Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Good morning. I'm Larry Biegelsen, the medical device analyst at Wells Fargo. It's my pleasure to host this session with the management team from Edwards Lifesciences. With us, we have Bernard Zovighian, the new CEO; and Scott Ullem, the CFO. Terms of format, it's going to be a fireside chat. If anybody has a question, just raise your hand. We'll come around with the mic. Bernard and Scott, thanks so much for being here.

My pleasure. Thank you.

Kevin, can you please start the clock? Thank you. All right. So let's jump in. Bernard, you recently became CEO. My question is, do you foresee any changes to the strategy going forward? Under Mike Mussallem, the company is very focused on innovation, structural heart disease and critical care?

Thanks, Larry, and thanks for having us. Good morning, everybody. It is always a privilege to talk about the company. So I have been with the company now for more than 8 years. And we made a decision together as a leadership team, and I am very confident about all of the decisions we made in the last 8 years. So let me give you a sense about why am I confident? It is mainly around 4 things. The first one is about there are so many patients in need. Despite their success, there are still many patients who need to be treated. The second element is about we are in a position of strength. So before COVID, during COVID, we committed to big investments in R&D, we didn't step down during COVID. We are heavily invested in R&D. And when I look at what we have done, even this year, very pleased about the beginning of the year, strong Q1, strong Q2 double-digit growth. We raised our guidance, 10% to 13% over full year. So feel good about the position of strength we are in today. Number 3 is about our very unique strategy. We have about 2,000 engineers committed to bring breakthrough innovation, not just incremental innovation. We are aiming to being first in any marketplace we want a place and becoming the leader. Also, we are focused on structural heart disease, critically ill patients. So the benefit of that is what our people are very deep. We have [indiscernible] knowledge. And finally, I feel very fortunate that the leadership around me is very strong, very experienced. We are all committed to one mission, bringing breakthrough innovation to more patients. So because of all of that, I'm confident that what you are going to see is durable, sustainable growth from Edwards Lifesciences.

That's very helpful. How do you see Edwards business changing over the next, call it, 5 years?

In short, what you can expect is, given the patient need, given our commitment to innovation, big change, more growth and a more global footprint. Now I can expand on that. And I'm sure, Scott, you may want to add a few things. In TAVR, we expect the market to grow, continue growing low double digit and us maintaining our leadership position. How to do that? We are going to maintain our playbook, best innovation, world-class science, high-touch model to ensure a great patient outcome. We believe also that we are going to be focusing on increasing awareness, patient activation, indication expansion. So we see [indiscernible] business, despite the fact that it is a big business today, has the potential to grow double digit in the years to come, 5 years, 10 years. So it's more, even more than 5 years, Larry. TMTT, we have been focusing on three key value drivers. Best innovation, but also adding a toolbox because these patients, mitral and tricuspid are very diverse, very complex, and one device is not going to be sufficient. So having repair technology, replacement technology for mitral and tricuspid, clinical evidence, at TCT, you are going to see more. And then a real world outcome, very pleased about with one technology so far. What you have seen is a very healthy momentum. So confidence about TMTT too, surgical and critical care, continuing to bring innovation and science. So if you think about the big picture for us, we see that the market we are playing doubling between now and 2028, so a little bit more than 5 years to $20 billion market potential and us extended our leadership position. Scott, do you want to add anything to that?

That's helpful. Under Mike's leadership, the company talked about moving into new areas like heart failure, but I don't think we saw that much. Do you, under your leadership, do you expect to move more aggressively into new adjacencies?

So for sure, like I said, we are in a position of strength. We have a very strong P&L, very healthy in our balance sheet, and we are very fortunate about that. I see ourselves remaining focusing on the patients we serve today. At the same time, what we noticed is we learned a lot in the past few years about aortic stenosis patients, mitral patients, tricuspid patients, and we see an overlap with heart failure patients. So yes, we have not discussed a lot about it, but we see an overlap, we have been very active. We have some investments, internal, external. We didn't talk a lot about it. We are not ready to talk a lot about it today, but we have some active investments. And when ready, we will talk more about it.

That's helpful. So let's switch gears and talk about TCT. I can't remember meaning that could be more impactful for the space and for you. You have important data coming out in TAVR, mitral and tricuspid. Maybe, Bernard, and I know it's limited what you can say, but at a higher level, how are you thinking about TCT and what it could mean for Edwards?

