Edwards Lifesciences Corporation

Greetings, ladies and gentlemen, and welcome to the Edwards Life Sciences Corporation second quarter 2021 results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Mark Wilterdig, Vice President of Investor Relations. Thank you. You may begin.

Thanks a lot, Diego. Good afternoon, and thank you for joining us. With me on today's call are Mike Musalem, Chairman and Chief Executive Officer, and Scott Ullum, Chief Financial Officer. Just after the close of regular trading, Edwards Life Sciences released second quarter 2021 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. 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 are made, and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties, including but not limited to those associated with the pandemic 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 2020 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 underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they're 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. Mike?

Thanks, Mark. We were encouraged by clear signs of recovery during the second quarter. Vaccine adoption in key regions has contributed to an increasing number of patients seeking, and most importantly, receiving treatment. At Edwards, our dedication of providing innovative solutions for people fighting cardiovascular disease around the world motivates our employees every day. We never stopped our aggressive pursuit of breakthrough technologies with the potential to help an even broader group of patients. Last year, we noted that we're in the midst of the onset of this tragic global pandemic. There were more than 20,000 patients around the world who were treated with our sapien valves in that second quarter. This quarter, more than 30,000 patients were treated with sapien valves, an indication that more patients are benefiting from our life-changing technologies than ever before. Comparisons to 2020 are challenging as last year marked an extraordinary time for structural heart patients, especially during the second quarter when the COVID surge overwhelmed hospitals and undermined regular ongoing care. Patients and their doctors around the world were forced to weigh the risk of COVID versus the severe effects of progressive heart valve disease. Fortunately, we're now experiencing encouraging signs of increased patient confidence to visit their physician. Turning now to our recent results, we're pleased to report better than expected second quarter sales of $1.4 billion, up 44% on a constant currency basis from a year ago period. All four product groups delivered large increases in sales led by TAVR. Total company sales increased sequentially versus Q1. And importantly, sales grew 11% on a two-year compounded annual basis compared to the strong pre-pandemic second quarter of 2019. While hospital heart teams have not been reporting significant backlogs, we believe that procedure rates in Q2 were lifted because patients who previously postponed their doctor visits returned and were treated. We are raising our full year outlook for 2021. We remain cautious about the mixed trends of the recovery from the pandemic. And additionally, we expect a more pronounced summer seasonality associated with a pent-up demand for vacations. Yet, given the better-than-expected year-to-date performance and momentum exiting the quarter, we now expect total sales growth to be in the high teens versus our previous guidance of mid-teens. In TAVR, second quarter global sales were $902 million, up 48% on an underlying basis versus the year-ago period, or 14% on a two-year compounded annual basis. We estimate global TAVR procedure growth was comparable with Edwards growth in the second quarter. Globally, our average selling price remains stable as we continue to exercise price discipline. We continue to be optimistic about the long-term potential of TAVR because of its transformational impact on the many patients suffering from aortic stenosis and because many remain untreated. In a recent article in the American Journal of Cardiology, it reported on the survival of severe AS patients since the introduction of TAVR in 2008. The analysis included clinical data on 4,000 patients obtained at the Mass General and concluded that in the TAVR era, overall survival of patients with severe AS has doubled. The long-term potential, along with the rebound in procedures, reinforces our view that this global TAVR opportunity will exceed $7 billion by 2024, up from more than $5 billion today. And beyond 2024, bolstered by two pivotal trials currently being enrolled, we believe the impact of treating this deadly disease before symptoms and before the disease becomes severe has the potential to transform the lives of even more patients. In the U.S., our TAVR sales grew sequentially over Q1 and over 50% on a year-over-year basis. Our U.S. TAVR volumes were well above pre-COVID levels as our two-year compounded annual growth rate was in the mid-teens. We estimate that our share of procedures was stable. We're encouraged that U.S. TAVR procedures grew as vaccinations increased and patients decided to seek treatment during the quarter. Growth was broad-based across both high and low volume centers. Outside the U.S., in the second quarter, our sales grew approximately 40% on a year-over-year basis, and we estimate that total TAVR procedure growth was comparable. On a two-year compounded annual basis, we estimate that sales grew in the low double digits in the second quarter versus 2019. And although we're encouraged by the strong results, vaccination progress outside the U.S. creates uncertainty for the remainder of the year. Long-term though, we see excellent opportunities for OUS growth as we believe international adoption of TAVR therapy remains quite low. TAVR procedure and Edwards growth in Europe also rebounded significantly on a year-over-year basis. Edwards growth was driven by the continued strong adoption of our Sapien platform and was broad-based across all countries. Patient flow recovered throughout the quarter, although it remained suboptimal in several countries and uncertainty among patients about the urgency of their disease. In Japan, we continue to see strong TAVR adoption driven by Sapien 3 and broad growth across centers of all sizes. We remain focused on expanding the availability of TAVR therapy throughout the country, driven by the fact that aortic stenosis remains an immensely undertreated disease amongst this large elderly population. As previously announced, we received approval earlier in the second