Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Matt Taylor, I'm the U.S. Medical Supplies and Devices Analyst here, and I'm pleased to be joined by management from Edwards Lifesciences, including Scott Ullem, the CFO; and Mark Wilterding, who runs the Investor Relations function at Edwards. So we're going to have about 25 minutes for some fireside chat Q&A, and maybe a minute or two at the end for the audience to participate.

But I guess I always like to start a little high level as we have a mix of folks in the room and some may be uninitiated in terms of Edwards. So could you talk a little bit about the business, how it's grown and evolved? And maybe especially touching on some of the portfolio management that's going on with the sale announcement this week of Critical Care.

Yes, sure. So just to go really big picture, Edwards is now over 60 years old, and we were founded by Miles Lowell Edwards, an engineer who had this dream of creating an artificial heart. And after a couple of years, he was coached by some physician partners to maybe narrow his objectives and focus on heart valve replacement. So that's what we've really done for many decades now. We have 4 businesses. One is our biggest business, is our Transcatheter Aortic Valve Replacement business. It's now, in 2023, about 2/3 of the company, 2/3 of the total revenues of the company. Our fastest-growing business is our Transcatheter Mitral and Tricuspid Therapies business. So these are catheter-based therapies for patients suffering from mitral or tricuspid regurgitation. Our third business is our Surgical Structural Heart business, which is a growing business that supports cardiac surgeons who are performing open-heart surgery on patients suffering from diseases in all 4 valves of the heart. And then our fourth business is our Critical Care business. And that's the one, Matt, you mentioned that we just announced on Monday morning, we're selling to BD. And so we'll go from 4 businesses down to 3 with the close of that sale later this year.

Great. And maybe just to start, talk about the impact of Critical Care. You were thinking about spinning it. Talk about the outcome of the sale. And then I guess you're going to receive a decent cash infusion here. Could we expect you to do anything differently with your cash now that you'll have that?

So you're right. We had announced in December at our investor conference that we were going to execute the separation through a 100% tax rate spin-off. After we announced that, we did get some reverse inquiry from interested parties and ultimately decided that the best course of action would be to sell the business to BD. And we're pleased with the result. I think they're pleased with the result. It was really a win-win for both companies. The business is performing well, but we're really trying to focus all of our attention on structural heart. And within structural heart, there are really 2 areas. One is valvular structural heart disease. So the 4 valves of the heart get disease through stenosis, in the case of the aortic valve, regurgitation in the mitral and tricuspid valves. And then there are nonvalvular structural heart areas that we're focused as well, including heart failure. So we've got initiatives underway inside of Edwards and investments outside of Edwards to go after some of those opportunities. The extra, call it, $3 billion net of cash that will yield from the sale of Critical Care does not change our investment priorities or our capital allocation priorities at all. It starts with funding internal programs and also funding the manufacturing capacity we need to support the growth of Edwards. We also already have a very active business development program. Most of the deals that we do are smaller in size. We tend to buy earlier stage companies because we're focused exclusively on structural heart. But we'll continue to be making investments and acquisitions in our structural heart focus areas. And then of course, we're buying back shares and trying to make sure that we're making smart balance sheet decisions around what our share count looks like.

Very good. Maybe you could touch on each of the businesses and in turn, talk about some of the trends there, and then I want to get to the pipeline. So let's start with TAVR. Could you talk a little bit about the TAVR trends in Q1? I guess you grew a little over 6%, about 7%. And talked about some trialing in Europe and some pricing pressure there. So I guess, could you give us an overview on what's happening, if there's any update in Q2? And then overall, how do you expect the TAVR market to grow and your growth to be within that?

