery, now that you can come in and put a transcatheter valve inside of a surgical valve or inside of a transcatheter valve, now you have a catheter-based option to buy yourself additional years. So it changes people's thinking broadly in this and it's why I'm optimistic about those treatment patterns continue to evolve.

Great. Makes a lot of sense. So diagnosis and awareness, as you mentioned, is an important issue, very low among patients and many primary care docs, too. A lot of severe AS patients, as you said, often confuse the symptoms with the symptoms of getting old or they'll change their lifestyle to live within their symptoms and many of them just get overlooked. You've just started experimenting with direct-to-consumer ads to start to boost awareness. I'm curious if you have any early feedback on those?

Yes. So it's a good question. Yes, we actually are doing -- we're taking a multipronged approach here. It's amazing, the number of reasons why people don't necessarily get their valve replaced. But one of the thoughts are is to actually go way upstream and go right to the patient and have them become advocates for it. And so we've started doing series of TV commercials even with -- in places where we think our demographic is likely to go like the golf channel, weather channel or whatever the folks of that demographic watches, and we're partway through that. So we don't have outcomes. We've got a lot of really good data scientists for this. We've got markets where we have no advertising in markets where we do have advertising. We have all the markers where we know if they actually have watched the commercial before. And so we're going to get some good updates on that. We probably don't have anything to report at this point, but our teams are involved and are optimistic that it will be one of the tools that will be valuable.

Great. There's also some new technology that helps aid diagnosis. When you look at the places where there's leakage in the funnel, one of them is just about awareness and getting that referral from a PCP to a cardiologist. There are these new Bluetooth-enabled stethoscopes that can help doctors -- help primary care doctors screen their patient populations more effectively. And then later in the funnel, often when people get echocardiograms, even at that point, the gold standard diagnostic, many of those patients are missed or incorrectly diagnosed. And there's new AI-enabled software that can help improve that echo capture rate. Just curious what your -- how optimistic you are related to those new AI-enabled software?

I think they're going to be very important in the long run. It's going to take a while before they take hold, but I think they're going to be super important. This idea of can you somehow capture relatively benign vital signs and use that as a signal to clinicians to actually trigger action is clearly going to be where their action is. And so if you talk about the first thing you brought up, which is, okay, what can you do with the general practitioner's office, one of the things they do is they put a stethoscope on your chest and you count on that clinician to do pretty good, listening to the heart sounds and know what they're listening to and be able to diagnose something. Well, you know what a stethoscope is, it's nothing more than something that's just listening to a sound wave. So if you just have a transducer that listens to the sound wave and if they bounce it off a cloud and compared it against 1 million other records of this and came back with a suggestion that there's an 80% chance that this patient has aortic stenosis, it would be advised for you to -- suggest they get an echo, that would be a big boost to a general practitioner who has to know the multitude of things that they're trying to cover. So I think a big win or what's kind of nice is one of the early companies in their Eko was actually partnered with 3M, who is the biggest stethoscope makers. So this actually could scale and become interesting. But it does make your mind wander about all the digital technologies that are out there. Can you look at a pressure waveform, can you look at an EKG, can you look at heart sound, and start to diagnose some of these heart valve diseases. Those things would be very important drivers. And you also talked about echo. For echo what most people -- this is an ultrasound measurement. They're actually looking -- it's a way of looking at the structures of your heart. And so they take a simple 2D device, put some lubricant on it, put it on your chest. Then they try and look across the cross section of your heart to see how the valve is functioning. It's tricky, and there's great variations among echocardiographer and the modern equipment. And there's great variation in terms of the way they write their reports. And so you don't end up with kind of this actionable stuff that you wish you have. And I think there's huge opportunities for technology advance, both in actually the machine itself and how the reports get generated and how they get fed back to the GP or the general cardiologists. There's huge opportunities to plug some big holes in the diagnosis.

Yes. Great. So patient outcomes are outstanding for TAVR and the procedures keeps getting better and more efficient. You're working on a next-gen TAVR valve, the X4. Can you maybe just talk a little bit about what is there to do? What's left to do in TAVR? How can it get better? What are the areas that you're focused on? And to what extent can like enabling technologies or better visualization help as well?

Yes. So X4, we're excited about. We haven't revealed everything about it, but we expect to have improved hemodynamics to be able to have even more degrees of freedom in terms of sizing it really perfectly. We expect to put our RESILIA tissue, which is our what's really proven to be the most durable tissue we have that we use in our premium heart valves today. So we think a real advancements are going to be possible with the X4 system. You also asked about...

Enabling technology.

Oh, yes, just the visualization. So visualization has gotten quite good with TAVR. And a matter of fact, it's quite common now that people do CT images of femoral arteries to make sure that the access is going to be great and actually of the valve itself. And it really gives people many more clues about what they're going to run into in the procedure. But it's even more powerful in the transcatheter mitral and tricuspid space. There is where imaging is good, but has an opportunity to improve dramatically. And I think we're going to see a lot of advancements. And these are much more difficult to visualize valve positions, but it's going to be super important in the future. And that person right now that -- the person who does the imaging and the procedure might be the most important person in the room today just because they're discerning things that are pretty subtle. And as imaging technologies advance, so we're working closely with all the imaging companies, we think that's just going to get better and better and be an important enabler of those procedures.