quarter for Sapien 3 in patients at low surgical risk, and we continue to anticipate increased treatment rates in Japan when reimbursement is approved in Q3. Now, turning to several recent TAVR clinical trial highlights, last week at the TVT conference, data on the Vancouver's TAVR economic study were presented, which further demonstrated the favorable economic value of our Sapien 3 platform. A comparison of 1,100 patients was conducted to assess the economic impact of next-day discharge. The SAPIEN 3 platform with a minimalist approach achieved better patient outcomes, 30 days post-procedure, and enhanced resource utilization, which resulted in meaningful cost improvements. Also at TBT, results from the Partner 3 bicuspid registry showed similar outcomes to other TAVR patients, as well as significant improvement in patient symptoms and quality of life. We remain as optimistic as ever about the long-term growth opportunity as patients and clinicians increasingly understand the significant benefits of TAVR therapy supported by the substantial body of compelling evidence. In summary, based on the strength that we saw in the second quarter, we have confidence that the underlying TAVR sales will grow around 20% in 2021 versus our previous expectation of 15 to 20% growth. Turning to TMTT, we continue to be very pleased with our clinical outcomes as they remain a key driver to treating many patients in need and unlocking this significant long-term growth opportunity. We continue to be committed to ensuring procedural success and employing a high-touch clinical support model. We are progressing in the enrollment of five pivotal trials across our differentiated portfolio to support therapies for patients suffering from mitral and tricuspid regurgitation. We have initiated use of the PASCAL precision platform and are currently enrolling class trials and early physician feedback has been positive. We remain on track for U.S. approval of PASCAL for patients with DMR late next year. We advanced our clinical experience with transcatheter replacement. as we continued enrollment with our TRICEN2 Pivotal Trial for EVOKE tricuspid replacement. We also continue to treat patients with both our transcatheter mitral replacement therapies through the ENCIRCLE Pivotal Trial for SAPIEN M3 and the MISEN study for EVOKE EOS. As we continue to build a body of compelling clinical evidence, we are pleased with the recent data from several late-breaking presentations across our comprehensive TMTT portfolio. In Mitral, an analysis at EuroPCR of over 2,100 commercially treated patients provided further evidence of the efficacy, safety, and ease of use of the Pascal platform. In addition, two-year results from the CLAS study of Pascal highlighted strong and sustained MR reduction as well as high survival rates for both FMR and DMR patients. And in tricuspid, 30-day outcomes for our TRISEN study for the evoked tricuspid valve replacement system demonstrated favorable technical feasibility and safety, along with significant improvements in tricuspid regurgitation and quality of life for patients. Similarly, outcomes for Pascal tricuspid valve repair resulted in significant TR reduction low complication rates and sustained functional and quality of life improvements at six months. Turning to the financial performance in TMTT, global sales of $22 million was driven by the continued adoption of our Pascal platform as we activated more centers across Europe. We now expect 2021 TMTT sales of $80 to $100 million up from our previous sales guidance of $80 million. We continue to estimate the global TMTT opportunity to triple to approximately $3 billion by 2025, and we are pleased with our progress toward advancing our vision to transform the lives of patients with mitral and tricuspid valve disease. In surgical structural heart, record second quarter global sales of $237 million was up 42% on an underlying basis versus a year ago period. Revenue growth was lifted by increased adoption of our premium Resilia technologies around the world and rebounding surgical aortic treatment rates in the US. We were encouraged by steady improvement in global surgical procedure volumes as we progressed through the quarter. We experienced strong year-over-year adoption of Edwards Resilia tissue valves. including continued adoption of the Inspiris Resilia Aortic Surgical Valve, the Connect Resilia Aortic Tissue Valve Conduit, as well as our new Mitras Resilia Surgical Mitral Valve, which was launched in Japan in the second quarter. We believe the adoption of Resilia Tissue Valves will be further bolstered by the four-year mitral data from our commenced clinical trial presented at the recent meeting of the American Association of Thoracic Surgery, as well as the growing body of Brasilia clinical evidence, which demonstrates excellent durability of this tissue technology, even in the high-pressure mitral position. In summary, given the strength of our year-to-date performance, we are raising our full-year surgical structural heart guidance. We now expect underlying sales growth in the mid-teens versus our previous expectation of high single-digit growth. We continue to believe the current $1.8 billion surgical structural heart market will grow in the mid-single digits through 2026. In critical care, second quarter global sales were $215 million, up 27% on an underlying basis versus the year-ago period. Growth was driven by balanced contributions from all product lines, led by hemisphere sales in the U.S., as hospital capital spending continues to show signs of recovery. Demand for products used in high-risk surgeries remains strong, and demand for the ClearSight noninvasive finger cuff used in elective procedures accelerated following its recovery to pre-COVID levels in the first quarter. InSmart Recovery received FDA clearance for the software algorithm that powers our Hypotension Prediction Index, HPI, on Hemisphere and the Acumen IQ cuff. The non-invasive Acumen IQ cuff provides clinicians with an important new tool to reduce hypotension in a broader range of patients, including those that do not require an arterial line. In summary, given the strength of our year-to-date performance, we're raising our full-year critical care guidance to low double digits versus our previous expectation of high single-digit growth. We remain excited about our pipeline of critical care innovations as we continue to shift our focus to smart recovery technologies designed to help clinicians make better decisions for their patients. And now I'll turn the call over to Scott.

