Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

All right. Welcome back. I'm Larry Biegelsen, the MedTech analyst at Wells Fargo. And it's my pleasure to host this session with the management team from Edwards Lifesciences. With us, we have Bernard Zovighian, the CEO; and Scott Ullem, the CFO. It's going to be a fireside chat. If anybody has a question they want to ask, just raise your hand, we'll come around. Bernard and Scott, thanks so much for being here.

Thanks, Larry. Thanks for having us. This is our pleasure.

So Bernard, let's start with the strategy, and I wanted to give you a chance to address the recent stock reaction. Were you surprised by the magnitude of the drop? And what's your message for current and potential investors?

No. Thanks, Larry, for getting into this one, which is an important question for sure. So I would say a couple of things about the Q2 stock reaction. I would say disappointed, obviously. No one feels good about this kind of acute reaction. A little bit surprised. The only -- the silver lining is this gave us an attractive entry point for our share repurchase. And you saw the news this week. We have done a $1 billion share repurchase. So that's the only silver lining out of all of this. But the message to investors is, in my mind, it is important to look at the big picture. Yes, for sure, talking the Q2 results, we are below expectation, no question about it. We are aggressively working at solving it. And I can tell you, I'm very confident about the potential of TAVR, the trajectory of TAVR. And I'm sure we are going to talk more about it. Now also TMTT, TMTT is becoming a growth contributor to the company, and you have seen that this year. And we see that TMTT will increase its contribution to the growth of the company. Now you look at the entire company, in Q2, we grew 8%. And we said that we are on track to deliver on 8% to 10%. 8% to 10% was the guidance for the year in December. So yes, I know that in Q1, we increased it to the high end of 8% to 10%, and we are back to 8% to 10%. But nevertheless, we are at 8% to 10%, which is a good performance for the year. So the message is, we are a global leader, successful company. We are into a big market, growing market. We have a capability and we should feel very excited about what's ahead of us. So that's a clear message.

So Bernard, you recently announced the sale of Critical Care, just closed, and the acquisition of 4 private companies.

Yes.

What's your strategic vision for Edwards? And how is the company going to look in 3 to 5 years?

Yes. Thank you. That's an important question. And I want to start with, I have been with the company for almost 10 years; it will be 10 years in January. So I was part of all of the strategic plan we have done in the last 10 years. The strategy has not changed. The discussion of Critical Care, we had this conversation for many years. We just made a decision last year and I am very pleased about the execution. We closed the transaction this week, slightly ahead of schedule. When you think about where we are going and we are continuing what we started, being this global leader in structural heart disease. The way we do it, in my mind, is very unique. It is about going first. It's about creating category and owning the category, being a pioneer. I can give you a few examples that you know well, I'm sure. On surgical, we have been the pioneer 60 years ago. We are still a global leader today. With global leadership in terms of share, premium pricing because we bring value. In TAVR, the same. We have been a pioneer 20 years ago. Today, we are the global leader, premium pricing, and we are still innovating with new technology, new evidence, and we are going to talk about it here coming. TMTT, the same. We were the first to say a portfolio is necessary. One modality, TEER, is not sufficient to unlocking of a market potential to treat all the patients. So you look at EVOQUE, category leadership. We are a pioneer. Mitral replacement with M3 and Innovalve, we are a pioneer. PASCAL and TEER, we came second. But you see what we are doing right now, we are bringing evidence, new technology. We are growing very fast. We are very pleased about it. So what you can expect in 3 to 5 years is Edwards being in structural heart disease the leader, adding multiple growing businesses. TAVR is today the most important business for us, will remain very important. TAVR is not anymore the only business. That's probably the message. So I feel good about what we are doing, executing the strategy basically.

Understood. The timing of the 4 recent deals, or 3 with the earnings call, concerned investors because it didn't seem like a vote of confidence in your TAVR and TMTT businesses. So how do you respond to that concern?

