Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Good afternoon, everyone. It's now afternoon. We've also arrived the morning of Day 1 of the William Blair Growth Stock Conference. Appreciate you guys all being out here. My name is Margaret Kaczor Andrew. I'm the research analyst here at William Blair & Company, who covers Edwards Life Sciences. Before we begin, I'm required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. Now we're very pleased to have Scott Ullem, the CFO; and Mark Wilterding, SVP of IR and FP&A of Edwards. So guys, thanks for joining. For the folks in the audience, we're going to do a little bit of a Q&A version of a typical presentation session. So hopefully, more active and more interactive and so on. But we'll go through some of the background still of Edwards, what they do, and dive into some of those details. Before maybe we begin, I'll give a little bit of background. Edwards actually helped create the first heart valve replacement technology about 60 years ago. I'm going to look at Scott.

Yes. That's right.

Perfect. And remains the global leader today is still in transcatheter and surgical heart valve technologies. The company continued to innovate on its SAPIEN platform over the years, and now it's that preferred TAVR technology, and they've treated over 1 million patients to date and have nearly a dozen New England Journal of Medicine publications to support the clinical efficacy of the device. But it's more than TAVR-in-SAVR business. The company has actually entered, in our view, a pretty pivotal moment in their history, frankly, as they move into transcatheter mitral and tricuspid therapies, or TMTT. So you'll hear us say that for short. And these guys probably -- again, you can correct me if I'm wrong, I think you've probably invested more than anyone else in the space within those 2 technologies.

Stands to reason. Yes. I think that's probably true.

So it's a toolkit approach, and we'll go into why the disease state is so difficult to treat and why there's maybe different types of technologies that will work best for various types of patients. And then the company has a fourth business segment in Critical Care, which was initially supposed to be spun off at the end of the year. Just yesterday, they were nice enough to announce a new announcement, which was that Becton Dickinson was going to acquire that business for $4.2 billion. At the tail end of that, again, you'll correct me if I'm wrong, but $6 billion or so in cash probably. Maybe short.

Probably less than that because there's a tax liability that goes with the sale.

Okay. Regardless, still a lot of billions for investments. So a lot to talk about here. Again, I know it's a journalist conference nature. So maybe Scott will start a little bigger picture first. If you could give us some background on kind of the 3 core segments, ex Critical Care, so SAVR, TAVR, TMTT and if you can highlight just the last 2 or 3 years in the growth drivers of each of that divestitures.

Yes. And good afternoon, everyone. Thanks for the question, Margaret. So you're right. So 3 business units pro forma for the divestiture of Critical Care. The first and biggest one is our transcatheter aortic valve replacement business, which is really built on the SAPIEN platform. SAPIEN is a trade name for our TAVR technology. And this technology was originally introduced as a commercial therapy in Europe, contributions from TMTT this year and in the years ahead. But the business is really focused on offering therapies to patients that can both repair mitral tricuspid valves or replace mitral tricuspid valves. And it's important to have those different therapeutic alternatives because these diseases present themselves in different forms. So unlike aortic stenosis, where there's really just a one-shot replacement requirement and mitral and tricuspid, there are more sophisticated requirements to treat all these patients. And then the third business is our surgical structural heart business. And so in this business, we make valves that are implanted through a traditional open chest procedure, and the big growth drivers right now for us are a new aortic replacement valve called INSPIRIS, a new mitral replacement valve called MITRIS. Then we have a new aortic product called KONECT [indiscernible] program and always has been our program with the exception of Critical Care. So this is not a change in direction. It's a refocus or a heightened focus on structural heart. The proceeds from the sale of Critical Care will be used to continue to invest in growth initiatives around aortic, mitral, tricuspid and pulmonic valves, both internal and external. And we've been very active on the business development front over the years. We typically buy relatively small acquisitions. We typically either make a minority investment in the business, sometimes we'll buy options to acquire a business and we can exercise those options based upon our view of different milestones that the company has achieved or regulatory approval of a particular product. And so we'll continue to do that. And I think you'll see continuing deal flow from Edwards, but all in the area of structural heart.

