Edwards Lifesciences Corporation (NYSE:EW) Q3 2023 Earnings Call Transcript

Edwards Lifesciences Corporation (NYSE:EW) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Greetings, and welcome to the Edwards Lifesciences Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mark Wilterding, Senior Vice President, Investor Relations and Treasurer. Thank you. You may begin.

Mark Wilterding: Thank you very much, Diego, and good afternoon, and thank you all for joining us. We are coming to you live from San Francisco at the 35th Annual TCT Conference. With me on today’s call is our CEO, Bernard Zovighian; and our CFO, Scott Ullem. Also joining us for the Q&A portion of the call are, Larry Wood, our Group Vice President — Group President, excuse me, of TAVR and Surgical Structural Heart; and Daveen Chopra, our Global Leader of TMTT. Just after the close of regular trading Edwards Lifesciences released third quarter 2023 financial results. During today’s call, management will discuss those results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A.

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Please note that management will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include but aren’t limited to, financial guidance and expectations for longer term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters and foreign currency fluctuations. These statements speak only as of the date on which they were made and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important safety information may be found in the press release, our 2022 annual report on Form 10-K and Edwards’ other SEC filings.

All of which are available on the company’s website at edwards.com. Unless otherwise noted our commentary on sales growth refers to constant currency sales growth, which is defined in the quarterly results press release issued earlier today. Reconciliations between GAAP and non-GAAP numbers mentioned during the call are also included in today’s press release. With that, I’d like to turn the call over to Bernard for his comments.

Bernard Zovighian: Good afternoon, everyone. As Mark said, we are hosting today’s call from TCT in San Francisco. I’m going to start by covering some of the exciting developments at the conference, share highlights of the significant progress our team has made advancing our strategy, review our strong third quarter results, and finally, discuss our confidence in the outlook for Edwards. We have a lot of data being presented this week about technologies, Edwards has developed. Included among these are results from free late-breaking clinical trials, all of which reflects Edwards’ commitment to generating high quality evidence, to advance innovative therapies for patients, suffering from structural heart disease. Yesterday, physicians presented five year data from the PARTNER 3 low risk pivotal trial.

We believe these data demonstrate that TAVR with the SAPIEN platform should continue to be the preferred therapy for treating patients, who have severe symptomatic aortic stenosis. Still more than 20 years of rigorous clinical experiences and trials, now eight New England Journal of Medicine Publication and over a million patients treated, SAPIEN technology offers patient unique benefits. SAPIEN 3 has demonstrated 99% freedom from death and disabling stroke at one year. 90% survival at five years and is the only valve with the THV and THV indication. This is true lifetime management benefit, which expands option for patients. Tomorrow at TCT, we are looking forward to the presentation of the six month analysis of our EVOQUE tricuspid valve, the first-of-its-kind of therapy for the millions of patients, suffering from tricuspid valve disease.

In addition, tomorrow, you will receive a one year full cohort result of a CLASP IID pivotal trial with PASCAL. We continue to make meaningful progress to advance our vision of offering a portfolio of innovative transcatheter therapies to treat tricuspid and mitral valve disease. In the last several weeks, we achieved four important milestones in support of our commitment to patient-focused innovation. First, CE Mark approval for EVOQUE tricuspid valve replacement system. Second, CE Mark approval for the MITRIS RESILIA surgical mitral valve. Third, PASCAL Precision approval in Japan. Finally, the competition of the enrollment in the first-ever pivotal trial for any transfemoral mitral replacement therapy the ENCIRCLE trial for SAPIEN M3. Turning now to Q3 financial performance.

Third quarter global sales grew 11% to $1.5 billion, led by our differentiated portfolio of innovative therapies. We were pleased with our results, which were in line with our expectation and/or present another quarter of double-digit sales growth. For the full year, we continue to expect total company sales growth to be in the 10% to 13% range. Now, I will provide an overview of the third quarter sales performance by product group. In TAVR, we continue to see strong demand for our leading SAPIEN platform with third quarter sales of $961 million, up 10% year-over-year. Our U.S. and OUS sales growth rates were comparable. Our U.S. and OUS competitive positions were stable and globally, local selling prices were stable. In the U.S., our third quarter TAVR sales were driven by the continued successful launch of SAPIEN 3 Ultra RESILIA.