I am, one, very excited, two, I am proud because it is not just about saying that we are committed to innovation but we are committed to clinical evidence. It is about doing it. We, a few years ago, we basically created these 3 large studies, important study, one for aortic patients, one for mitral patients, one for tricuspid patients. They are [indiscernible] randomized, and we are going to follow this patient for a longer period of time. So to be able to be at TCT and see this kind of evidence brought to the clinical community, very proud about it. Now can I talk about the results? No, I can't. We need to wait for the results to be presented. It is important. So at TCT, Mark and Scott, we're talking about having an investor event, and we are still thinking about when exactly. Correct, Scott?

Okay, Mark? Yes. So Thursday after the second of the two late-breakers from Edwards on Thursday [indiscernible]. So we'll get details around everybody, but if you can join us, we'd love to have you. We'll have Edwards leaders as well as some physician leaders who participated in the clinical trials.

That's actually the third one, that would be. That's helpful. What -- again, please. So on the PARTNER 3 low-risk 5-year data, you're meeting with investors, people are going to ask you about it. You know Bernard. I saw the date the curves converged between year 1 and 2 is still in favor of TAVR, of SAPIEN 3. Is there anything you can point to, any public data that could allay people's concerns that those curves won't continue to go and it's got the wrong direction for you. Is there anything out there that you could point to?

So that's a good question, Larry. It is a typical question that everybody is asking before a study is presented. Don't you think, we want to know. I want to know, we want to know. I want to start with a big picture kind of answer, which is let's look at the body of evidence on TAVR and the body of evidence on the SAPIEN platform, unprecedented, all of them highly positive. And we have seen that based on our global leadership, the SAPIEN platform delivered amazing safety, amazing efficacy, amazing ease of use. So very often, I hear some people just mentioning one element of a clinical endpoint. One element is important, we need to look at the body of evidence. Think about the physician. You have a night before you're doing the procedure with the patient, they meet with the family. And the tailwind, we are going to take care of your dad or your mom tomorrow. And what they know is with SAPIEN, it is predictable, it is safe, it is effective, it is durable, [indiscernible] everything, so it is a full spectrum. So summarizing, in my mind, an event with one piece of data, I don't believe it is the way to think about it. We are very confident that our body of evidence, our 2-year data were very strong, superiority of SAPIEN, and we feel good about. Now 5 years is going to bring us more information, adding to the body of evidence, and together, when we discuss that when we have this data in front of us.

That's helpful. Got it. Okay. And just curious, Medtronic's focus is going to be showing 4-year data, their curves at 3 years continue to diverge. And any concerns that, that might create a marketing advantage for them?

So it is tough for me to comment on. One is a competitive trial, but you think it is tough to comment on competitive trial, tough to compare your trials. But we need to look at things and big picture again, looking at everything. The therapy arm, the control arm, the body of evidence, everything together.

I think I understand the control arm, if I just look at the 2-year data, their control arm did, I think, worse than your control arm. So the SAVR treatment control arm may not be the same.

I know you are deep into the data. You know what it is.

Okay. So let's move on to TRISCEND II with that was a pleasant surprise on the Q2 call, interim analysis of TRISCEND II with EVOQUE for tricuspid. What data are we going to see there? I know you said you completed enrollment early this year. Are we only going to see out to 6 months? Or will we see some patients out to one year or longer follow-up for those patients that were enrolled earlier?

So this the core, you are going to see at TCT, what you are going to see is the planned interim analysis that was part of a study design. You are going to see a cohort of the patient at 30 days and 6 months. I have a full cohort of patients. Again, TRISCEND II is a big study, 450 patients at one year, you will see that later, not in 2023. But again, we believe this first cohort is going to give us some great indication about tricuspid disease, which is not well known today, not well understood. And so this one with TRILUMINATE is going to inform the clinical community about the disease itself, the difference between two technologies, a clip or [indiscernible] device and a replacement device. So, but again, it is the beginning, that you think we are just at the beginning of a tricuspid journey. We have great, we see a great potential to help this patient. You know what Larry, and I'm sure all of you, this patient has a terrible quality of life. There is no option for these patients. So if we can go there and provide solution to physicians to help this patient. Also, this patient are a huge burden to the health care system. They go in and see their physician on a regular basis. They go into the hospital on a regular basis. So being able to touch on everything will be important here.

So I was as bullish as anyone going into the TRILUMINATE data at ACC, but after seeing, talking to doctors about the data, I heard some disappointment because they only saw quality of life benefit. There were no trends on hard endpoints like heart failure hospitalizations and mortality. And so I guess my question is, I hear the same things you do, high unmet clinical need, nothing else for these patients. What do you think is needed to drive adoption for tricuspid? Is quality of life enough or do we need to see more than that?