Okay. And you mentioned all 4 valves in the heart sell. I'll just kind of double down within that as a category. Do you see more of the investments or the opportunity maybe on the mitral and tricuspid side, any of the 4 that you would kind of call out, because aortic I think a lot of people just assume it's a little further penetrated.

Yes. I wouldn't assume that. There's a lot going on in aortic innovation as well. So I think really, all 4 is really all 4. But that's just the valvular side of structural heart disease. There's a non-valvular side of structural heart disease, where we're also making investments. It's an earlier stage area for us at Edwards. We have one internal program with a therapy called APTURE, and we have investments outside of Edwards in heart failure, which is also structural heart and an area where you should expect that we're going to be more active in the years ahead.

Okay. So maybe let's do one more kind of high-level question. And it's around the CEO change, which, frankly, a lot of people know at this point, but maybe for this audience, there was a CEO change a little bit over a year ago from Mike Mussallem, who has been there for many, many a year to now Bernard. Maybe walk us through why that change had happened and as you look at the last 1.5 years or so, how has the company developed?

Yes. So this is a planned succession process. Our former CEO, turned 70 and decided that he was going to retire and Bernard Zovighian, who had been with the company for nearly 10 years now, has run 2 of our 4 business units at Edwards and has stepped into the role and it's been about as seamless of a transition as you can imagine. It's one of the benefits of an internal candidate, especially one who's run different businesses within the company. And Bernard had a real high-end in really charting the strategy for the company and is now executing it in his different role. But it's gone pretty well. I mean, nothing has really changed in terms of the strategy of the company, the focus of the company or really the patient orientation of the company.

Okay. Great. So maybe let's go back to TAVR. It's a significant portion of the sales today. As we think about the SAPIEN series of valves relative to some of the competitive valves, maybe you can walk us through a high level from a self-expandable versus a balloon expandable valve and why that matters?

Sure. So you're right. There are 2 basic varieties of transcatheter valve replacement technologies. One is a self-expanding valve. Edwards had a self-expanding valve program. We decided not to continue it even though we had the best self-expanding valve clinical trial data of any that had been introduced at that point. Self-expanding valves are a little bit taller in size. Usually, they're made out of nitinol, which is a memory metal. And so they get deployed, but sometimes they're a little less precise in the position where they can be deployed because this memory metal has a tendency to jump. Edwards is the leader in balloon expandable technology, where a valve has collapsed onto a balloon, threaded into position in the aortic position and then a small balloon is inflated to deploy that valve into position. It can be very precise and as very consistent outcomes as a result. Balloon expandable is the leading platform around the world. We're the leader in balloon expandable and have been since the advent of TAVR really.

Yes. Okay. Historically, TAVR has been this wonderful double-digit growth story. COVID maybe disrupted that a little bit in terms of, unfortunately, patient mortality, patients moving through the funnel and so on. But if we look at this year, your guidance is for 8% to 10% growth, stronger in the back half than in the first half even though you have some tougher comps. So maybe walk us through kind of that dynamic at both Pre-COVID, during COVID and as we look out for guidance this year, what are you assuming?

