Edwards Lifesciences Corporation (NYSE:EW) Q4 2023 Earnings Call Transcript

Edwards Lifesciences Corporation (NYSE:EW) Q4 2023 Earnings Call Transcript February 6, 2024

Edwards Lifesciences Corporation misses on earnings expectations. Reported EPS is $0.609 EPS, expectations were $0.64. EW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Edwards Lifesciences Fourth 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, Investor Relations and Treasurer. Thank you. You may begin.

Mark Wilterding: Thank you very much, Diego, and good afternoon, everyone. Thank you all for joining us. 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 will be Larry Wood, our Group President of TAVR and Surgical Structural Heart; Daveen Chopra, our Global Leader of TMTT; Wayne Markowitz, our Global Leader of Surgical Structural Heart; and Katie Szyman, our Global Leader of Critical Care. Just after the close of regular trading, Edwards Lifesciences released fourth quarter 2023 financial results. During today’s call, management will discuss those results included in the press release and accompanying financial statements and then use the remaining time for Q&A.

Please note that management will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include but are not 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 product 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 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?

Bernard Zovighian: Thank you, Mark, and welcome, everyone. At our recent Investor Conference, I introduced our exciting vision of a new era of structural heart innovation to address significant unmet patient needs. Today, I will build on that theme and share key highlights of our team’s strong performance in 2023 as well as our confidence in 2024. We are pleased with our strong 2023 financial performance, with full year sales up 12% to $6 billion, including strong growth across each of our four product groups. We invested more than $1 billion in research and development, and we achieved key strategic milestones, including the introduction of new technologies and indication expansion to ensure sustainable healthy growth in the near, mid, and long term.

We exited the year with strong momentum, with Q4 growth of 13% and TAVR growth of 12%. These results were better than expected, driven by our broad portfolio of innovative therapies. In 2024, we are well-positioned to enter a new era of structural heart innovation. In TAVR, we are strengthening our leadership. We are experiencing strong adoption of our flagship SAPIEN 3 Ultra RESILIA and continuing enrollment in our ALLIANCE pivotal trial for next-gen TAVR technology SAPIEN X4. In January, we achieved very important milestones with the completion of enrollment in PROGRESS, a pivotal trial studying the treatment of moderate aortic stenosis patients, a population estimated to be twice as large as severe aortic stenosis. This randomized trial enrolled approximately 750 patients two years ahead of schedule.

At TCT, later this year, we plan to present data from EARLY TAVR, a pivotal trial studying the treatment of patient with severe aortic stenosis, but without symptoms. We believe that all of these initiatives position us for healthy, sustainable TAVR growth well into the future. In TMTT, we achieved significant milestones with continued PASCAL global expansion and the introduction of EVOQUE in Europe. In Germany, EVOQUE was recently granted NUB Reimbursement Status 1, a very important step in therapy adoption. I am also pleased to announce that EVOQUE recently became the first transcatheter therapy to receive US FDA approval for the treatment of TR patients. This is an exciting development for a wide range of US patients. It will enable access to a groundbreaking treatment option that not only has the potential to significantly improve their quality of life, but also shows favorable clinical trends in all-cause mortality, reintervention, and heart failure hospitalization.

With the ongoing introduction of EVOQUE, we are now offering a unique and broad portfolio of transcatheter repair and replacement solution for mitral and tricuspid patients. In addition, the completion of enrollment in the pivotal trial studying SAPIEN M3 puts us on track to further enhance our portfolio. I am confident that we are reaching an inflection point as the only company with a commercially approved portfolio of catheter-based technologies to treat the millions of patients suffering from mitral and tricuspid disease. In addition to the meaningful progress of TAVR and TMTT, we are pleased with the company innovative RESILIA tissue, which was pioneered by our surgical business. We are on track to treat half a million patients with RESILIA-based heart valve by the end of 2024, supported by seven years of clinical evidence.