Great. Good opportunity to transition to TMTT. The mitral and tricuspid disease are 3 or 4x as prevalent as aortic stenosis. So the addressable market here is huge, but the actual global market for TAVR is almost $5.5 billion where the TMTT market is only about $1 billion, despite the fact that Abbott's MitraClip got FDA approval less than 2 years after SAPIEN and TAVR. So the question, why has it taken so long for TMTT to ramp up? And looking forward, should we expect this to be a market where we've got to continue to be a little bit patient?

Yes. Well, I would say a few things. You remember, Abbott started on this journey -- or Evalve before Abbott way more than 10 years ago, and it took, I don't know, 8, 10 years to enroll that trial. So very slow level of skepticism. If you were to ask surgeons about repairing a mitral valve, they would scoff at the idea that you would still leave a leak when you're finished with the procedure, and which happens in many cases, even though they're small, with edge-to-edge. And even though you had a good trial, really a very good trial, the trial that was run by Abbott, you also had an equivocal trial in Europe called MITRA-FR and it caused people to be less than super excited about it. And we would also argue that it's a single tool. And if you look at mitral valve disease or even broaden it to tricuspid disease, it's a multifaceted disease. So it's only approaching a small piece of that pie. And that's why we think it's going to take multi-modalities, so really a toolbox to be able to address this. And it's also going to take multiple trials. When you only have one randomized trial, in our experience, it doesn't really move the marketplace. It's helpful to have multiple people in the space with multiple trials that say, "Yes, this is good therapy." That's one of the things that's about to come now as we start to have Edwards results this year, next year and the year after come out, you're going to add to the body of evidence. So it's going to probably be less about share and more about really enabling the market to develop.

Great. Okay. So starting with edge-to-edge. You got CE Mark for PASCAL a little over 3 years ago. You're the undisputed leader in TAVR. But in mitral, of course, you're entering many years after Abbott. Can you walk us through what's a hypothetical conversation sound like between an Edwards rep and a doc who is currently using MitraClip? How do you convince a doc to switch?

So the PASCAL device is just different than a MitraClip. It has some different features associated with it. Probably the most notable of which, it has a central spacer that the paddles close on, and the paddles tend to be bigger, broader paddles. And so our belief is that it's gentler treatment of the leaflets, which are actually collapsing. And we also have independent collapsing, which makes it much easier to position and to get the maximum results associated with it. But that's just the starting point. The key is for the physician to have a great experience. And we haven't tried to just sell as many devices as possible. Our goal has been consistently make sure every time we do an implant that it's a successful one. And we heavily staff these. We have a high-touch model. And we've just strived to make sure that each time we do a procedure, we do a great one, with the idea that if we have a great track record, that's what will drive the adoption, and it's less about early sales. So that's been our mode of operation. We have many more clinical specialists, and we have raw salespeople that are out there to help people be successful with their early experience.

So far replacement technologies have dominated the market for transcatheter mitral therapies, and nobody has really cracked the code yet on transcatheter mitral replacement. You're studying 2 different Sub-30 French transfemoral mitral replacement valves. I wonder what are your latest thoughts on repair versus replace in mitral? And what do you expect from these 2 replacement programs?

Yes. So the edge-to-edge technique that's done by PASCAL and MitraClip is -- it's the only therapy that's available by catheter today. So it's really the only one that people know. The idea of a replacement therapy in mitral or tricuspid has the opportunity to completely eliminate the leak. Now a bit of the trade-offs is the edge-to-edge technique is done as a pretty good safety profile. So there could be an honest conversation between a physician and a patient says, "I'm unlikely to hurt you. A matter of fact, they're a great safety profile and there's a good chance that I'm going to help you." With these large valve systems, and remember, the mitral valve is much larger than the aortic valve, just delivering that valve carries along some safety risk, right? And especially for the companies have decided to start as a transapical device, and we decided against that. The idea of coming through the chest wall with a big hole in a sick ventricle in the first place, we're just not big fans of that because of the potential safety risks associated with it. And so we felt it was important to make these systems small and deliverable by femoral access from the beginning. And that will be the burden of proof is, can we deliver these pretty big valves, do that safely and also not have to subject the patient to a heavy anti-coagulation regimen after the fact that carries safety risk compared to what you get with the repair. So can I get the elimination of leak and safety together, in which case then you'd have really interesting replacement device. We have 2 replacement devices in the mitral position that we like, both the SAPIEN 3 inside a docking device that we call M3 and the EVOQUE Eos and then the tricuspid position, we have the EVOQUE valve, all of which there are Sub-30 French that have the potential, will be interesting, but we don't have pivotal trial data. We just have EFS data so far, but we'll see a lot over the next couple of years.

Great. Great. You mentioned EVOQUE and tricuspid. With a viable replacement therapy like EVOQUE, do you think it's possible that the transcatheter tricuspid market could actually ramp up more quickly than the mitral market?