So for sure, [indiscernible] for some people, you have also other group of physicians who see the potential with the TRILUMINATE data. Because if you think about this patient population, I have met many of them before the PASCAL tricuspid procedure or EVOQUE tricuspid procedure, and I have seen them after. Their quality of life is completely different. So I am not sure that we can say quality of life is not necessarily important. I say if we can reduce TR, if we can improve quality of life for these patients and they can get back to a normal life, I see that's big already. Now if like in TAVR, we can have a triple win impacting mortality, quality of life and the cost for the health care system, for sure, it is even better. But in my mind, there is a starting point. You need to better understand the disease, you study [indiscernible] and you go from there. So I cannot tell you about anything about the TRISCEND II study right now. But in my mind, quality of life is a big event for this patient. And we should not undermine this one. Anything to add here in, Scott?

Scott is waiting for the financial question. For the 2023, '24 question. Bernard, maybe a difficult question for you to answer, but 6-month data, it's hard to show in any trial, an outcomes benefit at 6 months. Is that fair? I guess like I said, I know it's a hard question to answer, but I was a little surprised to hear you're only presenting 6-month data because any invasive procedure, you are paying upfront penalty, you rarely see an upfront benefit on outcomes at 6 months.

No, you're right. But because we thought that it was important to bring early evidence to the clinical community on the tricuspid disease, we decided when we designed the study to have this interim analysis done. So this interim analysis will give us plenty of learning. For sure, we have a full cohort, 450 patients, 6 months and one year will give us more. But I'm still hopeful that given what I have seen with our TRISCEND I study, single-arm study, that EVOQUE was a very effective therapy for this patient. This patient the day before they were hospitalized, they are not able to have a normal life. A week later, they lost 20 pounds of fluid, they were able to walk again [indiscernible] and do things and were back to having a normal life. I see some potential here.

Okay. All right. And I guess one more question. I mean the mitral repair has kind of outpaced replacement in tricuspid. How do you see things playing out, repair versus replacement?

Yes. You want me to compare both. What I am saying is if you look at the learning on the mitral side, TEER [indiscernible] has improved a lot over the years, and we demonstrated that with our CLASP IID 6-month data last year at TCT, gets better in safety and efficacy and all of that. TEER can only treat a small portion of mitral patients. And so we need both with replacement and TEER for mitral [indiscernible] TEER and replacement for tricuspid. So your question is about which one is going to be bigger? I don't know. But what I know for sure is both will be important for both patient groups.

Okay. That's fair. And just lastly on TCT. Switching gears. We're going to see the 1-year data from CLASP IID. We've talked to doctors who said you usually see the same results at 12 months that you see at 6 months. I haven't checked other data sets, to be honest. But is there anything you can point to from an older data set that where you see kind of similar results, 12 months that you see at 6 months?

It is tough to compare trials, don't you think? And mitral is such [indiscernible] TEER has been in the marketplace for 10 years, very little has been done in terms of clinical evidence. So we are committed to change that. So to compare trial, tough exercise. I would say, we were very pleased with our 6-month data set showing that TEER is safe and effective and that PASCAL is durable from an efficacy standpoint, very durable from an efficacy standpoint. So let's look at the 12-month data, but so far, the physician has been reacting very well to what we have shown last TCT and well demonstrated by our momentum in the adoption of PASCAL in Europe and in the U.S.

Any more color you can add on the adoption of PASCAL in the U.S. since the launch?

It's going according to plan. You saw our results in Q1 and Q2, TMTT growth is going well. We increased our guidance for the year. So we feel good about it.

The other thing that we feel good about in the U.S. is really our primary focus at this point in the early days of the introduction has been on procedural success rate and clinician experience, and we've seen very positive results on both fronts. We saw the same thing in Europe, and we decided we'd take the same playbook to the U.S. where we're really trying to build a strong foundation that we're going to grow off for many years into the future as this market continues to grow. And it starts with physicians being well trained, comfortable and having excellent experience outcomes to their patients. And we've seen that in the U.S. So we're really pleased with where we are.

So switching gears. Most investors are hyperfocused on U.S. TAVR, right? You know that. I like the pipeline. But we'll talk about U.S. TAVR and just TAVR in general. You talked about earlier, low double-digit CAGR for TAVR. I mean what are the drivers? How confident are you in that and maybe touch upon some of the issues you've seen in Japan. But what can you say on TAVR that will make people feel better? I didn't, look, we have early TAVR coming late next year, I believe, progress, 2028 or so progress. That's a moderate trial, right? But I think between now and early TAVR, how do you want people to think about the TAVR growth?