Yes. So yes, TAVR, we started out in the first quarter with lower year-over-year growth rate than we expect for the full year. Our guidance for TAVR for the year is 8% to 10%. We always knew that the first half of the year was going to be a lower year-over-year growth environment than the second half of the year. That's been our plan, and we saw that in the first quarter again. Just breaking it down between the 4 areas of the world where we focus our attention, U.S. grew faster than the OUS business in the first quarter. Japan was our fastest big growing region in the first quarter. In Japan, we saw some competitive pressure last year that abated in the second half of last year, and we're back to more of a normalized growth curve in Japan. In Europe, we were surprised a little bit in the first quarter by some of the competitive trialing that we saw. We expect the European environment though to normalize as we get later into 2024. And then the Rest of World where, today, we're in TAVR in over 60 countries. And so there are big growth opportunities in other areas of the world, and that's been a pretty exciting area for us in 2024, and we think it will be in '25 and beyond. Overall, the business is performing well. There's still an environment now where around 13% of patients who have aortic stenosis, severe aortic stenosis get treated today. And it's a remarkably low treatment rate, especially relative to other diseases with a high mortality rate like severe aortic stenosis, and it gives us confidence that we should keep investing in this opportunity. In fact, we just finished enrollment in an important clinical trial studying aortic stenosis in patients who just have a moderate form of the disease, where it has not progressed yet to severe. And we think there's a real opportunity to help patients who need earlier intervention to get their valve replaced and today are not on indication to do so with TAVR. There's another trial that's actually reading out later this year at the TCT Conference, studying patients who have severe aortic stenosis without symptoms. And if the trial shows what we think it will, it will be an important opportunity to make this therapy available to patients who have this deadly disease, but who did not get screened for care because they don't have symptoms today. So those are some of the factors that are underlying our current performance and what we think are going to benefit our longer-term growth trends as well.

Maybe I'll ask a follow-up on Europe because you are introducing a new product there with the S4 Ultra RESILIA. Has that had any impact on the trialing dynamics in Q2? Or have you seen those change at all sequentially?

Well, we're going to steer away from commenting on Q2 for now. But for sure, we expect it will be beneficial timing. We had SAPIEN 3 Ultra RESILIA approved earlier in the U.S., and we just got it approved recently in Europe, too. So yes, no, it's good timing to be introducing our latest generation technology. This latest gen TAVR technology is important because we take the SAPIEN 3 Ultra design with the delivery system and the skirt configuration that has dramatically reduced paravalvular leak and add to it RESILIA, which is a special tissue treatment that we've run through clinical trials, 4 now. We've got 7 years of follow-up data. And it's meant to extend the durability of the tissues in the valve. So it's a pretty exciting introduction, and I think it's going to be especially well-received in Europe.

And on the topic of asymptomatic and diagnosis. I know you've been making a lot of efforts to increase awareness in using tools and investments to help increase the diagnosis rate. So maybe you could talk about some of those efforts as we work into the asymptomatic study, which a lot of investors say, "Well, how are you going to find these patients? It's going to be harder." So talk about your efforts to date and how they can be applied potentially to the asymptomatic population and when that's approved.

Yes. It's the right question. I mean how do you know you have the disease if you don't have symptoms, right? So one of the things that we're trying to inspire is for patients to get more screening and especially elderly patients to go get an echocardiogram. Our dream is that at some point, getting an echocardiogram becomes just a common practice when you turn a certain age like 70 or 65. There are a lot of things that are bringing patients into the system. There's a greater awareness now of heart valve disease, partly because of the visibility of TAVR in a lot of circles, not just among physicians, but patients as well are now more aware of the disease. They've seen information campaigns that we've led and that the industry has led and other organizations like the American Heart Association are leading, and that's helped drive awareness. And even things like wearables that have triggered patients to say, "Geez, I got a funny reading from my wrist device, I should go get it checked out." True enough, when screened, they find out that there's a problem that needs to get addressed. And so those are the types of technologies and activities that are helping to drive awareness and hopefully get patients into the system and get referred from the point where either they get addressed, either they get diagnosed by a primary care physician or by a general cardiologist. But ultimately getting that patient to the point of care into the heart team and the hospital is what really matters. There are a lot of patients today who find out about a definitive diagnosis of aortic stenosis and never make it to the point of treatment. In fact, there's one hospital that we profiled at an investor conference 2 years ago, Mass General in Boston, where approximately 50% of the patients in the system had severe aortic stenosis, were on indication for treatment, and somehow just got lost in the shuffle and never got treated. So that's something that's important to change, and we're going after it.

Great. And you referenced this idea that it would be great to see people getting echos when they're 65 or 70. I guess I'm wondering if you think it's possible that would be asymptomatic data having another Tier 1 level evidence study, there could be any movement to change the guidelines. Has there been support in the societies for that? Can we see anything on the back of the trial?

It's the right question. We sure hope so. I mean, if this trial demonstrates what we hope it will show, it should increase awareness and the importance of screening, not for symptoms, but for the disease itself. And the best way to do that is through imaging. So yes, that would be a really important extended benefit if this trial reads out the way we hope it will. Again, it's early to say. So we're going to see what the data show in October. And then see what the physician communities reaction is. And I think you're right, it's going to inspire some follow-on activity.

