Edwards Lifesciences Corporation

Welcome, and thank you for joining us today. Just after the close of regular trading, Edwards Life Sciences released its first quarter 2019 financial results. During today's call, management will discuss the results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A. Our presenters on today's call are Mike Masalem, Chairman and CEO, and Scott Alam, CFO. Before we begin, I'd like to remind you that during today's call, 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 are 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 in important product safety information may be found in the press release, our 2018 annual report on Form 10-K, and Edwards' other SEC filings, all of which are available on its website at edwards.com. Also, a quick reminder that when using the terms underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP results. Additional information about use of non-GAAP measures is included in today's press release at edwards.com. Now I'll turn the call over to Mike Masalem.

Thank you, Roya. It's been an exciting start to 2019 with multiple positive developments for the company and the patients we serve. Most notably, we announced groundbreaking results of the Partner 3 trial which demonstrated the superiority of our Sapien 3 valve technology and provides a strong platform for future growth. Also, CMS published a draft national coverage determination, or NCD, for TAVR, which could provide improved access for this therapy in the U.S. for even more patients suffering from aortic stenosis who today don't receive treatment. These important developments reinforce our confidence in the continued growth of TAVR. In addition, we received CE Mark for Pascal, an important early addition to our portfolio of TMTT therapies. We are also pleased to recently complete the acquisition of CasMed, a cerebral oximetry technology that will enhance the smart monitoring strategy of our critical care platform. I am more convinced than ever in the tremendous opportunity to drive success for many years to come through our differentiated strategy of focus, innovation, and leadership. Turning to our financial performance, we're pleased to report nearly $1 billion of sales this quarter, representing 9% sales growth on an underlying basis. This was consistent with our expectations, driven by our broad portfolio of new technologies. In transcatheter aortic valve replacement, first quarter global sales were $59 million, up 10% on an underlying basis as expected. Recall that we previously forecast that our first quarter sales growth would be below our full year range and that our sales growth rate would ramp following Q1. We grew at a slightly lower rate than the estimated global procedure growth due to a modest year-over-year share decline. We estimate our global competitive position was unchanged versus the fourth quarter, and we continue to exercise price discipline, holding global average selling prices stable. We continue to believe there's a large number of patients suffering from aortic stenosis who are either undiagnosed or untreated. We are investing more in programs to increase awareness, increase diagnosis, and improve referral patterns and help patients receive the care they need based on medical guidelines. One of our biggest investments is in clinical evidence to support indication expansion. And in March, the PARTNER III trial results were presented at the annual ACC Scientific Session and published by the New England Journal of Medicine, demonstrating that Edward's Sapien III valve proved superior to surgery. We are excited that these robust outcomes continued the steady and impressive progress that we have seen from the 17-year series of rigorous clinical experiences and trials which clearly support TAVR as a proven therapy for aortic stenosis patients. In the U.S., we estimate total TAVR procedures for the first quarter grew in the low double digits versus the prior year, and our growth was comparable. Growth was highest in newer and smaller centers, which provided access to a broader population of aortic stenosis patients. Patients continued to be treated through the Partner 3 low-risk continued access protocol. Our guidance continues to assume receipt of a low-risk indication late this year. We continue to enroll the U.S. pivotal trial to study our self-expanding Sentera valve in intermediate risk patients. We estimate enrollment of this trial will be completed next year. The US Centers for Medicare and Medicaid Services, or CMS, recently released a draft modernized NCD, which we believe better reflects today's practices and the needs of patients. We commend CMS on the proposed policy and are encouraged to see elements within the draft NCD to enable patient access, particularly underserved populations. And it would enable a future move toward measuring hospitals' quality outcomes with metrics instead of procedural volume measure. We'll provide input this week on the draft NCD, which is expected to be posted on the CMS website shortly thereafter. We continue to assume any changes to the current NCD are unlikely to significantly affect our estimated long-term global TAVR opportunity. We expect the new NCD to be finalized by the end of June 2019. Outside the U.S., in the first quarter, we estimate total TAVR procedures grew in the low double digits, while Edward's procedure growth on a year-over-year basis was slightly lower. We believe our competitive position remains stable versus the fourth quarter. We continue to see excellent longer-term opportunities for growth as we believe international adoption of TAVR therapy is still quite low. In Europe, we estimate that TAVR procedures grew low double digits and our growth was lower. Edward's growth in countries with lower TAVR adoption rates continue to outpace countries where the therapy is more established. We are implementing a disciplined commercial introduction of our Sapien 3 Ultra and Sentera systems in Europe as we focus on achieving high procedural success rates and therefore did not significantly impact first quarter growth. We're receiving positive impact from physicians on the unique features offered by both technologies. In Japan, we continue to see strong TAVR adoption driven by Sapien 3 and new