On the clinical side, we are pleased with the pace of enrollment in our pivotal trial alliance, designed to study SAPIEN X4, our groundbreaking next generation TAVR technology. In Europe, Edwards sales growth was driven by the broad-based adoption of our SAPIEN platform. We look forward to additional data, supporting the Edwards’ benchmark program to be presented at the PCR London Valve’s Conference in November. Our sales in Japan grew year-over-year, reflecting a gradual recovery in market growth and strong adoption of SAPIEN 3 Ultra RESILIA. Competitive trialing in the third quarter were — was less pronounced versus the first half of this year. And as expected, we grew faster than overall procedure growth. Around the world, we remain focused on improving diagnosis and treatment of the many more patients who remain undertreated.

In summary, the combination of our global TAVR leadership, along with the data presented at TCT this week, gives the company further confidence in the future of TAVR, and the company’s expectation of a $10 billion opportunity by 2028. Now, turning to TMTT. Our commitment to the unmet needs of mitral and tricuspid patients, took a significant step forward with the achievement of several important milestones in this past quarter. TMTT third quarter global sales of $52 million increased 65% versus the prior year. This performance was driven by accelerating adoption of our differentiated PASCAL precision platform, the activation of more centers across the U.S. and Europe, as well as key TEER (ph) procedural growth. We continue to be pleased with our excellent clinical outcomes, reflecting the impressive performance of PASCAL Precision and the value brought by our comprehensive high touch model.

We are continuing the expansion of PASCAL Precision globally, with the expected launch in Japan before the end of the year. In our mitral clinical trials, we look forward to the one year CLASP IID randomized pivotal trial, and CLASP IID registry outcomes with PASCAL to be presented as part of a late breaking scientific sessions tomorrow at TCT. This will add to the body of evidence, supporting TEER (ph) as an effective therapy for patients. With the earlier than expected completion of enrollment in the ENCIRCLE pivotal trial for SAPIEN M3, we believe we are one step closer to offering an important valve replacement option, beyond TEER to serve even more patients, suffering from mitral valve disease. In tricuspid, earlier this month, we received CE Mark approval for EVOQUE.

We look forward to bringing this new therapy to Europe through disciplined launch that will focus on ensuring excellent patient outcomes. Now, with this approval physicians in Europe will have access to this groundbreaking option in addition to TEER. As noted, tomorrow at TCT late breaking data from the TRISCEND II pivotal trial of the EVOQUE replacement technology will be presented on the first 150 randomized patients, based on EVOQUE’s FDA breakthrough pathway designation. This landmark presentation on a novel therapy demonstrate our leadership and commitment to innovation and science, and our focus on helping large population of patients with unmet needs. In summary for TMTT, we are proud of the new therapy introductions, clinical trial achievements and geographic expansion.

We have achieved to advance our vision to build a portfolio of therapies to transform lives of mitral and tricuspid patients. In surgical, third quarter sales of $247 million increased 11%, driven by a balanced combination of strong global adoption of Edwards’ premium technology and overall procedural growth. We continue to see strong momentum of our RESILIA portfolio globally, which has been widely adopted, because of the excellent durability of its proven tissue technology, supported by the recent seven year aortic data and five year mitral data from our commenced clinical trial. We are confident about the future of this technology, as we expand the overall body of RESILIA evidence, including ongoing patient enrollment of our momentous clinical study.

Finally, we received CE Mark approval for our MITRIS RESILIA mitral valve earlier this month. We expect to introduce this valve in the fourth quarter, followed by full European launch in 2024. In Critical Care, third quarter sales of $221 million increased 6%, driven by a smart recovery portfolio, with strong adoption of our Acumen IQ sensors, equipped with the high potential prediction index algorithm. We remain confident in our pipeline of critical care innovation, as we continue to shift our focus to smart recovery technologies, designed to help clinicians make better decision and get patient home to their family faster. And now, I will turn the call over to Scott.