The previously announced spin-off of Critical Care is progressing as planned and will enable a sharpened focus on structural heart. As a result, Edwards’ 2025 organic sales growth rate will be even more distinguished. In addition, this will give us more agility, increase our pace of innovation, and provide an expanded opportunity to serve a large and growing patient population. Because we are solely focused on structural heart disease, we are uniquely positioned to deliver sustainable growth and extend our leadership. Now, I will provide some additional details by product group. In TAVR, our full year 2023 global sales of $3.9 billion increased 10.6% year-over-year. Our US and OUS sales growth rates were similar. In the fourth quarter, our global TAVR sales of $979 million increased 12% year-over-year.

Performance was driven by double-digit growth in the US, Europe, and Japan. The company competitive position was stable globally, and local selling price were also stable. In the US, we remain pleased with the continued expansion and adoption of a SAPIEN 3 Ultra RESILIA platform. This technology builds on Edwards’ longstanding leadership in tissue technology and durability by combining advancements in tissue science with the industry-leading SAPIEN 3 Ultra RESILIA — Ultra valve. Developing safe, effective, and durable heart valve requires significant long-term commitment, and we are proud to build on 65 years on valve innovation while leveraging the expertise and know-how of more than 2,000 engineers and R&D specialists across the company.

We are proud of uninterrupted leadership in structural heart and will continue to invest vigorously in these platforms. In addition, our scaling of patient activation initiative along with next-gen TAVR and additional evidence on asymptomatic and moderate AS patients, position us for healthy, sustainable TAVR growth well into the future. Outside of the US, in the fourth quarter, our double-digit growth was comparable with our global TAVR growth, driven by Europe and Japan. Long term, we continue to anticipate excellent opportunities for growth, as international adoption of TAVR therapy remain quite low in many regions. In Europe, Edwards’ sales growth was driven by the broad-based adoption of our SAPIEN platform. It is encouraging that the growth in Q4 was widespread across all major countries.

Looking ahead, we are pleased with the recently announced CE Mark approval for SAPIEN 3 Ultra RESILIA, and we are planning for a disciplined launch. We were pleased with our sales growth in Japan, and as expected, we grew faster than overall procedural growth. After more than 20 years of rigorous clinical experience and over 1 million patients treated with SAPIEN valve around the world, our TAVR platform is positioned for continued global leadership and strong sustainable growth. Given the under-treatment rates, we are confident in the future of TAVR, driven by greater awareness, patient activation, a platform that delivers lifetime management for AS patients, advances in new technologies. such as RESILIA, as well as indication expansion and increased global adoption.

Turning to TMTT now. In 2023, we remained focused on our key value drivers to unlock the significant long-term opportunity for patients, a portfolio of differentiated therapies, positive clinical trial results to support approvals and adoption, and favorable real-world clinical outcomes. Based on the deep learnings we have achieved from our clinical trial and real-world experiences, we have carefully constructed a strategic portfolio of leading transcatheter technologies to provide both repair and replacement solutions for mitral and tricuspid patients. PASCAL Precision, EVOQUE, and SAPIEN M3 will provide best-in-class therapies to treat the broadest range of patients. Full year global sales of $198 million increased 67% versus the prior year.

TMTT’s fourth quarter sales of $56 million increased 71% versus the prior year. Q4 sales were driven by the accelerating adoption of our differentiated PASCAL Precision platform and activation of more centers across the US and Europe. We were encouraged by the ongoing double-digit growth of overall transcatheter edge-to-edge repair procedure, which highlights the large unmet patient need. We continue to expand global access of PASCAL Precision in new countries, including Japan, where we recently completed our first cases. Since launch, we have proudly treated more than 20,000 patients around the globe with PASCAL repair system. In mitral replacement, we have received FDA approval for SAPIEN 3 continued access program. Physicians are continuing to treat patients with this novel therapy.

In tricuspid replacement, we initiated the launch of EVOQUE in Europe, with a focus on outstanding outcomes and the goal of eliminating tricuspid regulation in patients. And in the US, following the recent early FDA approval, we are initiating the introduction of its novel therapy and building the foundation for long-term expansion. As we did for TAVR, we are focusing on best-in-class physician training, generating more evidence, and achieving excellent patient outcomes. We are grateful for the strong ongoing collaboration with clinicians all over the world to provide the treatment options to many patients suffering from tricuspid valve disease. In tricuspid repair, the CLASP II TR pivotal trial with PASCAL continues to enroll well and remains on track to complete enrollment by the end of this year.