centers are being qualified. We believe aortic stenosis remains an immensely undertreated disease among the large elderly population in this country and continue to focus on expanding the availability of this therapy. In summary, we're encouraged by the recent strong Partner 3 evidence supporting the adoption of Sapien 3, which has reinforced our confidence in achieving our underlying sales growth for 2019 of 11 to 15%. It has also reinforced our confidence in the $7 billion opportunity by 2024. Turning to our transcatheter mitral and tricuspid therapies, or TMTT, first quarter global revenue was approximately $4 million, lifted by the initiation of our Pascal mitral launch in Europe. We were pleased to receive the CE mark a couple of months earlier than expected. As we begin the commercial rollout of this differentiated and novel repair therapy, we remain focused on physician training, procedural success, and great outcomes for patients and are pleased with our progress thus far. We also continue to treat patients commercially with our cardioband mitral and tricuspid annular reduction therapy. Transferring the production of cardioband to other Edwards manufacturing facilities remains on track, and we continue to expect supply constraints to be progressively lessened throughout 2019. On the clinical front, we continue to invest heavily in the advancement of our portfolio of therapies for patients with mitral and tricuspid valve disease, and we are pleased to have treated patients with all of our therapies in the first quarter. Related to Pascal in the U.S., We are adding clinical sites and making progress with the enrollment of our CLASP2D pivotal trial to study Pascal in primary or degenerative mitral valve disease. We also continue to expect the initiation of our CLASP2F pivotal trial for patients with secondary or functional mitral valve disease in late 2019. In mitral valve replacement, we remain strong believers in our transeptal strategy and are pleased with the progress and early clinical results in both of our novel platforms. We continue to enroll patients in our Evoke early feasibility study, and we're on track to initiate a U.S. pivotal trial of Sapien M3 in late 2019. In transcatheter tricuspid repair, we're gaining significant clinical experience through our U.S. early feasibility studies for PASCAL, CARDIABAND, and FORMA, and we expect to initiate a U.S. tricuspid pivotal trial in late 2019. As shared previously, Abbott has filed multiple lawsuits against Edwards related to PASCAL in both the U.S. and Europe. Recently, the U.S. District Court in Delaware heard Abbott's motion for a preliminary injunction. We expect a favorable decision in the near future. Litigation does add risk, but we plan to vigorously defend ourselves so that we can continue to provide our differentiated Pascal therapy as a much-needed option for undertreated patients. Overall, we remain enthusiastic about the opportunities to treat patients suffering from tricuspid and mitral valve disease with our transcatheter therapies. We're on track to achieve our 2019 milestones, including achieving our revenue target and continuing enrollment in four pivotal studies. And you can expect to hear more in updates at DGK, the Cardiology Society in Germany, EuroPCR, and TBT medical meetings. In summary, given our first quarter CE mark for Pascal, we have increased confidence in achieving approximately $40 million of total TMTT revenue for 2019. We continue to estimate the global TMTT opportunity to reach approximately $3 billion by 2024 and are passionate about bringing solutions for these deadly diseases and improving patients' lives around the world. In surgical structural heart, sales for the first quarter of $215 million were up 3.5% on an underlying basis. First quarter growth was lifted by the sales of premium products, particularly through the adoption of the Inspiris Resilia aortic valve, which drove an increasing share of surgical aortic valve procedures. We have now successfully launched Inspiris in all major regions, and are encouraged by the steady growth and adoption of this new class of resilient tissue valves. This valve is designed to be an attractive option for active patients, and we observed a continued trend of physicians treating younger patients with Inspiris versus traditional surgical tissue heart valves. Separately, we remain on track to begin treating patients with our Harpoon system in Europe by mid-2019. In summary, In surgical structural heart, although the superiority results in partner three are expected to provide an incremental headwind to our aortic surgical sales, we continue to be comfortable with our full year underlying sales growth range of 1% to 3% based on our strong first quarter momentum. Even as TAVR adoption expands, we're excited about our ability to provide innovative surgical treatments for more patients and to extend our global leadership and surgical structural heart technologies. In critical care, sales for the quarter were $176 million and grew 11% on an underlying basis. All product lines contributed to this performance, boosted by a surge of Hemisphere sales, primarily in the U.S. Hemisphere, our all-in-one monitoring platform, is expected to be an important growth driver in 2019-20. as we continue with the full market launch of the platform with our flow track system and our acumen hypotension predictive index. This platform is designed to provide greater clarity on a patient's hemodynamic status while introducing artificial intelligence to improve decision making. Last week, we completed the acquisition of CasMed, a non-invasive cerebral oximetry monitoring technology company. We believe The incorporation of this technology into Edwards' leading hemodynamic monitoring platform, along with our predictive analytics capability, will strengthen our leadership in smart monitoring technologies. CASMED's annual sales were $22 million in 2018, and we expect minimal impact on our underlying near-term sales growth and earnings from the CASMED acquisition as we work to integrate our technologies. In summary, Given the fast start in Q1, we are more confident in achieving full-year 2019 underlying sales growth in critical care of 5% to 7%. And now I'll turn the call over to Scott.