Scott Ullem: Hey. Thanks a lot, Bernard. We are pleased to report third quarter sales performance in line with our expectations, with strength across all product groups. We achieved total sales of $1.48 billion, which represents 11% year-over-year growth. We achieved adjusted earnings per share of $0.59. Our GAAP earnings per share of $0.63 benefited from a change in U.S. tax regulations. A full reconciliation between our GAAP and adjusted earnings per share for this and other items is included with today’s release. I’ll now cover some additional details of our third quarter sales results and full year 2023 outlook by product group. A continuation of double-digit global TAVR growth reflected a more balanced hospital staffing environment, as well as strong adoption of the SAPIEN family of valves.

U.S. TAVR sales growth was driven by the launch of SAPIEN 3 Ultra RESILIA, which remains on track to represent the majority of our U.S. TAVR sales before year end. In Europe, Edwards sales growth was driven by the continued demand of our SAPIEN platform and was broad based by country. In Japan improved growth in the third quarter was driven by the ongoing launch of our SAPIEN 3 Ultra RESILIA valve. For global TAVR sales, we continue to expect full year 2023 sales of $3.85 billion to $4.0 billion, representing 10% to 13% growth. TMTT growth in Q3 was driven by adoption of our differentiated PASCAL precision platform, activation of more centers across the U.S. and Europe and strong procedure volumes. Overall, we are pleased with our continued progress towards establishing a portfolio of TMTT therapies, combined with temporary clinical data, in order to achieve our vision of transforming the lives of patients with mitral and tricuspid valve disease.

We continue to expect full year 2023 TMTT sales of $180 million to $200 million. In Surgical Structural Heart, 11% sales growth in the quarter was driven by the adoption of Edwards RESILIA products, based on positive year-to-date performance, we continue to expect that our full year sales will be in the range of $960 million to $1.02 billion, implying low double-digit growth in 2023. And in critical care, we continue to expect full year 2023 sales of $870 million to $940 million. For total Edwards, based upon the performance we have delivered year-to-date, we continue to expect full year 2023 sales to be in the range of $5.9 billion to $6.1 billion and full year sales growth to be in the 10% to 13% range. Lastly, we continue to expect our full year adjusted earnings per share to be between $2.50 and $2.60.

We are projecting fourth quarter sales to be between $1.45 billion and $1.53 billion. We are also projecting fourth quarter adjusted earnings per share to be between $0.60 and $0.66. Now, I’ll cover additional details of our P&L. For the third quarter, our adjusted gross profit margin was 76.4% as expected, compared to 81% in the same period last year. This year-over-year reduction was driven by impacts from foreign exchange. Remember last year, Edwards’ gross profit margin was lifted by an unusually positive impact from foreign exchange. We continue to expect our full year 2023 adjusted gross profit margin to be between 76% and 78%. Selling, general and administrative expenses in the quarter were $440 million or 29.7% of sales compared to $377 million in the prior year.

This increase was driven by investments in transcatheter field based personnel in support of our growth strategy and performance based compensation. We continue to expect full year 2023 SG&A as a percent of sales to be 29% to 30%, as we invest in field based personnel and our therapy adoption initiatives. Research and development expenses in the third quarter grew 16% over the prior year to $270 million or 18.3% of sales. This increase was primarily the result of continued investments in our transcatheter valve innovations, including increased clinical trial activity. For the full year 2023, we continue to expect R&D to be 17% to 18% of sales, as we invest in developing new technologies, and generating evidence to support TAVR and TMTT. Turning to taxes.

Our reported tax rate this quarter was 12.7% or 18.8%, excluding the impact of special items. Our reported rate benefited from the suspension of certain U.S. tax regulations, surrounding forward tax credits are slightly higher than expected non-GAAP rate, resulted primarily from income mix and a lower excess tax benefit from stock-based compensation. We continue to expect our full year tax rate, excluding special items, to be between 13% and 17%. Foreign exchange rates decreased third quarter reported sales growth by 140 basis points or $16 million compared to the prior year. At current rates, we now expect an approximately $40 million year-over-year negative impact to full year 2023 sales, compared to 2022. FX rates negatively impacted our third quarter gross profit margin by 410 basis points compared to the prior year.