Yes. So you're right. I mean, COVID messed up a lot of things in our business. And in fact, we had to pause some clinical trials during COVID just because physicians were laser-focused on treating or being prepared to treat COVID patients, but that's all aging history now. We're back into a new normal operating environment, and our business is growing nicely. For TAVR, it's a pretty exciting time in TAVR right now. We've got our newest product, which is -- it's called SAPIEN 3 Ultra RESILIA. And the RESILIA part is referenced to a tissue technology that Edwards researched and invented and then ran an extensive clinical trial on, and we recently read out the 7-year results in the commenced clinical trial, demonstrating that this tissue treatment had real benefits in terms of extending the durability and the longevity of the tissue on these valves. Biomechanical prosthetic valves like transcatheter valves end up having a defined life span because -- typically because there's coagulation and calcification of the leaflets. This RESILIA tissue treatment reduces the risk or defends the tissue from that calcification. So we're pretty excited about introducing that. We just got approval recently in Europe as well. So it's -- we're introducing it in the U.S. We're just now starting the introduction in Europe. And so we think it's a really nice next step in the evolution of this technology. We've also got a number of clinical trials underway right now. So we have one trial that's -- well, let me step back for a second. When we first designed the clinical trials for TAVR, it was relative to an established and safe and effective alternative, which was traditional open heart surgery, which has been around for decades. But as a result of their being an established procedure, the original clinical trial guideline was to reserve TAVR just for patients who are too sick or too risk of death from getting open heart surgery. And over the last 10 to 15 years, we've gradually been testing those parameters and demonstrating that TAVR is actually safe and effective and, in fact, in some cases, statistically superior to open heart surgery. And so we've got multiple clinical trials still underway, still advancing the eligibility of this therapy for different patients based upon clinical trial results. One of the results that's going to read out later this year at a big medical conference called TCT is the results of a study showing what happens with patients who get TAVR who started with severe aortic stenosis, but without symptoms because today, TAVR is reserved only for patients who show symptoms of this severe disease, which is sort of bizarre when you think about it. There aren't any other diseases where the therapy is -- once you demonstrate that you have the disease, and this is a disease, by the way, Aortic Stenosis, which has about a 15% mortality rate after 2 years, that you have to demonstrate they also have symptoms in order to get the therapy. So this trial is taking on that presumption. And we believe, we're hopeful we'll show signs that lead to an indication expansion so that any patient with severe AS can get TAVR. There's another trial reading out in 2 years, actually it rolled much quicker than we thought, which is studying TAVR patients who have a moderate form of Aortic Stenosis. So Aortic Stenosis is a progressive disease. It starts out mild, then moderate, then severe. We think there's rationale to think -- to believe that some patients who have just a moderate form of the disease would benefit from earlier intervention rather than waiting until it turns severe, waiting for the heart to remodel to accommodate the disease. And so that could be another growth driver in the years ahead.

So 3 growth drivers mentioned, next-generation products, S3 UR, I'm just going to call it simply the RESILIA product, but S3 UR too. I mean, you've got the early TAVR data that's coming out of TCT, which will be for asymptomatic patients as well. And then you've got the PROGRESS trial, which is the one that you were mentioning on moderate. But maybe we break that -- all 3 of those down. So S3 UR with the thought process that the lifetime of the valve is frankly better because of the lack of calcification, you did launch that with a price premium. Maybe talk about how the market receptivity has been to that price premium on the market, both in Europe as well as the U.S.

Yes. Well, we're still early days in Europe. So it's probably premature to speculate about pricing there. But in the U.S., yes, it did come with a price premium. It's a different product. It's got enhanced functionality. And so we thought it was appropriate and S3 UR now represents over 50% of our SAPIEN sales in the U.S., if that's any indication.

So people like it.

I think it's been received well. And like I say, it's got a lot of clinical evidence backing it up. So our business is largely driven by rigorous scientific data supporting the therapies, both the efficacy of the therapies and the safety of these technologies.

How long would you expect to sell both, the older generation valve and the newer generation sale?

We've been talking about that internally. We don't have an answer yet. For the time being, we're going to maintain supply for both SAPIEN 3 -- SAPIEN 3 Ultra and SAPIEN 3 Ultra RESILIA.

Okay. So then going to kind of the second pillar of growth, let's call it, which is the early TAVR data coming out of TCT later this year. How should we think about the potential guideline changes that could stand on the back of that? And with some of the earlier data sets that we had seen was some creep, right? And so maybe before reimbursement comes on, you saw lower risk data come out, and you suddenly saw some extra usage maybe of patients earlier in their care. Is that something that you would anticipate here as well?

Well, Mark, do you want to comment on TAVR results last year?

Yes, absolutely. Thanks for the question, Margaret. So we're looking forward to that data. It will be presented, as you mentioned earlier, later this year at TCT, last week of October. In terms of the questions you asked, it's hard to isolate three. I don't think it's happening on a wide scale. There may be some instances of it, but by and large, we like to think that physicians are using this product on label and to treat patients who have symptoms as opposed to those who are asymptomatic. In terms of the questions we're trying to answer coming out of this trial, Scott touched on it a little bit, but basically looking at how quickly do asymptomatic patients progress to being symptomatic and how much better off are they being treated sooner rather than later. And so those are the 2 kind of areas of focus for us. Indication expansion is something that we're looking forward to, but it doesn't happen overnight. It will take favorable outcomes of this trial. And again, we'll have more share later this year.