As a summary for TMTT, we are reaching an inflection point with the only portfolio of approved catheter-based mitral and tricuspid technologies. We remain committed to bringing our differentiated therapy to patients with this live threatening disease and believe our strategy positions us well for leadership. In our surgical product group, full year global sales of $999 million increased 13% versus the prior year. Fourth quarter global sales of $248 million increased 10%. Growth was driven by strong global adoption of Edwards’ premium RESILIA technology and overall procedural volumes. We are confident about the future of its tissue technology and its role in improving patient lifetime management. We continue to see positive momentum in our innovation globally with continued adoption for patients best treated surgically, including those with complex and concomitant procedures.

We continue to expand the overall body of RESILIA evidence, including ongoing patient enrollment of our MOMENTIS clinical study, we received CE Mark approval of our MITRIS RESILIA valve in the fourth quarter and have begun to launch in several European countries with favorable physician feedback. Turning to Critical Care. Full year global sales of $928 million increased 10% versus the prior year. Fourth quarter Critical Care sales of $250 million increased 11%. Growth was driven by contribution from all product lines, led by HemoSphere and Smart Recovery with strong adoption of our Acumen IQ sensor equipped with the Hypotension Prediction Index algorithm. Critical Care strategy is to drive growth through Smart Recovery and Smart Expansion, which are designed to help clinicians make more informed decisions and get patients home to their family faster.

And with that, I will turn the call over to Scott.

Scott Ullem: Okay. Thanks a lot, Bernard. So today, I’ll provide a wrap-up of 2023, including detailed results of our fourth quarter as well as provide guidance for the first quarter and full year 2024. As Bernard mentioned, we were pleased with our better-than-expected Q4 sales performance with strength across all product groups. We achieved total sales of $1.53 billion, which represents 13% year-over-year growth. We achieved adjusted earnings per share of $0.64. Our GAAP earnings per share of $0.61 included one-time expenses associated with our planned spin-off of Critical Care. A full reconciliation between our GAAP and adjusted EPS for this and other items is included with today’s release. We are maintaining all of our previous sales guidance ranges for 2024 with the exception of TMTT.

Absent big moves in foreign exchange, we expect total company sales of $6.3 billion to $6.6 billion; TAVR sales of $4.0 billion to $4.3 billion; Surgical Structural Heart sales of $1.0 billion to $1.1 billion; and Critical Care sales of $900 million to $1 billion. Given the early FDA approval for EVOQUE, we now expect full year TMTT sales to be at the higher end of our previous $280 million to $320 million guidance range. For the first quarter, we’re projecting sales of $1.53 billion to $1.61 billion, and adjusted earnings per share of $0.62 to $0.66. And now, I’ll cover the additional details from our P&L. For the fourth quarter, our adjusted gross profit margin was 76.8% compared to 81% in the same period last year. This expected year-over-year reduction was driven by impacts from foreign exchange.

Last year, Edwards’ gross profit margin was lifted by a significant impact from FX. We continue to expect our full year 2024 adjusted gross profit margin to be between 76% and 78%, driven by high-value technologies that yield strong gross profit margins. Selling, general and administrative expenses in the quarter were $480 million or 31.3% of sales compared to $411 million in the prior year. This increase was driven by investments in transcatheter field-based personnel in support of our growth strategy and patient activation initiatives. We continue to expect full year 2024 SG&A as a percent of sales to be 29% to 30% as we invest in field-based personnel and patient activation initiatives and increase our focus on efficient G&A leverage. Research and development expenses in the fourth quarter grew 16% over the prior year to $270 million or 17.6% 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 2024, we continue to expect research and development to be 17% to 18% of sales as we invest in developing new technologies and generating evidence to support TAVR and TMTT growth with the goal of treating even more patients. During the fourth quarter, we incurred approximately $17 million of one-time costs associated with our previously announced spin-off of Critical Care. Additional one-time costs will be incurred throughout 2024 prior to the expected separation at year-end. Turning to taxes. Our reported tax rate this quarter was 12.3%, or 13.4% excluding the impact of special items.

