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Edwards Lifesciences Corporation (NYSE:EW) Q4 2022 Earnings Call Transcript

Edwards Lifesciences Corporation (NYSE:EW) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Greetings, and welcome to the Edwards Lifesciences Fourth Quarter 2022 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to our host, Mark Wilterding, Senior Vice President of 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 today. With me on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, our Chief Financial Officer. Also joining us for the Q&A portion of the call are Bernard Zovighian, President of Edwards Life Sciences; Larry Wood, our Global Leader of TAVR and Surgical Structural Heart; Daveen Chopra, our Global Leader of TMTT and Katie Zimon, our Global Leader of Critical Care. Just after the close of regular trading, Edwards Lifesciences released fourth quarter 2022 financial results. During today's call, management will discuss those results included in the press release and the 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 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 product safety information may be found in the press release our 2021 annual report on Form 10-K and Edwards' other SEC filings, all of which are available on the company's website at edwards.com.

Finally, a quick reminder that when using the terms constant currency, underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP results. Reconciliations between GAAP and non-GAAP numbers mentioned during the call are included in today's press release. With that, I'd like to turn the call over to Mike for his comments.

Michael Mussallem: Thank you, Mark. During 2022, our company stayed focused on the long term, making meaningful progress on strategic milestones with the potential of transforming patient care. While the challenging environment negatively impacted sales, we still grew 8%. Looking forward, we remain optimistic that the health care environment will gradually improve and we expect 9% to 12% sales growth in 2023. We didn't pull back on investing in innovation because of the pandemic, and we didn't pull back because sales fell a little short. We continue to aggressively invest during this challenging period, which positions the company for sustained leadership in a new era of structural heart and critical care innovation. Looking back at 2022, in TAVR, we made important strides in executing our long-term strategy.

We received approval and launched the innovative SAPIEN 3 Ultra RESILIA valve. In TMTT, each of our platforms demonstrated promising clinical performance, and we received approval for PASCAL Precision in the U.S. and Europe. In Surgical Structural Heart, we extended our leadership position through the launch of MITRIS in the U.S. And in Critical Care, we continue to drive adoption of our transformative smart recovery technologies. Although our initial sales expectations for 2022 anticipated a better environment, we delivered balanced contributions across each of our product groups and regions. We achieved 12% growth in adjusted earnings per share while maintaining R&D at more than 17% of sales, which reflects our commitment to driving durable organic sales growth.

Consistent with our cash deployment strategy, we opportunistically repurchased stock at an accelerated level in 2022. We continue to invest in our production capacity in anticipation of future growth. and we made a series of external investments in promising early-stage technologies. Turning to our fourth quarter financial results. Consistent with our guidance, total company sales grew 7% on a constant currency basis to $1.3 billion. Our broad portfolio of innovative therapies drove this growth despite the health care disruptions in a number of our key geographies. In TAVR, full year 2022 global TAVR sales of $3.5 billion increased 7% on a constant currency basis, building on nearly 20% growth in the year ago period. Sales were below our original guidance of $3.7 billion to $4.0 billion due to foreign exchange headwinds and Covet induced health care challenges in key countries.

In 2022, we announced the approval of SAPIEN 3 Ultra RESILIA in the U.S. Separately, we continue to advance enrollment in our PROGRESS pivotal trial for moderate AS patients and gained significant learnings from our alliance pivotal trial to study the next-generation TAVR technology, SAPIEN X4. These transformative developments reinforce our long-term confidence in the strong growth of transcatheter-based aortic valve interventions. In the fourth quarter, our global TAVR procedures were comparable with Edwards growth. Our global -- I should say, global TAVR procedures were comparable with Edwards growth. Our global TAVR sales of $868 million increased 5% year-over-year on a constant currency basis, consistent with our expectations. Sales were up slightly over Q3 in dollars and on a constant currency basis and local selling prices were stable.