Yes. So don't misinterpret an announcement with a strategic decision made long time ago. So let me give you some examples. In the case of Endotronix, we knew the company for a long time, we made the first investment in 2016, an option agreement in 2018. And in this kind of option deal, what are you doing? You are doing a diligence and you are seeing, look, if you achieve this kind of milestones in that case, for Endotronix, it was FDA approval and some kind of clinical outcome, we will buy the company. And usually, we have a very short window. For Endotronix, we added a few weeks. They got FDA approval. So in July, we made the decision to buy the company. Innovalve was exactly the same. We made a decision in 2018, option deal. We wanted to see some clinical outcome. They achieved the clinical outcome. We made the decision in July also. ER, ER has been a very interesting space for us where we see that these patients are untreated today. And so for a long time, we were watching, but we were also watching for clinical signals. At TCT last year, JenaValve presented clinical data, and we say, you know what, we like it. And it took us [ here months ] since your TCT last year. We want to be able to close the deal. So it is the way, all of the strategy where long term in the making, strategic, planful, thoughtful, they all happened, the announcement in July, but that's just a coincidence.

I'll just add, when we said at our investor conference in December, there are 2 or 3 things that are near-term decisions, these are the deals we were talking about. We did not expect that the [indiscernible] were all going to come in the same month, but that's...

Yes. Good add. Yes, thank you, Scott. Absolutely.

And building on that, you've talked about, Bernard, building out an interventional heart failure franchise. I thought you said you were evaluating 2 to 3 heart failure deals, maybe I misunderstood, but Endotronix is your first move into that area. Should we expect additional acquisitions in that franchise, call it, in the next 12 months or so? And how should we think about deal size and dilution you're willing to accept?

Sure. So probably not expecting more deals in the next, let's say, 12 months. Obviously, we have been a heavy, heavy investors in the last 10 years. We have option deals today active we are looking at. We have equity investments. We are watching anything in structural heart disease where it can be an important market with a large unmet need where we can be a category leader, be a pioneer, being first. But I would not expect any deal in the next 12 months here. In terms of dilution, you want to talk about that?

Sure. Yes. So on, let's say, size and dilution. On size, usually what we look at is smaller-sized deals. We're not going to do bet-the-ranch company transforming deals because our strategy is focused on structural heart, and the opportunities that we have for external growth are generally earlier stage companies that tend to be smaller in size. Now they also tend to be unprofitable. And so most of what we buy is dilutive, but we try to offset the impact of that, at least in the short term to medium term by making other changes and reprioritizing where we're investing.

But I think -- thank you, Scott. This concept about being a pioneer, creating a category is so important. You have a different kind of trajectory. You have a different kind of impact to patients, to physicians, to the space, to innovators, to payers, to providers. Again, you remember the example I gave you, surgical, TAVR, EVOQUE, mitral replacement, AR is the same. So for Endotronix and for PASCAL, it is not about becoming second, aiming for leadership with a fast innovation, clinical research, but most of what we do is about being a pioneer. And if it is not about that, it is about aiming for leadership fast.

So on Endotronix, remind us of why interventional heart failure is synergistic with your structural heart business?

Many of the patients, it is very easy answer, Larry. Many of the patients we are today serving, mitral patients, tricuspid patient, have also heart failure. And so for us, expanding within structural heart with true heart failure in accent, we are also -- we are treating these patients today. We are talking to the physician today. So it is a natural progression for us.

Okay. That's helpful. Maybe if we have time, we'll dig into Endotronix more later, but there's obviously other things to get to. Let's get the numbers out of the way first before -- I wanted to dive into TAVR and EVOQUE, et cetera, but Scott, let's just -- there's obviously -- I know you've been a lot of focus on trying to figure out what '25 might look like. We published the other day when the Critical Care deal closed, we got to $255 million for remaining, call it, Edwards for 2025. The pieces where we looked at the midpoint of the prior '24 guidance, it was about $2.75. We assumed about $0.40 dilution from Critical Care. And so that's pro forma '24 EPS of $2.35. We assumed you grow your '25 EPS by 10%, and we used a lower share count based on the recent repurchase. And we got to $2.66. And then I think deal dilution, we assumed about $0.14. And then interest income from the remaining $500 million in proceeds from Critical Care added about $0.03. I hate to go through all that math on the webcast, but I think that was the math that got us to about $2.55. Scott, of course, I'd love to get your reaction.