Hey, thanks a lot, Mike. I am pleased at the momentum we experienced as we exited the first quarter and continued in the second quarter across all of our product lines. While we're expecting some headwinds due to the summer vacation schedule and flare-ups of COVID in various regions, we're optimistic about favorable business conditions for Edwards. Total sales grew 49% year-over-year as patients increasingly were more confident about pursuing treatment in the second quarter. Of course, the unusually high growth rate also reflects depressed sales in last year's second quarter due to COVID. Our underlying two-year compounded growth rate in the second quarter was 11%, another indicator that conditions are improving. The much stronger-than-expected sales performance, lifted by unexpectedly high procedure volume, fell through to the bottom line, resulting in adjusted earnings per share of 64 cents. Based upon our strong start to the year and positive outlook, we are raising our previous sales guidance ranges for 2021. For total Edwards, we now expect sales of $5.2 to $5.4 billion. For TAVR, $3.4 to $3.6 billion. For TMTT, $80 to $100 million. For surgical structural heart, $875 to $925 million. And for critical care, $800 to $850 million. Now, regarding second half margins. We're intending to resume a higher rate of spending as commercial activities increase, especially as we continue to build our clinical and field teams to support our planned new product introductions in multiple regions. In addition, we expect growth in research and development expenses as our clinical trial activities increase. The combination of these actions contributes to our more moderated guidance for margins in the second half. We expect our full year adjusted earnings per share guidance at the high end of our previous range of $2.07 to $2.27. While public health conditions remain uncertain, we're projecting total sales in the third quarter to grow sequentially to between $1.29 and $1.37 billion, resulting in adjusted earnings per share of 50 to 56 cents. Now I'll cover additional details of our results. For the second quarter, our adjusted gross profit margin was 75.9%, compared to 74.4% in the same period last year, when we experienced lower sales and substantial costs responding to COVID. This increase was also driven by a more profitable product mix, partially offset by a negative impact from foreign exchange. We continue to expect our 2021 adjusted gross profit margin to be between 76 and 77%. Selling general and administrative expenses in the second quarter were $374 million, or 27.2% of sales, compared to $275 million in the prior year. This increase was primarily driven by personnel-related costs, including performance-based compensation, increased commercial activities compared to the COVID-impacted prior year, and the strengthening of OUS currencies, primarily the euro. We're planning to see a ramp up in the expenses noted above in the second half as COVID related restrictions subside to support continued growth. We continue to expect full year 2021 SG&A expenses as a percent of sales, excluding special items, to be 28 to 29%. Research and development expenses in the quarter grew 24% to $225 million or 16.4% of sales. This increase was primarily the result of continued investments in our transcatheter innovations, including increased clinical trial activity. We are planning to ramp up expenses in the second half as we invest in developing new technologies and generating evidence to expand indications for TAVR and TMTT. For the full year 2021, we continue to expect research and development expenses as a percentage of sales to be in the 17 to 18% range. During the second quarter, we recorded a $103 million net reduction in the fair value of our contingent consideration liabilities, which benefited earnings per share by 14 cents. This gain was excluded from the adjusted earnings per share of 64 cents that I mentioned earlier. This reduction reflects accounting adjustments associated with reduced expectations of making future milestone payments for previous acquisitions. This accounting impact does not impact our 2021 guidance. Turning to taxes, our reported tax rate this quarter was 10.3%. This rate included a larger than expected 590 basis point benefit from the accounting for stock-based compensation. We continue to expect our full year rate in 2021, excluding special items, to be between 11 and 15%. including an estimated benefit of 5 percentage points from stock-based compensation accounting. Foreign exchange rates increased second quarter reported sales growth by 450 basis points, or $29 million, compared to the prior year. At current rates, we now expect an approximate $70 million positive impact, or about 1.5%, to full-year 2021 sales compared to 2020. Foreign exchange rates negatively impacted our second quarter gross profit margin by 180 basis points compared to the prior year. Relative to our April guidance, FX rates positively impacted our second quarter EPS by a penny. Free cash flow for the second quarter was $457 million, defined as cash flow from operating activities of $526 million, less capital spending of $69 million. Before turning the call back over to Mike, 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 $2.6 billion in cash and investments as of June 30th. Average shares outstanding during the second quarter were $630 million, down from the prior quarter as we repurchased 1.3 million shares during the second quarter for $112 million. In the first half of the year, we repurchased 4.9 million shares at an average price of $85. In May, we obtained board approval to increase our share repurchase authorization and currently have approximately $1.2 billion remaining under the program. We now expect our average diluted shares outstanding for 2021 to be at the lower end of our 630 to 635 million guidance range. And with that, I'll pass it back to Mike.

Hey, thanks, Scott. So we're pleased with our performance in the first half of 2021. To serve the many patients suffering from structural heart disease, we never stopped investing in our people, our innovative technologies, and our new growth capacity. As patients and clinicians increasingly recognize the significant benefits of transcatheter-based technologies supported by the substantial body of compelling evidence, we remain optimistic about the long-term growth opportunity. Our foundation of leadership combined with a robust product pipeline positions us well for continued success. And with that, I'll turn the call back over to Mark.

Thank you very much, Mike. Before we open it up for questions, I'm excited to announce that our 2021 Investor Conference will take place on Wednesday, December 8th at our headquarters here in Irvine, California. This event will include updates on our latest technologies, views on longer-term market potential, as well as our outlook for 2022. Please look for more information at on our website next month. With that, we're ready to take questions now. Diego, 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 any additional questions, please re-enter the queue and management will answer as many participants as possible during the remainder of the call. Diego?