In the U.S., Edwards fourth quarter TAVR procedures grew in the mid-single-digit range. As expected, our fourth quarter U.S. TAVR procedure volumes were impacted by the U.S. hospital staffing constraints and the holiday season slowdown. We estimate that our share of procedures was stable. Growth in the U.S. was higher in larger volume centers and in states with fewer COVID restrictions as measured by the Daxferns Containment and Health Index. We're encouraged by recent hiring trends, which suggests that hospital employment is rebounding. As we mentioned, we began the introduction of SAPIEN 3 Ultra RESILIA in the U.S. the Resilient issues anti-calcification technology addresses one of the primary causes of reintervention following heart valve replacement and is demonstrating a strong track record of performance in Edwards Surgical house.

As of now, this newest valve has been introduced in approximately 10% of U.S. TAVR centers and physician feedback has been encouraging. Outside of the U.S., in the fourth quarter, Edwards TAVR procedures also grew in the mid-single digits, and we estimate total procedure growth was comparable. In Q4, geographies outside of Europe and Japan grew even faster in the quarter. Long term, we see excellent opportunities for growth as we believe international adoption of TAVR remains quite low. In Europe, fourth quarter procedures grew in line with the global rate. Market growth continued to be impacted by a bump in the COVID cases and staffing shortages, which reduced hospital capacity, particularly in larger countries such as Germany. And even though there are a broad range of competitors, our leadership position and local selling prices remained stable throughout the year.

Importantly, a cost-effectiveness study published earlier this month demonstrated that TAVR with SAPIEN three was economically beneficial when compared to surgical aortic valve replacement in treating German patients with low surgical risk. The data suggests that TAVR enhances quality of life and offers a cost-effective option over the long term. These findings are consistent with the cost-effective outcomes for the use of SAPIEN 3 in France, Italy and Spain. In Japan, fourth quarter procedure growth was much slower than expected due to an extended COVID wave and continued restrictions, which limited hospital staffing and capacity. We expect these factors to diminish substantially over the course of 2023 and look forward to launching SAPIEN 3 Ultra RESILIA in Japan later this year.

We remain focused on expanding the availability of TAVR therapy driven by the fact that AS remains a significantly undertreated disease amongst this large elderly population. In summary, our outlook assumes COVID-related challenges improved during 2023 as hospital resource constraints decrease. We remain positive in our outlook for 2023 underlying TAVR sales growth of 9% to 12%, consistent with the range we shared at our December investor conference. We remain confident in this large global opportunity that will double to $10 billion by 2028, which implies a compounded annual growth rate in the low double-digit range. Turning to TMTT. Since launch, we have proudly treated more than 10,000 patients with the PASCAL repair system. We achieved significant milestones in 2022 and made meaningful progress toward achieving our vision to transform care for patients with mitral and tricuspid disease.

Following the Class II presentation at TCT and FDA approval in Q3, we initiated the introduction of the PASCAL Precision system in the U.S. Initial feedback from clinicians has been positive, and we're pleased with the patient outcomes to date. Class IID full cohort of 300 patients with 1-year follow-up will be presented in the second half of 2023. In Europe, the PASCAL Precision launch is ongoing with a focus on bringing this latest advancement to our existing centers as well as expanding into new centers. Also aligned with our commitment to generate high-quality scientific evidence we continue to advance enrollment in our Class IIF pivotal trial for patients with functional mitral regurgitation. In mitral replacement, we're making good progress on the enrollment of the ENCIRCLE pivotal trial for SAPIEN M3 and expect to complete enrollment of the main cohort around the end of 2023.

The sub French transfemoral valve leverages the SAPIEN 3 platform with a recapturable repositionable dock. Separately, we've completed enrollment in the MISCEND early feasibility study with the Eos valve and are incorporating the learnings from this early experience into our next generation. We believe the Eos platform has the potential to be an excellent option for mitral patients, who have a poor prognosis and limited treatment options. Shifting to tricuspid and our strategy of advancing the body of clinical evidence, we are currently enrolling two pivotal trials studying both tricuspid replacement and repair, TRISCEND II and the Class II TR. We prioritized enrollment in our TRISCEND II study, that study trial that's studying EVOQUE as it addresses the large population of patients who are suffering from debilitating systems and have few treatment options.