Last one I want to ask on asymptomatic is just that in the past, we've seen other studies, the lower study helping with moderate and high-risk growth. Do you think asymptomatic could have kind of a halo effect on traditional TAVR as that data comes out and hopefully reads out positively?

We do. We do think there will be a halo effect if it reads out positively. Keep in mind, when TAVR was first introduced, it was introduced with a lot of restrictions on it. And it was reserved just for patients who are too sick or vulnerable to an adverse outcome from undergoing traditional open heart surgery. Over time, this partner series of trials that we've run has facilitated an expansion of the label to include patients who are not just the sickest of the sick, but even patients who are at low risk of undergoing traditional open heart surgery now have access to TAVR. But there are still a lot of patients who don't. You can get surgery if you're asymptomatic. Surgeons operate on patients and replace their aortic valves when they have moderate aortic stenosis, yet neither one of those patient populations has it available today. And so if we can continue to expand the population of patients who have access to this therapy, it's only going to reduce this perception that TAVR is experimental or not accessible or available or appropriate for all patients. And so we think there will be a halo effect if there's additional positive clinical trial results in October.

Very good. So we spent a lot of time on TAVR, and I wanted to pivot and talk a little bit about TMTT, which has turned into a really nice growth driver that will have some extra horsepower this year with a new product, the EVOQUE valve for tricuspid replacement. So I guess, teeing that up, can you talk about some of the underlying trends there? You've already raised guidance twice in the last 6 months or so or quasi twice. So could you talk about how the mitral business is developing and then maybe tee up what we should expect from EVOQUE?

Yes. Maybe I'll start with mitral, and then Mark, you can tackle EVOQUE. So we're really excited about what's happening in TMTT right now. One of the benefits of TAVR having performed so well globally is it has increased awareness of heart valve disease and awareness of catheter-based solutions like TEER, so the transcatheter edge-to-edge repair, which our PASCAL therapy provides to patients suffering from mitral regurgitation and tricuspid regurgitation. Both of these practice areas have been growing rapidly. We've seen double-digit growth in TEER in Europe and the U.S. over the last couple of quarters. We offer PASCAL for patients with mitral and tricuspid regurgitation in Europe. We have an indication just for a portion of patients suffering from mitral regurgitation in the U.S. We also have PASCAL in Japan, and it was really the biggest driver of our 70-plus percent growth in the first quarter. So this is a big area of opportunity for us. It's a high-growth opportunity for us. And then you add to that EVOQUE, which Mark can talk about.

Sure. Yes. We're equally excited about EVOQUE. We got European approval late last year, U.S. FDA approval in February. And since then, we've performed a number of commercial cases. Outcomes have been tremendous, in line with that, with which we saw in the clinical trials themselves. The difference this device makes for patients is like night and day. These are patients who were dealing with very poor quality of life, a lot of fluid retention, inability to walk into the procedure itself. And yet when they come back for follow-up several months later, they're like a totally different person. They can walk, they're mobile, they've restored their quality of life. So it's very rewarding for us to see that. We've got good line of sight in terms of how we want to go from a very methodical targeted launch at this point, focusing on the same clinical -- excuse me, the same sites that were involved in the clinical trial itself to broadening it out over time. And so we're feeling good about what we're seeing so far with EVOQUE.

Great. So I guess it sounds like the early demand indicators are really strong there. I guess, could you remind us on the rollout? How many studies were kind of teed up from the study itself -- sorry, how many centers are teed up for the study itself? And then how many you might be able to add through the year?

We're at about 40 or 50 today in the U.S. And again, the same sites, as you mentioned, as I said earlier, that were involved in the clinical trial itself, it will grow over time. We don't have a target or say map that we're looking at, but we haven't communicated that. I should say internally, we've got targets. But it will grow over time.

And we know about a lot of the good quality-of-life benefits for those patients who don't really have other options. But we will see the 1-year data this year as well at TCT and there's been some speculation about whether we could actually see benefits on harder endpoints like mortality. So I guess I'm hoping you could comment on the likelihood of seeing that, a; and b, how much does that actually matter in terms of it being a catalyst for uptake?

Yes. Well, we haven't seen the results yet, so we'll have to hold off on the specific predictions. But there was a view that the early approval of EVOQUE also reflected favorable trends in mortality and rehospitalization. So that's, I think, what others are expecting to see at TCT this fall. What was the second part of your question?

I guess if we see a mortality benefit or not, does that change your long-term view on what EVOQUE sales could be?