Thank you. And as a reminder, to ask a question at this time, press star one on your telephone keypad. And if you'd like to withdraw your question, please press star 2 on your telephone keypad. Our first question comes from Bob Hopkins with Bank of America. Please state your question.

Oh, great. Thank you, and good afternoon, and congrats on such strong performance across the board. I just have two quick questions on the guidance. First is just on the short term and some of the comments you made about this quarter and Just curious, you mentioned the backlog dynamic, which is not something you'd really talked a lot about before. Was that a major factor in the quarter? Can you quantify that? And any thoughts on what that looks like in the Q3 or the back half?

Yeah, thanks, Bob. And, you know, we were pleased with the results. They were broad-based. Your observation is correct. We really haven't talked about this much in the past. Most of our data historically has come from talking to our HART teams and you know, really around the world, but especially in the U.S. And when we talk to them, they really don't know the difference in their backlogs compared to what they've seen in the past. But we believe, based on a number of sources, some of anecdotal conversations, some of it was going on with other companies like insurers or others in the healthcare space that noted much more patient activity. And we believe that this flow of patients, so patients visiting their primary care physicians, patients going back to their general cardiologists, their general cardiologists referring them on to heart teams, all those things that we think were potentially delayed, that there was a real pickup in the second quarter. And because of the rate of treatment being much larger than anything we've ever seen in our past, We believe that that's in there. It's not based on, we don't have hard data, Bob, to quantify how much that was, but we believe that that was a key part of what happened.

Okay. Thank you for that. You know, just curious. And then that kind of feeds into my second question, which is also around the guidance for the back half on the total revenue, which I think you call for roughly a 3% decline sequentially from what you did in Q2 and then Q4 being kind of flat with Q2 and I'm just curious, maybe either for Mike or for Scott, just maybe talk about some of the moving parts that went into that guidance where you expect a little bit of a decline sequentially and then Q4 similar to Q2. I might have thought that would have been a little bit higher given the momentum, but just curious of the moving parts you're assuming there.

Yeah, I mean, you've got it right, and I'll invite Scott to come in and add more color to it, but you're right. We did exit with momentum, and it was strong momentum coming out of Q2, but at the same time, we're mindful of the fact that we probably got some help in Q2 from some of these patients coming off the sideline. Also, you know, all of us are all acutely aware of what's going on with the pandemic and the recent surge that's happening. And although it hasn't had dramatic impact on the health care system so far, we think it can have impact. And so that's also baked into our thinking. Q3, we think there's going to be a pronounced seasonality. associated with people both in the healthcare system and patients themselves wanting to get away and take a vacation. And so all those went into our thinking. And I don't know, Scott, if there's much to add to that.

No, that's a good summary. You know, if we would not have exceeded our Q2 sales expectations by as much as we did, you probably would have seen a different sequential trend from Q2 to Q3 as we continue to grow and recover through this pandemic. But We just exceeded Q2 so much that we do think we'll see some of that seasonality that Mike talked about, and then going back up to a more normalized level of sales when we get into the fourth quarter.

Fair enough. Thank you very much.

Our next question comes from Vijay Kumar with Evercore ISI. Please state your question.

Hey, guys. Thanks for taking my question, and congrats on a nice print share. Mike, maybe a big-picture question. When I look at the guides here, the beat in the quarter came from TAVR. I think there was some nervousness around slowdown in Asia-Pac, Japan, due to the COVID outbreak. How, you know, when you think about those regions, how those regions normalized, and given U.S. was so strong, it offset that weakness. You know, when I look at your guide, every other segment was raised, some cures were you know, when you thought about the guide. Was it, you know, some concerns around these outbreaks? Is that what went into the thought process around TAVR guidance?

Yeah, thanks, Vijay. You know, one of the things you have to be a little bit careful of when you look at growth rates and use that as a way of measuring Q2 is to be a little bit more reflective on what the climate was like in Q2 of last year. So Japan just didn't decline significantly. as much as the U.S. in Europe last year. And so while the growth rate looks like less in Japan, it looks like it was less of a performer, actually, Japan was doing quite well and grew very nicely. Similarly, Europe didn't get hit quite as hard in Q2 as the U.S. did, as the U.S. really got hit hard. So Europe has actually been performing, we think, at a pretty high level. Now, having said that, you correctly note that, hey, you know, Japan's in... a near lockdown and portions of the region. There's portions of Europe that are still troublesome, although, you know, there's encouraging signs in Europe as well. I just saw some data this morning that said vaccination rates in Europe are comparable to U.S. vaccination rates. And we know of, you know, some places where that are under pressure in the U.S. So what we've taken all that into account when we provided our guidance. But when we look backward at Q2, We feel like we saw strength across each of the regions.

That's helpful, Mike. And then one maybe on the SAVR portion, structural heart. I want to make sure I heard this correctly. Did you say mid-singles at both outlooks in 2025? You know, I think there's been some concerns about cannibalization. I'm curious. Is that a comment on the entire market being up mid-singles, or is that more specific for Edwards?