TRISCEND II is on track for completion of enrollment in the first half of 2023, and we expect Evoke CE mark by the end of this year and U.S. approval around the end of '24. We're very pleased with the recent tricuspid data presented at PCR London Valves meeting which we reported favorable results from both our TRISCEND study of EVOQUE and the TriCLASP post-market clinical follow-up for PASCAL. In Europe, clinicians are very positive about the performance of our differentiated PASCAL Precision system in their tricuspid patients, and we're looking forward to bringing this therapy to patients in the U.S. following the Class II TR trial. Turning to the sales performance of TMTT. Fourth quarter sales of $32 million were consistent with our latest guidance and driven by the continued adoption of PASCAL in Europe supported by the early initiation of PASCAL Precision in the U.S. Full year global sales were $116 million, up nearly 50% on a constant currency basis versus the prior year.

In 2023, we expect TMTT sales of $160 million to $200 million. We look forward to advancing our vision to transform the lives of patients with mitral and tricuspid valve disease through the milestones outlined in our recent investor conference. We remain committed to bringing this differentiated portfolio of therapies to patients with these life-threatening diseases and believe our strategy positions us well for leadership. In Surgical Structural Heart, full year global sales were $893 million, up 6% on a constant currency basis versus the prior year. Fourth quarter 2022 global sales of $224 million increased 8% on a constant currency basis over the prior year. We are encouraged to see strong global growth driven by the increased penetration of our premium RESILIA products despite COVID challenges in certain regions.

Although hospital staffing shortages continue to be a concern, we believe that heart valve surgery was prioritized. We have seen strong momentum of the RESILIA portfolio globally. We believe that surgeons value the features and benefits of this advanced tissue technology for both aortic and mitral surgical valve replacement procedures. We saw adoption of the MITRIS RESILIA valve in the U.S. increased in the fourth quarter. And built upon previous generations of proven mitral valve technology, MITRIS offers greater ease of use and is designed to facilitate potential future transcatheter interventions. We are growing the large body of RESILIA evidence with our new Momentis clinical study to demonstrate the durability of this tissue in the mitral position.

Enrollment in this study was initiated earlier this month. In summary, we remain confident that our full year 2023 underlying sales growth will be in the mid-single digits for Surgical Structural Heart, driven by the adoption of our most advanced technologies and growth of overall heart valve surgeries. Turning to Critical Care. Full year global sales of $855 million increased 7% on a constant currency basis versus the prior year. Fourth quarter Critical Care sales of $225 million increased 13% on a constant currency basis over the prior year. Growth was driven by contributions from all product lines and regions led by HemoSphere and Smart Recovery. In our Smart Recovery portfolio, adoption of FloTrac and ClearSight sensors featuring our unique hypotension prediction index algorithm RECONNECT remains strong.


Demand for our pressure monitoring devices used in the ICU due to elevated hospitalizations in the U.S. As discussed at our recent investor conference, sales growth in 2023. We remain enthusiastic about our pipeline of critical care innovations, highlighted by smart recovery technologies designed to help clinicians make better decisions and get patients home to their families faster. And now I'll turn the call over to Scott.

Scott Ullem: Thanks a lot, Mike. Today, I will provide a wrap-up of 2022, including detailed results for the fourth quarter as well as provide guidance for the first quarter and full year of 2023. So as Mike mentioned, our sales of $1.3 billion in the fourth quarter grew 7% on a constant currency basis, despite the health care disruptions in a number of our key geographies. Our gross profit margin was healthy, even excluding the temporarily inflated rate due to FX. Combined with sales growth and disciplined spending, this resulted in adjusted earnings per share growth of 25% to $0.64. GAAP earnings per share was $0.65. Obviously, we were disappointed with our stock performance last year. The only upside to the poor stock price performance was that it provided an opportunistic time to repurchase shares more aggressively.