And for the folks in the audience, I'm not sure you had size that as a population. So maybe you can add some of that background as well. I think you're trying to play with the mic in the back.

The asymptomatic. Well, it's a little bit difficult to put a beat on it. We used to think that there may be as many asymptomatic patients as there are symptomatic patients. But we're estimating within the prevalence pool, what that could look like, there are probably more symptomatic patients now, partly because there's greater awareness of the disease, but there's still a good chunk of patients who have severe AS but do not have symptoms or can't associate the symptoms with the disease.

Okay. That's helpful. And so one of the interesting parts for me in med tech and folks that have heard me talk before around Monday, we had a presentation as well. Asymptomatic is one of, I think, the future of health care in general. And it's actually a pretty big component, I would say, of the growth of medical technology companies such as yourself. So just big picture for me. Do you agree with the statement like that? And what kind of structural changes do you need in the marketplace to drive a symptomatic care? Because most patients, frankly, if you don't have symptoms, you're not going in for care anyways.

Well, it's especially true for elderly patients. And most of the patients who we treat are elderly and if you're an 80-year-old who has severe Aortic Stenosis, you might have other things that are slowing you down as well. So it's tough to associate and say, geez, are you lower on energy? Do you feel faint. Do you just not have it get up and go they used to and have a patient and say, yes, and it's because of my Aortic Stenosis. Nobody knows that. So getting to a point where you can actually diagnose quantitatively, the disease is really the holy grail. And I think everything from wearables to better hospital diagnostic technologies is going to help these patients get the care that they need.

Okay. That's helpful. And then as we talk about progress, I know it's still 2 years away as we think about a readout in 2026. But maybe size that up for us as well. And then just from a, again, a high-level perspective, if you think about someone earlier in the disease state, why would they need a transcatheter technology versus just doing a more surgical case, is it age, what's the characteristics that lead to that?

Yes, a couple of questions in there. One is the size of the population. We think there are at least 2x as many patients with moderate Aortic Stenosis as there are with severe Aortic Stenosis. So it's a big opportunity. It doesn't mean that all patients with moderate AS should get their heart valve replaced. But that's one of the things that we're studying is, when is intervention appropriate. In terms of surgery versus TAVR, there's been, for a long time, some speculation that surgical valves may be more durable than transcatheter valves. And therefore, for younger patients who will likely live longer, maybe they should get surgery. So I'm clear that that's the case. And Edwards is the leader in both surgical valves and transcatheter valves. So we've studied this a lot. We care deeply about the durability of our valves. In testing and clinical trial results that we've seen, there's not demonstrable difference between the two and the tissue is the same, which, as I mentioned before, is really the primary cause of valves reaching end of life. So I don't know that moderates are more likely to get surgery than their transcatheter, but that's one of the things that we need to understand better and we'll have a better view on when we get to 2026 when this trial reads out.

And do you have a sense even of those that are moderate, some of them may in fact be older, right?

For sure. No, that's exactly right. The disease progresses at a different rate. Some patients can stay moderate for a long time. Other patients progress rapidly from moderate through severe to risking mortality.

So we've spent a lot of time on TAVR, which is the aortic valve, obviously, a huge market, a huge part of your revenues. But TMTT, the mitral and tricuspid area is kind of the next frontier, the great frontier or whatever you want to call it. Maybe again, high level for us, why is mitral and tricuspid such a more difficult valve to treat -- valves to treat relative to aortic? Why it's taken so long?

Well, I think one is -- it's just new -- I mean the journey for mitral and tricuspid is just beginning in a lot of ways, as with aortic valve replacements, it's been much more tried-and-true and understood for decades. And it's reflected in the treatment rates. So right now....

And on the surgical side, just sorry to interrupt.