Relative to our July guidance, FX rates had a $0.01 negative impact on third quarter earnings per share. Free cash flow for the third quarter was $356 million, defined as cash flow from operating activities of $411 million, less capital spending of $55 million. We continue to expect full year 2023 adjusted free cash flow will be between $1.0 billion and $1.4 billion. And before turning the call back over to Bernard, I’ll finish with an update on our balance sheet and share repurchase activities. We continue to maintain a solid and flexible balance sheet with approximately $1.9 billion in cash, cash equivalents and short term investments, as of September 30. During the third quarter, we repurchased 2.2 million shares under our 10b5 plan. We continue to expect average diluted shares outstanding for 2023 to be between $610 million and $615 million.

We have approximately $500 million remaining under our current share repurchase authorization. And with that, back over to you, Bernard.

Bernard Zovighian: Thank you, Scott. In closing, after more than 20 years of rigorous clinical experience over 1 million patients treated. In this week, five year PARTNER III results. Edwards TAVR is positioned for strong sustainable growth, as many patient remain undiagnosed and untreated. In addition, we have two strong global businesses, critical care and surgical, which our position for durable long-term growth driven by portfolios of differentiated technology. Moreover, we are achieving many, many significant milestones in TMTT, that gives us the confidence about progressing our vision to treat the many mitral and tricuspid patients in need. Altogether, we are convinced of the tremendous opportunity to drive success in the future through our patient focused, breakthrough technologies and leadership. With that, pass it back to Mark to open up Q&A.

Mark Wilterding: Thank you very much, Bernard. Before we open it up for questions, I’d like to remind you about our 2023 investor conference, which we will host at our headquarters in Irvine, California, on Thursday, December 7. This event will include updates on our latest technologies, views on longer term market potential, as well as our outlook for 2024. More information and a registration form are available on our website. With that, we’re ready to take questions now. In order to allow for broad participation, we ask that you please limit the number of questions to one plus one follow-up. If you have additional questions, please reenter the queue and management will answer as many participants as possible during the remainder of the call. Diego, please go ahead with additional details on accessing the Q&A portion of the call.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Robbie Marcus with JP Morgan. Please state your question.

Robbie Marcus: Great. Thanks for taking the question. Maybe to start you guys did 11% TAVR growth in the quarter, roughly similar U.S., OUS. How do we think about what’s holding it back here from being faster, pre-COVID it was growing at much higher rates. It’s been one of the slower to recover, sub-sectors in med-tech. Data we presented this weekend, should be supportive of growth. But what gives you confidence this going to remain a double-digit growth market for the foreseeable future.

Bernard Zovighian: Thank you, Robbie. Let me start and then I will ask, Larry, to continue here. First, we are pleased to this quarter. Again, it is the third quarter in a row of double-digit, sales growth, we are very pleased about it. Very balanced between U.S. and OUS. Our Ultra RESILIA adoption is going very well according to plan in U.S. and in Japan. And, and we look at the opportunity with, so many patients are undiagnosed and untreated. So we feel good about, what’s ahead of us, we feel we are well-positioned. All of the data, presented this week give us even greater confidence. But, Larry, you want to add anything?

Larry Wood: Yeah. I don’t have a lot to add, this is our third straight quarter of double-digit growth, which coming out of COVID and all the rockiness that we saw during that period of time. It’s actually been really good to see the stability that we’ve seen and the continued growth even as our business gets larger. So I actually feel really good about our growth rate. I think, we’re continuing to work to get patients off the sidelines and our patient activation. I think the data, hopefully, the data here is reassuring for patients. People were worried about a durability signal with TAVR. And now we have really high quality data published in the New England Journal of Medicine which shows absolutely no durability signal at five years using [indiscernible] definition. So we think all of those are positive and those continue to help us have double-digit and sustainable growth over a long period of time. So I feel great about where we are.