During the fourth quarter, we repurchased $750 million of stock through an accelerated share repurchase program. And in total, we repurchased $1.7 billion of stock last year. Average shares outstanding during the fourth quarter fell to $616 million. We have approximately $900 million remaining under our current share repurchase authorization. For the full year 2022, sales increased 8% over the prior year on a constant currency basis to $5.4 billion. Adjusted earnings per share grew 12% and we generated nearly $1 billion of free cash flow. We expect our sales growth rate to expand in 2023 with a gradual improvement in hospital staffing. Although still early in the year, we saw encouraging signals during Q4 and a good start so far in Q1, which reinforces our confidence about the 9% to 12% full year range.

We are maintaining all of our previous sales guidance ranges for 2023. Absent big moves in FX, we expect total company sales of $5.6 billion to $6 billion, TAVR sales of $3.6 billion to $4 billion, TMTT sales of $160 million to $200 million, Surgical Structural Heart sales of $870 million to $970 million and critical care sales of $840 million to $940 million. For the first quarter, we're projecting sales of $1.37 billion to $1.45 billion, and adjusted earnings per share of $0.58 to $0.64. Now I'll cover details of our results. Our adjusted gross profit margin in the fourth quarter was 81% compared to 76.8% in the same period last year. This improvement was driven by the expected positive impact from our FX program which includes hedge contract gains and natural hedges that offset the negative sales impact from the weakening of the euro and the yen against the dollar.

At current foreign exchange rates, we continue to expect our full year 2023 adjusted gross profit margin to be between 76% and 78%. At current exchange rates, the reduction in this year's forecasted gross profit margin versus 2022 reflects 250 to 300 basis points of reduced benefit from FX plus some incremental inflation. SG&A expenses in the fourth quarter decreased 3% over the prior year to $411 million or 30.5% of sales, primarily due to the weakening of the euro and the yen against the dollar and partially offset by continued investments in the ongoing build-out of the U.S. TMTT commercial team and our high-touch model for TAVR. We continue to expect full year 2023 SG&A expenses as a percent of sales to be between 29% and 30%. Research and development expenses in the quarter were consistent with the prior year at $232 million, or 17.2% of sales.

We continue to expect R&D expenses in 2023 to be between 17% and 18% of sales as we invest in developing new technologies and generating evidence to support TAVR and TMTT growth. Turning to taxes. Our reported tax rate this quarter was 13.3% and or 14%, excluding the impact of special items. We continue to expect our 2023 tax rate, excluding special items, to be 13% to 17%. Foreign exchange rates decreased fourth quarter reported sales growth by six percentage points or $73 million compared to the prior year. At current rates, we now expect approximately flat year-over-year impact from foreign exchange to full year 2023 sales. Foreign exchange rates positively impacted our fourth quarter gross margin by 230 basis points compared to the prior year.

Relative to our October guidance, FX rates had a minimal impact on fourth quarter earnings per share. Finally, before turning the call back over to Mike, I'll finish with an update on our balance sheet and cash flow. We continue to maintain a strong and flexible balance sheet with approximately $1.2 billion in cash, cash equivalents and short-term investments as of the end of the year. Free cash flow for the fourth quarter was $214 million, defined as cash flow from operating activities of $283 million, less capital spending of $69 million. In 2023, we expect free cash flow to grow to $1.0 billion to $1.4 billion. And with that, I'll pass the call back over to Mike.

Michael Mussallem: Thank you, Scott. informational therapies covering solid financial performance. We expect higher growth and meaningful in 2023 with a gradual improvement in hospital. We believe to serve our patients -- we're confident that our patient-focused innovation strategy can transform care and bring value to patients and health care systems worldwide. With that, I'll turn the call back over to Mark.

Mark Wilterding: Thank you, Mike. Thank you, Scott. With that, we're ready to take your questions. Diego?

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