Hey, thanks, Mike. We are pleased with our start to the year in which we generated underlying sales growth of 9% consistent with our expectations. TAVR sales were $598 million. As previously communicated, We expect our sales growth rate to ramp up following the first quarter as we introduce new products and benefit from the recent clinical evidence supporting TAVR therapy. Let me remind you that in addition to foreign exchange, our reported sales growth this quarter includes two prior year adjustments. The first quarter of 2018 was impacted by adjustments related to our German stocking sales and surgical consignment conversion in the United States. Adjusted earnings per share was $1.32, higher than we anticipated as a result of better production efficiencies, a more favorable tax rate, and deferred expenses. Gap earnings per share was $1.18 and was impacted by our previously announced $24 million charge related to the acquisition of strategic transcatheter technology. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release. I'll now cover the details of our first quarter results and then discuss guidance for 2019. For the quarter, our adjusted gross profit margin was 76.7% compared to 74.5% in the same period last year. This improvement was driven primarily by the favorable impacts from foreign exchange and product mix. This quarter, we were pleased that operational efficiencies offset the continued investments in our manufacturing capacity. We continue to expect our full year 2019 adjusted gross profit margin to be between 76% and 78%. Selling, general, and administrative expenses in the first quarter were $280 million, or 28.2% of sales, compared to $256 million in the prior year. This increase was driven by field personnel-related expenses, partially offset by the weakening of the euro against the dollar. We continue to expect SG&A, excluding special items, to be between 28 and 29 percent of sales for the full year 2019. Research and development expense in the quarter grew 20 percent over the prior year to $171 million, or 17.3 percent of sales. This increase was primarily the result of significant investments in our transcatheter structural heart programs, including an increase in clinical research for the PASCAL system. For the full year 2019, we continue to expect research and development, excluding special items, to be between 17 and 18% of sales. Turning to taxes, our reported tax rate was 10.2% for the quarter, or 10.6%, excluding the impact of special items. This rate included a 610 basis point benefit from the accounting for employee stock-based compensation, which was 190 basis points, or 3 cents, favorable to our guidance expectation. Our rate also benefited from lower U.S. taxes on foreign earnings stemming from U.S. tax reform. We continue to expect our full-year 2019 tax rate, excluding special items, to be between 12 and 14 percent. Foreign exchange rates decreased first quarter sales growth by approximately 3% or $26 million compared to the prior year. At current rates, we continue to estimate an approximate $60 million negative impact or about 1.5% to full year 2019 sales compared to the prior year. FX rates positively impacted our first quarter gross margin by 180 basis points compared to the prior year. Relative to our January guidance, FX rates positively impacted earnings per share by about a penny, reflecting our effective currency hedging program. Adjusted free cash flow for the first quarter was $139 million, defined as cash flow from operating activities of $1 million, less capital spending of $42 million, and excluding a $180 million payment related to our previously announced global intellectual property litigation settlement. Our first quarter free cash flow is traditionally our lowest quarter during the year, and we continue to expect full year 2019 adjusted free cash flow to be between $800 and $900 million. In the first quarter, we were on track in implementing capital expansion projects in line with our strategy to increase global capacity and redundancy. Turning to our balance sheet, at the end of the quarter, we had cash, cash equivalents, and short-term investments of $963 million. Total debt was $594 million. Average shares outstanding during the first quarter remained level with the prior quarter at $212 million. We continue to expect average diluted shares outstanding for 2019 to be between $211 and $213 million. Turning to our 2019 guidance, we remain confident in achieving our expectations for financial performance in 2019, including guidance of $3.9 to $4.3 billion in total sales for Edwards. Our guidance for underlying growth rates remains unchanged for Edwards and our product lines. We continue to expect TAVR sales of $2.4 to $2.7 billion, TMTT sales of approximately $40 million, and surgical sales of $810 to $850 million. In light of Critical Care's fast start to 2019 and recent acquisition of CazMed, we now expect sales of $700 to $750 million, up from our previous guidance of $670 to $710 million. For the full year 2019, we are raising our adjusted earnings per share guidance range to $5.10 to $5.35, up from our previous guidance of $5.05 to $5.30. This increase was reflective of our Q1 performance and incorporates the CASMED acquisition. For the second quarter of 2019, At current foreign exchange rates, we project total sales to be between $1.02 billion and $1.08 billion, and adjusted earnings per share of $1.27 to $1.37. And with that, I'll hand it back to Mike.