For the full year 2023, our reported tax rate was 12.4% or 15.0% excluding the impact of special items. Our lower-than-expected non-GAAP rate in the fourth quarter benefited primarily from US tax credits on foreign remittances and income tax. We continue to expect our 2024 tax rate, excluding special items, to be between 14% and 17%. Foreign exchange rates decreased fourth quarter reported sales growth by 80 basis points or $9 million compared to the prior year. FX rates negatively impacted our fourth quarter gross profit margin by 320 basis points compared to the prior year. Relative to our October guidance, FX rates had a nominal impact on fourth quarter earnings per share. Free cash flow for the fourth quarter was $48 million, defined as cash flow from operating activities of $136 million less capital spending of $88 million.

Adjusted free cash flow for the full year 2023 was $943 million, defined as cash flow from operating activities of $896 million less capital spending of $253 million. Adjusted free cash flow excludes the $300 million payment related to the Medtronic intellectual property agreement. We continue to expect full year 2024 adjusted free cash flow will grow to be between $1.1 billion and $1.4 billion. 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 strong and flexible balance sheet with approximately $1.6 billion in cash, cash equivalents and short-term investments as of December 31, 2023. During the fourth quarter, we repurchased 6.0 million shares through an accelerated repurchase agreement and a pre-established 10b5-1 plan.

As a result, average diluted shares outstanding during the quarter declined to 607 million. We continue to expect average diluted shares outstanding for 2024 to be between 600 million and 610 million. We have approximately $1 billion remaining under our current share repurchase authorization. And with that, back to you, Bernard.

Bernard Zovighian: Thank you, Scott. In conclusion, we are proud of the significant progress we made in 2023, advancing new breakthrough therapies for patients and delivering solid financial performance and healthy profitability. We are even more excited about 2024. This year, we anticipate launching groundbreaking technologies and advancing multiple important clinical trials. These breakthroughs, along with significant unmet patient needs, give us confidence in our ability to accelerate growth in 2025 and beyond. In TAVR, we will continue to drive global adoption of SAPIEN 3 Ultra RESILIA, present pivotal trial data from EARLY TAVR, studying asymptomatic AS patients, and enroll in ALLIANCE, a pivotal trial studying the next-generation SAPIEN X4.

We also look forward to a number of key developments in TMTT, including the US and European introduction of EVOQUE, the expanded global adoption of PASCAL Precision, CLASP II TR enrollment completion, and SAPIEN M3 approval in Europe by the end of 2025. And in Surgical and Critical Care, we remain committed to healthy growth and expanded leadership. In closing, longer term for Edwards, we are confident in our plan to expand the structural heart opportunity, which reflects our sharpened focus on valvular and non-valvular patients and our commitment to innovation. We believe that executing our strategy will create value for all of our stakeholders. With that, back to you, Mark.

Mark Wilterding: Thank you very much, Bernard. With that, we’re ready to take everyone’s questions. As a reminder, please limit the number of questions to one plus one follow-up to allow for broad participation. If you have additional questions, please re-enter the queue and management will answer as many participants as possible during the remainder of the call. Diego?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Larry Biegelsen with Wells Fargo. Please state your question.

Larry Biegelsen: Good afternoon. Thanks for taking the question, and congratulations on the early approval of EVOQUE in the US. I feel like I need to start there. So, I’d love to hear you guys talk about your commercialization plan for EVOQUE. Are you ready to launch now? Should we expect a price premium? And talk about the reimbursement pathway? Should we expect you to file an NCD? And I had one follow-up.

Bernard Zovighian: Thank you, Larry. I hope you are doing well. Let me start and then I will ask Daveen to add some color here. So, first, the way we are thinking about this one is like we did in TAVR, we want to make sure that we are going to introduce this very novel therapy, having in mind, building foundation for long-term expansion. So, we’re going to be focusing on physician training, generating more evidence, excellent patient outcome, making sure we have coverage, payment, reimbursement, established in the US and in Europe. So, we are having here a long-term view, the same way we did in TAVR in last 20 years. But again, Daveen, I’m sure you want to share some of your plan.