No. So what we were commenting on was the total market. And we said that that total market that's $1.8 billion will grow in the mid-single digits through 2026. Now, that total market is total what we call surgical structural heart. So it's not just valves. It has more than that in it. But we're trying to send a signal that we think that's still a growth market. And that is with the TAVR impact. So we consider, we think TAVR is definitely going to have impact on surgery during that period of time, but it's going to grow in spite of that. We've enjoyed some very nice growth for a number of reasons, a lot of it built on just the strength of our premium Resilia platform.

I would just add to that, one of the things that happens when there's a greater awareness of structural heart disease and valvular disease is that more patients are just coming into the system. And many of those patients who have isolated aortic cirrhosis are great candidates for TAVR. But there are a lot of patients who come into the system who need surgery, and it's one of the reasons why we expect that business to continue to grow.

That's helpful perspective, Scott. Thank you, guys.

Our next question comes from Larry Beagleson with Wells Fargo. Please state your question.

Good afternoon. Thanks for taking the question, and congrats on a nice quarter. Mike, I'd love to hear you talk about the trends you're seeing in your mitral and tricuspid businesses. You know, the $80 to $100 million guidance for this year, you know, what percent is mitral, what percent is tricuspid, and how significant are clinical sales in that TMTT number?

So clinical sales are a portion of it, but it's minor. I don't know the exact, Larry, but I would guess it's in the, Maybe it's in the 10% range of overall sales. You know, the market itself feels like the growth of transcatheter, mitral, and tricuspid did pick up in the quarter. And so we see it's still a market that's driven by mitrals more than tricuspid. So I don't know if that's helpful.

So it's very helpful. I mean, I guess I'd love to hear how you're thinking about that. business beyond 2021. I mean, $8,200 million is a pretty big pickup from what you did in 2020. How do you think about that business going forward? Thanks for taking the question.

Yeah, thanks, Larry. Yeah, you know, when we said $80 million at the beginning of the year, that was about a doubling from last year. So now we think it'll more than double. But I think you know about how we feel about this market. We formed a business unit around it. And have an awful lot of really important differentiated innovations going on in this space. So we have a high confidence level that this is going to be important. It's a road. We're very focused on making sure that we have great outcomes, and that's key to us. We work on having rigorous, pivotal trials. We have differentiated therapies, and we work on having great real-world outcomes with our high-touch models. We've said that we think it's going to be more than $3 billion by 2025, so it gives you a signal as to what we think, where the market is maybe a billion dollars in that neighborhood today. Thanks, Mike.

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

Yeah, nice quarter. Thanks for taking the question. Maybe I could start some P&L questions. Scott, gross margin was a touch light in the quarter. Just maybe walk us through how you get back up to the 76-77 guidance through the back part of the year. What gives you the confidence?

Well, it was a touch light, but keep in mind there are a couple of moving pieces. One was we had about a 180 basis point hit from foreign exchange. primarily due to these hedge contracts where there are downsides and it works opposite of the benefit that we get with the translation of sales from outside of the U.S. But that was more than swamped by 230 basis points for manufacturing efficiencies and lower special COVID expenses than what we had in the second quarter. So, you know, you've got FX and manufacturing efficiencies at play, and we came in 10 basis points short of the bottom end of our range for the full year, gross margin guidance. You know, we're probably right now looking at something that is closer to the lower end of the 76 to 77% range, but it's probably too early to get more granular than that, Robbie.

Great. And while we're on the P&L, I'll use another here. The accounting charge that was a benefit this quarter. I didn't hear what it was related to, if you don't mind just letting us know what it's tied to. Appreciate it. Thanks a lot.

Sure. Sure. So it was accounting adjustments that were associated with some lower expectations of making future milestone payments connected to some past acquisitions that we've done. So the accounting associated with those is we evaluate the probabilities and the timing and the assumptions around whether we might make those milestone payments. And in this case, we think there's some lower likelihood of some of those, and so we run it through as a gap gain but not something that shows up in our non-gap earnings per share.

Okay. Is it any specific deals you can talk to, or is it just the overall portfolio?

Well, there are two primary deals where we have earnouts. One is Valtech, which is the parent company of the CardioBand product, and the other is Harpoon. And I won't get into the details beyond that, but those are the two big deals where we've got exposure to future milestones and where the expectations for those move up and move down over time, and we run those accounting results through the P&L.

Great. Appreciate it. Thanks for taking the questions.

Our next question comes from Pito Chickering with Deutsche Bank. Please state your questions.

Good afternoon, and thanks for taking my questions. The first one is a question on the growth in new centers versus established centers in 2Q. If you look into the back half of the year, are there any constraints such as salespeople, manufacturing, or center capacity that could limit that growth?

Yeah, thanks. You know, we feel like this quarter we saw broad growth across all size centers. And so I think that's most noteworthy, maybe even more than we have seen in the past, real strength from some of the big centers. We continue to add centers this quarter. I would say it was kind of a normal addition, kind of what we've been adding right along. We're probably at an 800-plus level in terms of centers right now. And so that's going to be probably diminishing important. But the ones we're adding now are quite small centers and don't really have material impact to our results.

Okay. And the question for you in margins, we've been talking about investments above clinical trials and field teams for this year, but it looks as though you're increasing those investments. I'm just curious, sir, what's changed in the last 90 days to increase those investments?