Yes. Thanks for the question. And we know that everybody on Wall Street is trying to understand what the future looks like for Edwards Lifesciences. We're not going to give 2025 EPS guidance today. There are estimates on Wall Street that show earnings per share going up in 2025. That's not going to happen. Our earnings per share will be lower in 2025 than they are in 2024, but one of the biggest influences on it, of course, is what happens with the top line. And as we get closer to the end of the year, we'll have a better feel of what the top line looks like and then how that flows down the P&L The building blocks that you mentioned, those are the right considerations, but we're not commenting on the arithmetic around those considerations yet. So maybe we'll leave it at that for the short term. What's especially important to note is 2025 is going to be a transition year for us in terms of earnings and margins. In 2025, we expect that will be a base off of which we resume EPS growth in '26 and beyond.

That makes sense. I mean just a couple of follow-up questions. I guess you said it would be lower. So when you say lower, you're talking about the old guidance, which was $2.75. No, it sounds like we're not going to get it, so how much lower today?

It will be markedly lower than the $2.70 to $2.80 range that we had for 2024, but beyond that, we're not going to get more granular. We're going to do exactly what we said on the Q2 call, which is next month, when we announce Q3 earnings, we will also provide Q4 guidance. And in December, we'll announce our 2025 guidance, so exactly what we said we would do on the Q2 call.

And that makes sense. Just a couple of follow-ups. So the deal dilution, 2 follow-ups on that. One is we saw the announcement yesterday about headcount reduction, 3% of the remaining workforce or 540 people, that's what MassDevice reported. So that should help, I would imagine. And then you spend about 19% on R&D. So where am I going with this? The deal -- the question we've been getting is that you spend a lot on R&D that we -- that investors don't -- feel like you should offset dilution from these deals. And Scott, you alluded to that earlier. So my dilution math is, call it, $0.14. Maybe that's too high. I mean are you going to try to at least offset that piece?

So maybe let me start about what you talk about, the rightsizing of the organization. What you have seen yesterday is indeed management taking action. You have the Critical Care business, close was yesterday or the day before. And as an executive team, we look at how to think about the Edwards without Critical Care. So we rightsized. About 20% of the organization went to BD, about 4,600 people. And so we rightsized the infrastructure without Critical Care. So yes, this is going to take care of some of our spending optimization for 2025, but I think we will give you a little more detail, again, like Scott said, Q3 earnings and investor conference in December. Do you want to add anything here?

Okay. All right. Well, I'm sure people have more questions later, but let's move on. So okay, the other big question is really -- is cap. And I guess I wanted to ask about the second half guidance. The guidance, I think you lowered it from 8% to 10% to 5% to 7% for '24 in the Q2 call. And I think you grew about 6% in the first half. So the guidance assumes basically, this however similar in the second half to the first half. Why don't you think your TAVR growth will get worse in the second half, or why -- how derisked is that. I guess it's not. It doesn't give you any margin for error if things actually do get a little bit worse. So how derisked is this updated TAVR guidance in your view?

So let me answer it in a couple of ways. Firstly, we gave a range. So we were at 6%, we gave a range 5% to 7%. So we could be a little bit lower or a little bit higher than what we did in the first half of the year. Second, we had the July trend when we gave you the guidance. And July was aligned with the first half of the year. So we felt good about this guidance. And again, we need to remember about the TAVR trajectory. TAVR, it is largely underpenetrated today in the U.S. and globally, so there is a ton of potential. At the end of -- in a few weeks now from now at TCT, we are going to release a very important randomized study for a new patient population, the asymptomatic patient population. At ESC a few weeks -- a week ago, we released a randomized study on female having TAVR, TAVI in Europe. And so what you see is that it is largely underpenetrated. We are in a global leadership position. Twenty years later, we are still bringing evidence to unlock the market potential. So if you ask me, -- are you -- do you believe you have more risk. I say no, we have probably more opportunity in the years to come, including the next year and the year after. We feel confident. We are bullish on TAVR. Do we like what happened in Q2? Do we like about this year being in the 5% to 7%? Absolutely not, but we are working aggressively on that. I'm sure -- I don't know if we are going to talk about it because we see plenty of catalysts in TAVR to get back this procedure growth at the level we want, and at the level patient needs, to be fair.

I'm sorry, you said you don't know if we're going to -- I'm going to ask about what? I'm sorry, I missed. I didn't hear.