Daveen Chopra: No, definitely. Thanks, Bernard. I’ll start by saying, of course, we are very excited by this approval coming through the FDA breakthrough pathway. This innovation is obviously the first transcatheter technology in the US to change the life of the many patients suffering from tricuspid regurgitation. As we look at kind of our rollout model, as Bernard said, we are really planning a controlled rollout of this technology, focused on great clinical outcomes. And we’re really going to start with those centers that — who are in a clinical trial, and then over time, will grow it to new centers. We’re going to have a dedicated team of clinical case support who has been training on the over 1,000 EVOQUE cases that now have been done to-date.

And this team will continue to scale as we move forward. Specifically, on your question on — I think I heard a question about NCD in there and the kind of timing. Obviously, with EVOQUE, it’s a parallel review technology. So, CMS is working on the national coverage kind of on their own process, and we are continuing to work with them to kind of provide information to help support their process. So, as we all hear more about that, you guys will definitely [indiscernible] that.

Larry Biegelsen: Super helpful.

Bernard Zovighian: Thank you, Daveen. So, what you can see, Larry, here, we have a long-term view on this one. We want to shape the space in a way that we like, in a way that everybody is going to be very proud of, like we did for TAVR.

Larry Biegelsen: That’s helpful. And Daveen, just one follow-up for you. What are your thoughts on the likelihood of seeing a statistically significant mortality benefit at one year or 18 months when the full TRISCEND II data is presented at TCT? And how important is that for adoption and reimbursement? Thanks.

Daveen Chopra: Well, I think right now, as we’ve talked about, we’ve obviously shown very favorable trends in all-cause mortality, heart failure hospitalizations and tricuspid regurgitation. And those were some of the key trends that’ll help us lead to our approval. Obviously, our full data set will come at TCT in the fall with one-year follow-up, and it’s hard to speculate on what that data will show.

Larry Biegelsen: All right. Thanks so much.

Operator: Our next question comes from Robbie Marcus with JPMorgan. Please state your question.

Robbie Marcus: Great. Thanks for taking the questions, and congrats on a very nice data. Maybe just to follow up on that. We’ve seen just TMTT, in general, whether it’s mitral or tricuspid maybe ramp over the past few years a little slower than expected. Obviously, COVID really disrupted that, that upward trajectory. Maybe just speak to some of the bottlenecks that you see in the system, especially with tricuspid replacement, it’s a totally new therapy. There will be some education, I imagine. But maybe just speak to what you see as the bottlenecks and what Edwards can do to help ramp adoption in a pretty sick patient population?

Bernard Zovighian: Thank you, Robbie. So let me start on your earlier comment about a little slower than expected in the past years. And then, Daveen can talk about a bottleneck in the system. So, if you think about it, since the beginning, since six years ago, when we put together this vision, we did study this patient population, mitral and tricuspid, and we knew that they were very complex and diverse. And we knew from the beginning that one device, one therapy, a repair technology only will not be sufficient. Repair technology, and we are very pleased about PASCAL, but can only treat some — a small proportion of patients. So it is why we have this vision of having a portfolio. So right now, what we have is this portfolio on the tricuspid side, we are on track to get also a mitral replacement.

And what we are going to see, what we are going to see altogether is an acceleration. Clinicians will be able to treat more patients. So, the dynamic in the next 10 years is going to be very different than the dynamic in the last 10 years. But again, Daveen…

Daveen Chopra: Yeah, I’ll make a couple of quick comments. First, we’re really excited, because we see that the replacement technology really has the potential to treat a large number of patients. Because especially in tricuspid regurgitation, note one patient is alike. There’s really a huge heterogeneity and replacement will really see as the core of treating the largest number of patients, and then we see other technologies like [TEER] (ph) as well as other modalities that are still in trials potentially to add new patient groups on top of that. We’ve seen in Europe where tricuspid as a therapy has been approved longer that centers are starting to continue to build up and grow the tricuspid practice. As you bring in technology to market, you start seeing the awareness of the disease to grow and you see more referrals and you see more patients getting to the heart team.