It's a great discussion. So I have lots of dinners with leading docs around the world and we place bets on that, and it's uncertain. And a lot of it is just going to depend on the data. So that's what I would say to keep your eye on, just how compelling is the data. Right now, the thing that you can say is there's a few tools that are available for mitral patients, including some pharmaceutical therapies that allow them to just manage for a while without severe consequences. These people with tricuspid disease just don't have many options. And so they get in some pretty desperate straits. So that could be a driver if we really have an effective solution, and that will be the question is how good is the EVOQUE valve.

Great. Let's zoom out maybe talk a little bit about R&D. Innovation and evidence generation are obviously really central to your strategy. You're working on a lot of different programs right now across the business. Could your R&D stay in that kind of 17% of sales range for the next 5 or even 10 years? Or could we start to see that ratchet down a bit as some of your TMTT programs evolve?

Yes. I mean you're right. As the company grows, that gets to be a big number, right? The absolute number in R&D, and can we do that very effectively? Right now, we think we do and we don't guide people to expect to see leverage out of the R&D line. We know because of what we do, and especially when we go after these big bold innovations, that they have a risk profile associated with it. And what it allows us is to have the ability to have multiple options that we're pursuing so that if something really is interesting that we can find it and pursue it. And so we're not so quick to say that that's the place to turn down the volume. We think generating like real organic growth from really bright ideas is the single best way to grow the company. And so we don't look at that and say, "Oh, boy, there's our great leverage opportunity." Yes, of course, that's there. But also remember that when we sign up for many of the technologies we do, we sign up for following these patients on a long-term perspective. And so we generate a lot of clinical evidence, which also has some costs associated with it.

Great. A question from the audience about the expense journey for Edwards for awareness or improving diagnosis to really capitalize on the opportunity. Some medtech companies will actually have kind of dedicated market development teams that focus on the referral channel and finding the leakage, et cetera. Do you expect to invest more in that area?

The short answer is yes. And we are -- I mean, if you turn the clock back 10 years, virtually nothing was spent in that space. We encouraged our docs that did the procedure to educate their referral base. And now we're doing a lot of that actively ourselves. I wouldn't call us experts at that yet. We're still learning how to execute that, but we have a lot of things going in many countries around the world, which includes everything from small seed investments to help some of these new emerging diagnostic techniques get started to big clinical trials, which will point out the fallacy of watchful waiting to actually have some specialists that call on general cardiologists to educate them because we find an amazing amount of variance between general cardiologists in terms of those that actually refer and those that rarely refer to some of these other tools that we discussed earlier that could help. And we also do just simple programs with health systems and with countries that remind them how many people that they're just not moving through the system because the patient got lost. Here's a patient that should be indicated and should be moved through. And you find in many cases, they're 10%, 20%, 30% of the patients that are kind of in limbo because we don't have a great electronic medical record or a great system of handoffs through the system that allow people to be treated. So we have multiple investments going in that, and that's probably just going north for the company.

Great. One more audience question on value-based pricing -- or maybe pricing more generally. Pricing has held up really nicely over the years, been a lot of innovation in the space. How do you think about pricing going forward? And could value-based pricing, as it takes hold, start to change your approach in that area at all?

So I mean, we think about value a lot, and we're pretty expert at being able to talk about the value that comes from our technology. We're happy to put TAVR or any of our technologies up against other spending in health care in terms of what kind of mortality does it buy you or quality of life that it buys you. And so we're very comfortable with that. By and large, this idea of just lowering price to lower price, we don't think is a bright strategy. We think people really want to count on our technology as being very high quality that they can count on for a lifetime. So in general, we think that we offer volume discounts to people. And so as they do more and more, they are able to come down the cost curve. We don't raise price on our customers. And so when they get improved efficiency for shorter lengths of stay or they can do 4 or 5 or 6 cases in a cath lab in a day instead of 2, we let all those efficiencies flow to the hospital and let them be the beneficiaries of that. And we let them be the winners in that process, but not necessarily with price. Instead, we stay aggressive investors because we think we can make things so much better tomorrow than they are today.

Great. Great. if I can just maybe sneak one quick last one in. This is the Strategic Decisions Conference after all. If you look out the next 3 to 5 years, your strategy is pretty straightforward. Are there 1 or 2 kind of big strategic decisions that hit the screen for you over the next few years?

Well, I mean you guys go by our nature, we're innovators. And so we constantly have these tough discussions on, "Boy, should we be investing in the next generation of this technology or that technology or should we just be forgetting about that one and dropping them out of the portfolio?" Those are not simple decisions and there's the ones that we take to the top of the house, and they have a very weighty impact. People may not remember all of the struggles that we had with TAVR along the way where we had choices when we might have gotten discouraged and walked away from it. But instead, we stayed the course. And so we're reminded by that when procedures are struggling. Are we one step away from a breakthrough? Or should we have always known and walked away? Those technology decisions will be big wins for Edwards.

Excellent. Excellent. Mike, thanks so much for being here. Really appreciate it.

Thanks, Lee.