About the TAVR catalysts in the years to come.

Sure. Yes. I was -- first, I was going to ask about the near-term headwinds you called out on the Q2 call about crowding out of procedures. People are -- so anything new in that regard, some of the issues you've called out on the Q2 call?

No. I said whatever it is, first, we look back as a team about it lasted 5 to 10 years. Let's take the U.S. as a leading indicator. The procedure in cath labs have grown significantly. You look at all of them, TAVR, WATCHMAN, mitral and obviously, PCI and now tricuspid, very healthy CAGR. So hospitals have shown us that they can grow, and they grew by adding cath labs, by adding staffing, by improving processes. What happened this year is the addition of 2 new therapies were approved, and we discussed that in the Q2 earnings calls. And it is not just the 2 new therapies, TriClip and EVOQUE, it is also a new disease stage for hospital to treat. So we need to learn the disease. We need to learn the therapy. We need to create a network, all of that to be able to grow again and to scale again. So we believe it is temporary. When we said temporary, we said it's not going to be a matter of days or weeks, but it is not also going to be a matter of years. It is going to be a matter of quarters. We are confident that all of these transcatheter procedures are profitable, are necessary for patients, and hospital again have demonstrated that they can scale, they scale it, and they are going to do that. And we are helping them. We are with them, working with them to make sure they can do that. Do you want to add anything on that, Scott?

Let's focus on the catalysts, but starting with early TAVR. And my question on early TAVR is one of the pushbacks we hear is, well, it's just a pull forward of patients. These patients would have developed symptoms, they would be treated eventually anyway. What -- I guess my question is, first of all, what's your reaction to that? And historically, when we've seen a clinical trial come out from Edwards on TAVR, it's given a boost to the market. Do you -- is there a reason to expect that this would give a boost to the market given what I said, people are saying, "Well, you're just pulling patients forward."

You're right, Larry. You know this feels very well when we published and presented low risk, gave a boost to the high-risk patients. And also some of the low-risk patients were committed ahead of an approval. So we expect here that by bringing high level of science like we are doing, at this, I'm very proud about who we are as a company. This category leadership, this commitment to science is super important. I'm glad we do it. Unfortunately, we are one of the few, but bringing this kind of data on asymptomatic, just imagine if the kind of conversation that will happen within the medical community at TCT, brand-new data, new patient population, plenty of learning. People are going to talk about it. Patients are going to talk about it. The referring cardiologists are going to talk about it. So yes, this has a potential to create a boost. How much of a boost? That's a good question. And then obviously, the big inflection point come when if the study is positive, highly positive, you have an indication expansion, you have an NCD and automatically here, you have a big boost, but that's later.

In terms of your question about the pull-forward, if this was a therapy that had similarly high treatment rates as therapies for other deadly diseases, like forms of cancer, then you might -- then that might be a consideration. When the treatment rates for severe aortic stenosis are in the low double digits, the concept of a pull-forward is not a real risk. And in fact, a lot of patients end up not surviving severe stenosis and never demonstrated symptoms. So that's not really a consideration or a limitation.

So Bernard, usually when the data comes out, it has a pretty fast impact on the market. It's before like guidelines or anything. The NCD, then you have to file for the indication and then it goes into the NCD automatically. Do you think there's something different here with the data itself?

No, to be the same, you can -- we can -- look, it is tough to predict what's going to happen. One is, I have not seen the data. As a company committed to world-class evidence, we have very strict restriction in term who get access to the data and when and all of that. I have not seen the data. But provided we get positive data, we can see a boost after the presentation like we have seen in the past and a bigger impact when we get indication expansion.

And the other thing I just want to follow up on, I have heard you talk publicly about new indications having a kind of a halo effect on the prior indication. So like when low risk came in, it helps. It makes me a little concerned to hear you say that because it almost sounds like asymptomatic itself is not an attractive opportunity because there is some debate. Does an asymptomatic patient want to get a procedure, just how easy it is to diagnose these patients, right? So I just want to clarify, you're not saying that you don't think the asymptomatic population itself is an attractive opportunity?