Very confident. I'm very confident about it. We are very confident about it. We see questions coming from some of you from the Street about it. We are confident. They are, look, we have, think about what we have. We have an amazing technology. And so we are going to continue executing on our playbook. Best innovation, there is more innovation coming, even though we are very pleased with what we have today. We are launching a SAPIEN 3 Ultra RESILIA, which is going well, a body of evidence, the excellence, our field people, our supporting physicians to ensure we have best patient outcomes. So this is a playbook which is working. There are so many patients in need. We are just, in my mind, just scratching the surface here in terms of patient needs, then you have education expansion [indiscernible]. We can increase this patient population in a big manner. And then you have, we have a number of activity around improving the diagnosis of patients, improving the treatment rate of patients. So all of that together, we feel good that this market is going to grow double, low double-digit CAGR in the next years, 5 to 10 years, and this TAVR market doubling from 10% today to 20%, I think something like that in 2028. So we feel excited about it. I think we are going to maintain our leadership position also.

And the competitive trialing in Japan?

So it is typical, it is happening. Every time there is a new therapy, a new competitor, physicians do what they should do, try it. And typically, in more than one time, more than 2x. Usually, it is 10 patients, 15 patients, 20 patients. And this takes like couple of quarters, 3 quarters. And then physicians are back to their preferred therapy. We have been the global leader forever. They know what they have with the SAPIEN platform. So it is happening right now. We are very confident that we are the leader today in Japan. Sequentially, we grew in Q2. Year-over-year, we grew in Q2, even if it was slightly below our expectation. But we are growing. And we believe that it is going to be back to a more normal state.

Just one addition, which is we're excited that this year, we're also introducing SAPIEN 3 Ultra RESILIA in Japan. And in Japan, we did not introduce SAPIEN 3 Ultra. So this is almost a 2-generation skip, and we're really enthusiastic about the reception we've seen from physicians in Japan, who have started to use it.

And Low Risk, you also recently launched in Japan. When was that? Scott, do you remember?

Late last year, I think we got...

It is a little surprising that you've seen the softness, I think, to me, given you just launched Low Risk?

Well, you had a combination of, remember, it just came out of Wave 7 of COVID in Japan, combined with competitive trial activity. So it was an active kind of noisy first half of 2023. As Bernard said, we've got a lot of confidence in our continued leadership position in Japan. And our growth year-over-year and sequentially this year has demonstrated that we're still in a good place.

It depends how you look at, you said your softness. I'm looking at, we have been used to see many competitors getting into the region in Europe, for instance, over the years. We have been in Europe for more than 15 years and we maintain our global, our European leadership position. So it is typical. You have a new competitor, you see these kind of things happening. But again, we grew sequentially and quarter-over-quarter. We wanted to do more but we still grew in Q2 quarter-over-quarter. So yes, it is happening, but we feel good about where we are going to end the year in Japan.

And so switching gears, to the guidance, I think 10% to 13% for total Edwards total TAVR. Scott, underlying growth, keep me honest here. How are you thinking about what gets you to the high end of that range?

Well, a lot of it just has to deal with this more balanced staffing environment that we've seen unfolding in 2023. So that permits easier access to patients to get treatment they need to get imaged and screened before treatment, but then ultimately getting their procedures as well. And so we're seeing a nice rebalancing of the environment generally where we're operating. We've expected there was going to be an uptick in the latter part of this year and our guidance is still assuming that in Q3 and Q4. The reason we increased our guidance originally, it's 9% to 12%, then 10% to 12% and then most recently 10% to 13%, is because of the favorable performance we've seen in the first and second quarter. So we're hopeful that can continue in the second half.

Got it. And Scott, on 2024, just the puts and takes. And I think on the top and bottom line and historically, you've been pretty helpful when you see things that you want to highlight or call out like FX, tailwind, headwind to margins and things like that. What are some of the things we should be thinking about?

Well, FX is certainly one. In fact, remember, at the beginning of this year, we thought we were going to have a big headwind to sales from FX in 2023, like $150 million. It's come way down from there to almost negligible. But at today's foreign exchange rates, if you just fast forward then to 2024, we would see a headwind to sales to some degree. We'll be able to quantify that better as we get to our investor conference. But there's, that's always the case. I think more importantly, we're seeing margins that have normalized versus where they were in 2022 where there was a big FX impact, now we're more of a normalized baseline for gross margin and we'll talk more about how that may trend in 2024 later this year.

So right now, the FX impact to gross margins in '24, did I hear you say neutral or just no comment right now?

I was talking about 2023, it's more of a normalized baseline. We'll talk about 2024 gross margin at the investor conference in December.

But in terms of the FX impact in 2024 on the gross margin, no comment is what I mean?

No comment until December. Right.

Got it.