You're talking about clinical trials?

Yeah. So we've got multiple pivotals underway right now, five in TMTT, and then we've got other ones in TAVR and surgical, and as we continue to enroll patients, those clinical trial expenses increase. Keep in mind, we incur expenses at two points. One, at the point of treatment, but then secondly, we follow these patients a lot of times out to 10 years, and so we've got this increasing and recurring clinical expense that, you know, is part of our strategy. We're trying to build a robust body of clinical evidence, and it's an important part of how we're intending to grow the top line over time.

Yeah, and I'd add, Peter, although things definitely picked up in Q2 in terms of clinical trial activity, it could go even faster yet in the future, and so that's what we anticipate. Great. Thanks so much.

Our next question comes from Matt Mixick with Credit Suisse. Please state your question.

Hey, great. Thanks so much for taking the question. So maybe a follow-up to Peter's question there on centers. I noticed that TVT, some of the information you had up around the meeting included some comments on the number of interventional centers around the country that were also performing TAVR. And the reason I ask is that in the past you've talked about this you know, sneaking up on maybe 850 centers in the U.S. and not really going to go to the 1,100, 1,200 centers as we have for cardiac surgery. But, you know, this sort of comparing the number of centers that are, you know, doing stenting but not TAVR seems a little bit like a new way of highlighting the underpenetrated nature of the adoption. I'm just wondering if you could speak a little bit about that, if I'm reading that right or where you are exactly in that curve. And then I have one follow-up.

Yeah, thanks, Matt. Yeah, I'm sorry if we weren't clear on that. I mean, we have been, I think, pretty consistent since the new NCD was approved a few years ago that we thought this was going to head toward around 850 centers. That continues to be our belief. Nothing has really changed in that regard. And it's probably constrained by the way that the NCD is written. We probably argued that it might have been larger, but, you know, it is what it is. And so that's where it is. But I really wouldn't focus overly on number of centers, for example, in the U.S., when you think about what the potential is for TAVR, because the real issue is patients coming off the sidelines. There are many, many patients with severe AS that, for one reason or another, don't get diagnosed or don't ever make it to a heart team and treatment. And that is going to be the key to the growth of TAVR overall. And we're fortunate to have a great procedure that has terrific results, and we're making progress on encouraging patients to come back. Now, it's a challenge, obviously, with COVID, because those same patients that are vulnerable to COVID are those that are, you know, have very similar characteristics as severe AS patients. But it's a real opportunity. And, you know, the other thing that we find is, you know, there's much conversation about health disparities these days. That's true in spades. for severe aortic stenosis patients. There are real health disparities. And so as the overall system looks to tackle that, we think that's a bit of a tailwind to our efforts.

That's fine. You mentioned that you're growing at a similar pace to the volumes in the various regions where you're operating. And any thoughts or contemplation of

share easing or share loss you've had some significant gains in the past year and a half for a variety of reasons and so you know anything changing in that on the share front yeah so we're you know that's always very difficult to measure at this point in time and you know that's one that you get a chance to look back on after everyone's reported and you get a chance to see the tbt registry uh it's it's not truly our our key focus you know most of our growth really comes from these patients coming into the system rather than any sort of changes in chair. But, you know, as we stayed, we really think that those positions were stable in the quarter. Great. Thank you, Mike.

Our next question comes from Cecilia Furlong with Morgan Stanley. Please state your question.

Great. Good afternoon, and thanks for taking the questions. Mike, I wanted to start with PMTT in Europe and just really what you were able to do in 2Q in terms of being able to access new sites, open new sites, and then as you contemplate the 80 to 100 for the year, what's factored in from a new site opening versus just continued penetration in your existing sites?

Yeah, it is a key part of our growth strategy, so that's a correct observation. We have been involved in a lot of physician training, We have a high-touch model, so we're there, and we really help make sure that when people start up, they start up the right way. I think at this point we're in double-digit countries, more than 10 countries across Europe, and we're opening centers in all those places. And so a significant increase to our team and, of course, a lot of rigor in terms of trying to back that up.

Great. Thank you. Just on Japan as well, off of the recent traction, as you're thinking about reimbursement heading into 22, just the growth drivers you've seen recently, but how you're thinking about really opening new centers in that region going forward in 22 and new centers really being kind of a growth driver as you look forward over the next few years.

Yes, thanks. Yeah, I think we talk about it. every time that we're speaking to you that there is a really significant undertreatment in Japan. They've got such a large elderly population that their treatment rates should be much higher, and there are a number of structural issues that stand in the way of Japan getting that done, and we try and become students of that, and we're making some progress. Adding new centers is important and valuable. One of the things that I think may not be clear to most is we've only had a high surgical risk indication up until now. And so we're going to jump to a low surgical risk indication. And once that reimbursement comes in place, which happens this quarter, or we expect to happen this quarter, that's when there should be some real reaction from clinicians in terms of treating these patients. So we look forward to adding these new centers. But we're also mindful of just COVID in Japan. So, you know, it's one where we're very positive about it in the long term, but, you know, a little uncertain in the short term.

Great. Thank you.

Our next question comes from Travis Steed with Barclays. Please go ahead.