Absolutely not. I see the opposite. I just -- I am careful about talking about the study. I have not seen the outcome before we see the study. I know that this is going to be plenty of learning and plenty of debate about it. Today, people are [indiscernible] at the debate because we don't know and we are going to bring in the science to talk about it in a thoughtful fashion.

Okay. I guess one other one. It was interesting to see on the TCT program preemptive treatment of aortic stenosis is a discussion. I guess we'll all have to wait and see what that is, but it's definitely provocative.

Yes, absolutely.

All right. Anything you want to add on early.

No, I believe in TAVR. We have so many opportunities ahead of us. I look at the next 10 years of TAVR, very exciting. I'm very confident. There are millions of patients undiagnosed, untreated. Only severe symptomatic patients up-to-date are under the guidelines. We need to expand that. So it is why TAVR was great in the last 10 years. I believe the next 10 years for TAVR is going to be very exciting.

I want to get to tricuspid and EVOQUE, but just 2 other TAVR questions that I feel like we need to answer. One is Boston Scientific. If they come to the U.S. next year, how you're thinking about that? And two, at its low price strategy.

Yes. So let me try to cover the 2 questions together. We always in our strategic planning had the assumption that with more competitor, we are going to lose some share, not in a big way always. And, I think in the past, we have been talking about that, no change today. But we look at where we are today, we have -- we are by far the global leader with a premium pricing. There is no coincidence. It's better technology, better science, and we are helping a physician treating their patients in the best way possible. Long term, it is about growing the market. It is going -- it is about being able to serve and treat more patients. This is, for us, we have a priority number one. Are we going to defend our leadership position? Absolutely. Our priority is about growing the market. We are the leader, we grow the market. For sure, all of these competitors, they are trying to grab a few points of share from us. I get it. And we are going to defend ourselves because we believe we have the best technology. But -- so I'm not concerned about that. We knew it was the game. We are not surprised about pricing. We believe pricing reflects the value of what you bring to the health care system. And this is why we are very confident in our premium pricing technology.

Okay. I want to make sure we get to tricuspid. Scott, did you want to add anything to that? Bernard, obviously, you ran TMTT before you became the CEO. So I'm sure this is near and dear to you, the launch of EVOQUE. Just love to hear an update on how that's progressing. And talk about the kind of catalyst pathway there. There's a lot, right? We have data at TCT. We have an NCD. What are the catalysts that really drive adoption?

So let me start with the first, Larry, with our tricuspid strategy. And by the way, the mitral is the same. From the beginning, 7, 8 years ago, what we said is this patient population is very complex and very diverse. One technology, one modality is not going to be sufficient. We needed a portfolio. It is why we are this very unique portfolio, and we are the only one, again, repair replacement for both mitral and tricuspid. So when we think tricuspid, we think PASCAL and EVOQUE. And both are going very well. On EVOQUE, indeed, it is the way to think about it. Here, we have in mind being the pioneer, creating the category and think about TAVR as a proxy, being able to bring innovation. Today that we have Gen 1, Gen 2 and Gen 3 are in the pipeline. TRISCEND II is the first study, and we are going to see the full course in a few weeks from now at TCT when we are now partnering with physicians, centers to be trained to create a network to be ready to treat a new disease state, both TEER and EVOQUE. So this is the way we are thinking about it, being able -- so think about TAVR, 10 years of growth or more, 15 years of growth, EVOQUE is the same. What we have in mind is a multiyear growth for EVOQUE in the next years, starting with more centers. I'm sure you all remember at the beginning of the NCD for TAVR, I think it was only 200 centers. My guess is that the EVOQUE NCD will be about 200 to 300 centers. And then it will grow over the years like TAVR grew, and our TAVR is at 850. So more centers, best innovation, science, helping physicians grow their practice. So the next decade of growth for EVOQUE and tricuspid, to be fair.

And then also, we have the NCAP going into place in October, and the NCD would be March of next year?

Yes.

And then TRISCEND II, I guess you've been asked many times, how important is a statistically significant mortality benefit to adoption?

I believe that all of this is important, the mortality, reduction in hospitalization, quality of life, safety, efficacy. All of that is important. I can tell you that right now, we have so much demand about the EVOQUE technology, so much demand worldwide. And so right now, it's not about not having demand. So the NCD -- the NTAP and NCD will accelerate the demand. The TRISCEND II result potentially also will accelerate the demand. Our problem right now is not increasing the demand. It is more about creating a category, training physicians, making sure the patients are well taken care of, so we can experience 10 years of growth.