Just on the surgical. Yes, exactly, not in catheter-based. But just to give you a sense of treatment rates for Aortic Stenosis, something like in the U.S., 12 or 13-ish percent of patients with the disease actually get treated, which is relatively low for a disease with this high mortality rate as we're talking about with severe AS. For mitral regurgitation and tricuspid valve regurgitation, the treatment rates are even lower. I think 3-ish percent for MR and less than 1% for tricuspid regurgitation. So huge opportunity, and that's one of the reasons why we've been investing so aggressively at this, not just in TMTT, but in surgical as well. I mentioned that one of our new valves in surgical structural heart is a mitral replacement valve using this RESILIA tissue.

Okay. If there are questions in the audience, feel free to ask them because I always try to do that in the last 5 minutes, just in case, but we will have a broader breakout later. So the two most successful products, let's call it, within TMTT for you guys so far have been PASCAL as well as EVOQUE. So walk us through why those products can address the disease better maybe than historical technologies have been able to?

Sure. So you hit on it before, Margaret, you made a good point, which is, historically, there just hasn't been that much surgical intervention to treat mitral regurgitation and tricuspid regurgitation. One of the reasons is because the diseases are not as well understood. Aortic Stenosis is Aortic Stenosis. Mitral regurgitation is either degenerative mitral regurgitation or functional regurgitation. There's a problem with the leaflets or the chordae or the papillary muscles that control the mitral valve. So it's a much more complicated disease state that physicians are just now better understanding, and we're delivering therapies to go to help support that journey. I think that one of the exciting things about tricuspid replacement is that this is a valve that is often times referred to as the forgotten valve by physicians. And yet tricuspid regurgitation is a brutal disease. People who suffer from TR have dramatic swelling in their legs. It's a painful disease. They're in and out of the hospital regularly, like monthly or every other month. And it really just is debilitating from a lifestyle standpoint. So here we come with EVOQUE, which has just gotten commercialized in Europe last year and the U.S. earlier this year, and it is a life changer for patients who get EVOQUE. I mean they literally go from being immobile and paying to 2 weeks after procedure being able to walk down the hallway to go see their doctor for the follow-up appointment. And it's just amazing. Procedure takes about an hour. Patients are very stable. It's a beating heart procedure. So the patient -- there's no sternotomy, there's no stopping, there's no -- all the things that go along with typical open heart surgery. And it's one of the reasons we're so enthusiastic about it. For mitral and tricuspid, there's a repair technology called transcatheter edge-to-edge repair or TEER is the acronym. And there are 2 competitors, really Edwards and another company that's been the leader for several years. And we're excited about TEER because there are a lot of patients who benefit from TEER in a way that they would not benefit from a full replacement. So TEER is the only option. And it's safe, it's effective. And the recent clinical trial data that Edwards has generated suggests that our PASCAL therapy is really top-notch in terms of safety and efficacy. And we've seen it in the real world as well. We've now got a business that's thriving in Europe. We just got approval to launch PASCAL for patients with degenerative mitral regurgitation in the U.S. We're active in Japan as well. So early stages, but we've seen in the first quarter, for example, over 70% growth largely driven by PASCAL.

And I'd be remiss to not point out the fact that you guys have raised guidance twice, some of that of TMTT already just in the early quarters of launch, let's call it. Can you give us a sense, especially with EVOQUE, maybe that's a new technology within this space. What are you hearing from clinicians? And can you even give us a sense of what percent growth or sales that could be by year-end?

Right, sure. So we're not going to get into sales forecast for EVOQUE, but we can tell you what we're hearing from physicians, which is similar to what we heard from physicians while we were enrolling the clinical trial. It was a trial called TRISCEND II. The trial enrolled much faster than we expected. And that's oftentimes an early indicator for what the commercial experience will be like for a therapy. And it's been just that. And ever since we got the approval, there's been much more demand for launching EVOQUE programs at hospitals that we're able to support right now. So we're going as quickly as we can at training new sites, getting operators comfortable with the procedure, making sure that operators and the imagers who participate in these procedures are working well. And so we're pretty optimistic about how this is going to make contributions to Edwards, not just in 2024, but in 2025 and beyond. Again, remember, the forgotten valve has very rare intervention. Now here's a chance where with a very straightforward procedure, these patients can get the treatment that they need.

Perfect. Well, really appreciate your guys' time. We will have a breakout in the Adler Room upstairs. Thanks guys.

Thanks, Margaret. Thanks, everyone.