From a pure business standpoint, Larry, look, we increased our guidance 10% to 13% this year. We are in a position of strength going into next year. So we feel good about our 4 businesses.

And Bernard, at a high level, how do you want investors to think about the algorithm at Edwards? Is double-digit growth an important goal for you each year in terms of leveraged earnings? How do you want investors to think about the algorithm for Edwards going forward?

So Scott and I and the leadership team, we have been discussing that a lot. My point of view is a little bit the same than in the past to think about this like having consistent, sustainable growth, double-digit growth. So it is not like sometimes you have companies here having a great year or a great quarter, correct, because comparables are easier. Here for us, no, we want to be consistent. We want to be durable, company delivering, discuss durable growth, top line, double digit, committed to big investments, committed to the pipeline, committing to all the patients in need. So this is the way to think about it. Now EPS leverage, for sure, it is important here, but this is the way we think about it.

Just on growth, Larry, if you just look back over the last several years, we feel really good about how we performed. There were a couple of quarters last year where in 2022 where we didn't have the performance we were anticipating. But in 2023, year-over-year, 2-year CAGR, 3-year CAGR, 4-year CAGR. We've consistently demonstrated around double digit, 10% or more growth for TAVR and for the full company. So it's not going to be exactly consistent every single quarter, every 90 days. But over time, we've got this unique growth opportunity where organic sales growth, we think, is going to continue to perform nicely.

And capital allocation, can we expect any changes under your leadership, Bernard?

So we are very fortunate to have this healthy balance sheet and P&L. We have been very active because most of our deals are premarket approval. And because they are small in nature, we have not been public about it, but we invested heavily internally to our pipeline, to our clinical evidence. And we also have been very active in acquiring small companies, technologies to complement our pipeline. So we feel good about that. I feel like we are going to continue doing that, pre-market acquisitions, small acquisitions to make sure we have this differentiated pipeline to drive our top line.

I would just add, the only thing I'd add to that is our priorities have not changed at all. And one of our priorities is that we're going to continue to repurchase stock. We think it's an important way to return capital to investors. You saw us be very aggressive last year when we had the opportunity. And so we don't, we're not going to repurchase same amount of stock every quarter. But over time, we intend to continue to offset dilution from incentive compensation and work the net share countdown.

A couple of random questions here. Competition, you talked about maintaining a leadership position in TAVR. So two here. One is Medtronic promoting better hemodynamics with Evolut FX versus SAPIEN 3, especially patients with small annulus or annuli, what is Edwards' response?

So we are listening to all of these, and because we take all of the competitive products, technologies and company very seriously. Having said that, we look back and we look at the big picture, I know that sometimes it is easier to pick on one element of a clinical evidence. We want to look at the body of evidence. It is the way physicians are looking at it. It's like do we want to look at pacemaker rates, stroke, durability, safety, effectiveness, all of that. So it is important, great to pick one or two. We believe that looking at the full body of evidence is the way that we should think about it at least for us. Anybody is free to do whatever they want, but I think physicians care about the patient, and so they care about the body of evidence.

Okay. And you talked about competition also earlier. Some people, people are watching Boston Scientific entry into the U.S. with ACURATE neo2, think the short answer, I'd be curious to see if you agree it's more similar to it's self-expanding, so more similar to CoreValve, Evolut? So is your view that because you're balloon expandable and a lot of other reasons that you're going to be more immune from losing share to neo2 when it comes to the U.S.?

Like I said, I want to start again with, we take everyone very seriously as we should. Two is, we have been in the valve space for more than 60 years. For many companies, it's one of the business. For us, it is all what we do. We take valve disease very seriously, valve technology very seriously. We have seen so many competitive products coming in and coming out. We have been very stable. We believe in our technology. So yes, we will look at it when they come to market, we will take seriously, but we feel good about what we have.

And X4 [indiscernible] remind us of the status?

X4 is, we restarted the study right now. And so we are going to give you more update probably during investor conference about the next steps.

Got it. You'll continue an annual investor conference under your leadership?

Yes, absolutely. And I think we decided on a date already in March.

Okay. I thought you were going to say maybe twice a year now.

December 7 at our corporate headquarters in Irvine this year.

Okay. Bernard, we've got a minute left. This has been a great opportunity to hear your perspective. Any closing remarks you want to leave people with?

Look, I think like, I hope you [indiscernible] this conversation as confident as I am about the potential that we have in front of us. We have solid businesses. We are in a healthy position, exiting COVID because we didn't stop investing. We have a great foundation. I believe that what you are going to see is durable, sustainable growth from us. I believe it is going to be an exciting time. So thank you so much for your interest in Edwards Lifesciences.

Thank you. Bernard and Scott, thanks so much.