We have heard that actually demand is outstripping supply, but it's a supply of your ability to the clinical support, the people. So what are you doing to -- is that a fair statement? And what are you doing to add people that could support the cases?

It is fair. It is not just support, it is also training physicians. It is how many teams could you train. We are approved in U.S. and in Europe. So we are hiring staff to train physicians, to support physicians. There is an imaging component also. So we are adding people. So it is all of that together. We are scaling the TMTT organization to be able to scale the EVOQUE procedure in the U.S. and in Europe. And think also about geography expansion. We are going also -- our goal is to bring EVOQUE everywhere globally. So the scaling just started.

Bernard, I agree with you, PASCAL for tricuspid is important to have a TEER option. What's the status of the pivotal trial? I mean there are 2 products approved. My concern has always been that it would be difficult to complete that trial because patients are being randomized to medical therapy.

We feel good about what we said. We are on track to complete the study by the end of the year.

Enrollment by the end of the year, and then you've got to follow the patients for 12 months. And you with that trial, you feel like...

We feel good about that.

Not seeing a lot of crossovers and things like that?

No, we feel good about it.

Okay. I wanted to ask you about Endotronix quickly. What attracted you to the asset, given what we've seen with the incumbent CardioMEMS, about $130 million in sales, relatively flat. Why is this an attractive asset? And secondly, you don't call on heart failure doctors today, I don't believe. So do you need to build a referral sales force?

So let me start there. We have -- so I talk about why us getting into the space, natural progression, many, if not most of the mitral and tricuspid patient we are serving today have heart failure. So natural progression, one. When we look at the technology, we look at this one and we say, look, this one is differentiated, easier to use, differentiated. We believe that with also providing science, you know that there is an NCD right now at play, also with CMS. We believe this space can become very -- can grow, become very important. We can become a leader there. And I want to maybe drive a parallel with PASCAL. When we started with PASCAL and TEER, the mitral market was barely growing. Remember, 5, 6 years ago, it was not single digit. It was a single-digit growing market. And we begin at that time with using our playbook with innovation, with science, and you can have a market grow and you can have an impact on patients. And here, it is the same philosophy. I think like Cordella, which is the name of a technology from Endotronix, is differentiated. The data that they have shown that there is some also clinical differentiation. So we are excited about the opportunity. Is it going to go big next year? No, we are going to do it in a very thoughtful fashion, and learning and growing and scaling. Do you want to add anything to that, Scott?

Sales force, you didn't...

Yes. So sales force, their trial was in about 70 centers in the U.S. So this is where we are going to start. Obviously, they were able to support these 70 centers already. So this is where we are going to start. So yes, we are going to scale Endotronix a bit in the next year, but not in a big way.

Got it. But you will need to add people.

We will need to add people, and we have kept the Endotronix organization separate. And this is the way we organize it in terms of maximizing the integration. They have been a private company for a long time, very experienced leadership team. So we have done a good job running the trial, having good outcome. So we believe in their management.

Got it. All right, Bernard, we're out of time. I want to give you the last word. Feel free to make any closing remarks that we can go over a little bit. Is there anything we didn't cover today that you wanted to highlight or anything you want to just kind of summarize for us?

Yes. No, thanks. I would say a few things. I will say everybody was disappointed about the Q2 TAVR results. And I think it is important to say like Q2 TAVR result, the company grew 8%. We are on track to deliver 8% to 10%, which was our guidance in December last year. When I look about what's ahead of us, I am super excited. We are present and a global leader in large, growing space. And we are adding now TMTT is becoming a reality, which is a contributor to the growth of the company. Here, we have an opportunity to create this category and be the leader. So you look at ahead, what's ahead of us. Yes, TAVR will remain a very important business for us, but Edwards is not TAVR anymore only. And we see the plenty of category. So very excited about it, very confident about it. So that's it also, and final point is for investors right now, where the stock price is, it is a nice entry point.

Perfect. Thank you. All right. Thanks for being here.

Thank you, Larry.

Thank you, everyone.