Thanks for taking the question. I guess one longer-term question on margins. You're spending a lot today on R&D and SG&A, but also have a lot of investments in front of you. So I was curious how you think longer-term, how you balance the spending versus margin expansion.

So, yeah, longer-term, we do think we're going to continue to get some benefits from scale. And we think about margins, I guess, in all three areas, gross margin, R&D, SG&A. On the gross margin line, you've seen us expand gross margins. And even as we've invested a lot into our physical footprint of production facilities around the world, we're getting more and more efficient as our volumes increase. And so that's going to continue to be helpful, I think. On the R&D side, we're going to continue to invest heavily. And that may not in the short term be a source for additional leverage. But longer term, we do think revenues are going to outpace operating expenses. including SG&A, where we're getting more benefits of scale. Our administrative, some of our back office functions can support a bigger business around the globe. And so we think we've got opportunities to, over time, incrementally expand the operating margin.

That's helpful. On the international business, I don't know if you've mentioned any update on China and how that's going. I noticed Medtronic filed a study today in TAVR for their device in China. So Curious if there's any update on China and are you looking at other markets to move into as well longer term?

Yeah, so for us, China was in terms of THV was a minor contributor to sales in the quarter. It actually did very nicely in critical care and surgical heart valves. But, you know, we're still launching there. We've got a very deliberate and methodical approach that's aimed at having great patient outcomes. And so we're going to be looking at this as a long-term opportunity or an intermediate and a long-term opportunity, and we're going to try and take it from that perspective. It doesn't help right now that some of us can't travel to China, and so those kind of things tend to be obstacles, but overall a team that's out there executing.

Great. Thanks for taking the questions.

Our next question comes from Josh Jennings with Cowan. Please go ahead.

Hi, good evening. Thanks for taking the questions. Mike, I was hoping to just start, get a better understanding of your comments around patient backlog and TAVR. You know, our checks with some physician experts are anecdotal, but they're relaying that when they query their patients, most of their patients, one even said at a high volume center, they can't find a patient that's saying that they delayed their procedure because of COVID. And so is your backlog, when you talk about primary care physician offices, is this just you know, to the incidence in 2020, the patients that just were not diagnosed are now coming back through the channel and there are just more patients with aortic stenosis that have not been diagnosed yet and are getting diagnosed by the primary care physicians or general cardiologists and then moving through the channel. Is that the primary thrust of your backlog comments?

We think so, you know, at the risk of oversimplifying. Yeah, indeed, we believe that during COVID pandemic, People were more fearful of COVID and entering the system with COVID than they were concerned about their AS in many cases. You know, we even had some clinicians tell us that, you know, when patients are home and they're not very active, they may not even demonstrate some of the symptoms they might have if they were more active. But we do hear that they're coming back now. It's been, again, anecdotal, so I'm a little hesitant to say that we know exactly where that's coming from, Josh. So, for example, we had one physician at a leading center that tells he thinks that the patients that are coming back now are sicker than they were before, and that will show up in the numbers. But, again, totally anecdotal. But we've heard enough of this that we believe that there are patients that are coming back into the system, and we saw kind of a surge in the second quarter.

Thanks for that. And maybe just one quick follow-up on a similar topic. There's a stronger adoption of handheld ultrasound technologies, more technologies coming into play. Are there any enabling technologies that will enhance or accelerate the diagnosis of these undiagnosed aortic stenosis patients in the primary care office or the general cardiologist office that's giving you some optimism about deeper penetration of TAVR as we move forward here? Thanks for taking the questions.

Yeah, thank you. You know, we think there's a host of technologies that are still pretty early, and we've been backers of some of these that could really help with the diagnosis of valvular disease. It comes from many directions, and we think as the world digitizes and there's more handheld devices and there's more ability to bounce signals off the cloud, whether it's EKGs or stethoscopes and handheld devices of all sorts, especially those that can listen to heart sounds, that this is going to be enhanced. I'll avoid doing a commercial for any particular companies, but there are numbers that are pursuing this exact thing, and we think it's a very helpful sort of megatrend for us. Great. Thanks a lot. Sure.

Our next question comes from Anthony Patron with Jefferies. Please go ahead.

Greg, congrats on the quarter. I hope everyone's well. Two quick ones. One would be just on the competitive dynamics in Europe in particular, and just maybe a quick update on the pricing dynamics there, just given that the environment is a little bit more richer with competitors in that region of the world. And then the second would be on the 7 billion global TAVR outlook, you know, that figure has not factored in asymptomatic. So just wondering, taking the temperature here, on asymptomatic latest thoughts on sides of that opportunity and how that market opportunity can be untapped over time. Thanks.

Yeah, thanks. Well, and I'm sure that everybody, Anthony, gets a chance to track, you know, what's going on with the various companies that are engaged in TAVR. You know, in general in Europe, there's a pretty full complement of competitors It seems to us that the two leading companies probably account to close to 85% of the volume in Europe. So it gives you a bit of a sense. I don't know if that's exactly helpful for what you're looking for. Was there more? Let's see. Oh, the $7 billion opportunity. You're right. It has very little asymptomatic in it. We have a big early TAVR trial that's going on right now, and you also heard that we initiated it. a trial of patients with moderate AS. Those are not in that number. So I tried to cover it in our general remarks. The $7 billion in 2025, we don't see as sort of top of some curve. This has the potential to grow significantly more, particularly if we can demonstrate the value of TAVR for these patients that today are not really indicated today. And we think these trials have the potential to do that.