Sure. Yes. Thanks for that. Yes. Look, anytime there's a mortality benefit, that's an even bigger changer -- game changer. But for patients suffering from tricuspid regurgitation, as Mark said, this is a terribly debilitating, miserable disease. And so quality of life improvement alone is compelling in terms of the benefit that this therapy can provide, if widely adopted. Again, we'd like to see broader benefits as well, but just the quality of life alone is pretty amazing and a really good rationale for broader adoption.

Great. And maybe we could talk a little bit about what I'll term, the portfolio effect of having solutions across the TMTT landscape. So eventually, you will have approved repair and replacement solutions in the mitral and tricuspid physicians at least. And it seems like, anecdotally, we've heard that EVOQUE is maybe helping you with your TAVR business, as people are so interested in EVOQUE that it may help you to get some leverage or induce them to buy mitral or TAVR or other products. So can you talk about the portfolio effect in general, whether you're seeing any benefits today and how that could evolve over the next year or two as you get more approvals?

Yes. I think the portfolio benefit is really centered around TMTT, and here's why it's important. It's a really good question. When patients present with either mitral regurgitation or tricuspid regurgitation, there are important decisions and decision criteria that physicians assess in determining the right kind of treatment. And if you just have one alternative, it's a different conversation when partnering with a physician that only you have a repair and a replacement solution. Because for some patients, TEER is the best alternative and maybe replacement is not a good alternative or they're not appropriate, and vice versa. For some patients, replacement is better than a repair solution. So having both is really valuable as we partner with physicians to help them provide the right kind of care for patients. Today, now with the approval of EVOQUE, we've got repair solutions for mitral and tricuspid, replacement solution for tricuspid. And by the end of next year, we're expecting to introduce our first-ever sub 30-French mitral replacement solution, SAPIEN M3 in Europe and then in U.S. to follow.

And maybe I'll pivot and ask you a few margin and financial questions. So related somewhat to this topic is that you've been running all these studies, trying to get these approvals for a long time. Hopefully, you will have them in a year or two. So can you talk about what that means for future spending plans and if that will allow you to get some leverage on those investments and actually produce more operating margin expansion?

Yes. Yes is the short answer. The longer answer is, our dream for the last 10 years has been to invest aggressively in areas where we think there's a huge patient clinical opportunity and also an opportunity to grow sales and to perform well on the P&L. And we're seeing that happen now with the approvals that we're seeing in TMTT with that business now expected to grow to $320 million to $340 million in sales this year, it's a real thing. And we're going to continue to invest aggressively in generating data to support adoption of those therapies. So our #1 objective is grow top line profitable sales. Organic top line growth is our #1 objective. At the same time, as the company continues to grow and scale, we're going to see benefits that flow down the P&L, both through probably research and development as a percentage of sales and SG&A and the like. We're expecting incremental small improvements in operating profit over time. But again, if we had to choose, we'd probably prioritize investing for longer-term sustainable organic, profitable top line growth.

Very good. And a couple of minutes left. So I wanted to touch on heart failure and related to this topic. So you mentioned that before as sort of another area within structural heart that you've started to invest in. Over time, do you see that becoming kind of like a fourth leg of the new stool? Could it be a big area of revenue, kind of like another TMTT? Or is this something that investors should pay less attention to now in the background?

So we're excited about heart failure. We're excited about it because there really have not been a lot of success stories in heart failure device. There's a lot of heart failure pharmaceutical offerings, but device companies are still in their infancy in terms of developing really viable therapies that are available for a wide group of patients suffering from heart failure. We have one internal program right now. The name is APTURE, and we just got approval and are starting to enroll our first pivotal IDE trial called ALT-FLOW II, which studies APTURE. APTURE is a unique product. It's studying -- this trial is studying HFpEF patients, so patients suffering from heart failure with preserved ejection fraction. And the unique thing about APTURE relative to some of the other heart failure devices is it's not a transseptal intracardiac shunt. It's a shunt that goes through the coronary sinus. And it's meant to replicate the native flow of blood and the fluid dynamics between the left side of the heart and the right side of the heart. And so based upon the early feasibility study results, we've got some optimism this could be a real difference maker in the lives of patients we're studying from HFpEF. And in fact we saw really remarkable improvements in KCCQ scores from ALT-FLOW I and we're hopeful that we got to replicate those in the pivotal after we get it enrolled.

Okay, very good. Well, we're about out of time. So why don't we actually end there. But Scott, Mark, thanks so much for your time, and thanks, everybody, for your interest in Edwards.