Robbie Marcus: Great. Maybe one more product question here from me. You just kind of EVOQUE approved in Europe with CE Mark. We’ll see the data for six months tomorrow in tricuspid replacement. This is a market we hear from doctors a lot, they may not be terribly excited about repair but replacement could be a really exciting option. What do you think Edwards needs to do as a company to take this market and accelerate adoption and drive uptake here in an area that’s been pretty slow with tricuspid repair? Thanks.

Bernard Zovighian: Thank you, Robbie. So we are going to do, what we have done in TAVR for the last 15 years, basically. Focusing, number one on the patient outcomes. So which is why, we are being — we are going to be focusing on making sure, our team (ph) is well-trained, well equipped, to support the physicians. We are going to have a disciplined launch in Europe, and we are going to produce evidence like twice in two, cohorts you are going to see tomorrow. And we are going to continue to produce more evidence. But maybe Daveen, you want to add anything here?

Daveen Chopra: Yeah. No. Thanks, Bernard. I appreciate it. No, I think, as Bernard has said, we really do believe that it’s the comprehensive high touch model and outstanding outcomes is a key step. But it’s much more than that. And us having the ability to take the TAVR playbook from long ago and help apply it to this news area is really important. And for us that includes not only technology, innovation, evidence, but also continuing to then overtime, work on helping improve diagnosis referral and eventually treatment of patients. But for us, this is a comprehensive kind of play, a long-term play for us to really build a new therapy that we’re really excited about to help patients with.

Bernard Zovighian: And if I may add, Robbie here. We’re also at the beginning of better understanding of this tricuspid — tricuspid disease, we believe that with TEER and replacement adoption physician will have more options to treat even more patients. So we are going to learn a lot here, about, what therapy for what patient but I think two therapy in Europe. And as you know, leading that space we are going learn a lot in the past sort of few years, and I’m sure, patient will benefit from that.

Robbie Marcus: Thank you.

Operator: Our next question comes from Larry Biegelsen with Wells Fargo. Please state your question.

Larry Biegelsen: Good afternoon and thanks for taking the question. Hey, Scott, year-to-date the TAVR growth is a little over 10% I believe in the midpoint of the guidance it’s about 11.5%. So should we be thinking about the low end of the TAVR range of 10% to 13% for the year. And if not, what drives the acceleration implied in Q4 for TAVR? Then I had one follow up.

Scott Ullem: Well, I’d take you back to the beginning of the year when our guidance for the full year for both TAVR and Edwards was 9% to 12%. We increased it to ultimately 10% to 13% because of the first quarter and second quarter results. So we’re coming in about where we thought we would for Q3 and Q4. The 10% to 13% guidance reflects the stronger than expected Q1 and Q2. In the fourth quarter, our guidance for the full company is about $10 million higher at the midpoint than our results in Q3. So we haven’t broken out guidance by business unit, but you can expect that overall, we expect the fourth quarter that looks pretty similar to the third quarter. You’re right, I think for the full year, we’re probably going to end up about in the middle of the range that we, that we said 10% to 13%, but that doesn’t mean that it’s 10% to 13% for Q4 because, again, that higher range reflects the increase from the first quarter.

Larry Biegelsen: Thank you for that. And obviously, people are starting to think about ’24 right now. So Bernard, at our conference you talked about targeting double digit annual revenue growth. Does that apply to 2024? And Scott you know ’23 guidance implies margins are down year-over-year because of investments and currency. What are some of the puts and takes in the P&L you know, that we should be thinking about it. And any help on, on FX would be appreciated? Thank you.

Bernard Zovighian: Thank you, Larry. Let me take you to the first part of your question here. So for, you know, 2024 guidance, you will get all of the details here in December at our investor event. And your question is about my confidence and our confidence as a company. Yes, we are confident as I said during the script, I think like we have an amazing opportunity in front of us with so many patients. All of our businesses are in solid position in global leadership position. So I am confident for the years to come for 2024, more to come in December, Larry.