Thanks again. Our next question comes from Joanne Wench with Citi. Please state your question.

Thank you for taking the question, and nice quarter. Two quick questions. If Pascal is approved in the United States by the end of next year, does that mean data at ACC?

Yeah, you know, we don't have great visibility as to when we're going to see data. Certainly we're going to see it sometime next year, but I'm not sure what meeting we're going to see it. It's too early for us to be able to judge it. But, you know, what we think from a timing perspective is that we should have that approval by the end of next year, which means we're probably launching, and you can see it in the numbers, in 23.

And, you know, I think that the TMTT numbers in – outside the United States is inching up nicely. Is there anything that you're learning from that process or from that launch that will make it easier to bring it into the United States? And thank you.

Yeah, thanks, Joanne. So obviously, we learn a lot from those experiences. And as we mentioned, we have a high-touch model, so we're in every case. So we get the chance to learn about that on a regular basis. You know, we're highly focused not necessarily on just trying to drive sales but to make sure that we get great results. And we've been really pleased so far that we've had differentiated outcomes. And that stays the focus because we're in this for the long run. We know that these patients today could be served better, and we're striving to do exactly that.

Thank you.

Our next question comes from Danielle Antalfi with SVB Lyric. Please state your question.

Hi, good afternoon, everyone. Thanks so much for taking the question. And congrats on a good quarter. Just a follow-up to Josh's question on the backlog. I guess, Mike, I'm just curious, you know, previously you talked about this not being a backlog type of market given the the high mortality rate for these patients if they don't get treated. So I guess I'm curious about, you know, the increased level of confidence that there is a backlog, first of all. And second of all, is it really about low-risk patients? Do you have a sense of whether you're treating a higher percentage of low-risk patients right now? Any color you can give on the patient mix that gives you conviction that this is a backlog workdown versus just strong underlying volume?

Sure. And again, John, we're trying to share with you our best thinking and what we believe. We believe that this occurred upstream. Part of what was driving our comments in the past, and you're exactly right, we've said, hey, you know, AS patients don't store very well, and we think that's true. But remember, we said there were 10,000 patients treated in, I mean, 20,000 patients treated in Q2 and 30,000 this q2 so big difference and so it's not as though all of those 10 000 patients all come it doesn't take very many to move numbers like they moved in q2 so we believe that it's patients across all risk levels you know even i think people sometimes don't understand that low-risk patients are quite old in many cases And so it's not just simply the newer indication. It's broadly that these patients that were elderly and had risk of COVID were hesitant to enter the system. We believe that they were more likely when signs of optimism really reached their peak in the second quarter to reenter the system and be treated, and that we got some lift out of that. We don't have perfect visibility on that, so I can't be more quantitative.

No, that's helpful. Thanks, Mike. That's it for me. Yep.

Our next question comes from Chris Pasquale with Guggenheim. Please state your question.

Thanks. Two related to clinical trials, since those are such a big part of the pipeline story today. First, just to piggyback on Joanne's question, has Class 2D completed enrollment yet? Because it would seem like that would have to happen soon to make a spring meeting.

Yeah, thanks. You know what? We don't share the details of exactly where we are on that, but we do feel like we have a fair amount of visibility into the pipeline. We've been progressing really well, feel like we're on track to have our enrollment in place and to be able to make our submissions so that we get out of an end-of-year, next-year approval. Okay.

And then you touched on this a little bit earlier, but there's a lot of overlap between the patients you guys are treating in many of these studies and those that were most impacted by COVID. Do you have any concern about COVID introducing noise into these studies that could complicate interpretation of the data down the road? Just curious how you're thinking about that, if you're doing anything to try and head that off.

Yeah, Chris, that's an astute observation. Yes, we are concerned about that, especially those studies where re-hospitalization or hospitalization is measured as an indicator in both the control group and the test group, those things can definitely get affected by during a moment like a COVID outbreak. So it is of concern. It's very much on FDA's radar screen, and I'm sure all companies that do trials that have those sort of endpoints. Our PIs are all about it. And then The good news is between our principal investigators and the FDA, people are cognizant of it and are working together to try and deal with those variabilities. Thanks.

Thank you. Our next question comes from Matt Taylor with UBS. Please state your question.

Hi. Thank you for taking the question, and congrats on the quarter. I did just want to see if I could get more specificity from you on the regions that you're operating in that aren't doing so well. You mentioned there's some in Europe and some concerns in Japan and APAC. I just want to think about how we should view them improving or getting worse in Q3 versus Q2. Could you give us any insight into that?

Yeah, I mean, what happens is, you know, to get really discreet and go country by country might be misleading because then we – Would it get into, you know, countries that are pretty small that might not make a difference? We tend to look at it in terms of the U.S. in total, Europe in total, Japan as a region, and then the rest of the world. When we look at each of those discreetly, even though each one has its soft spots, so, for example, you know very well where the soft spots are in the U.S. and the places that are vulnerable to low growth, but the U.S. in total looks quite positive. The same thing in Europe. There are countries, some of the Nordic countries, you know, I could go on to a greater level of specifics that are struggling more, but overall, Europe is doing pretty well. They performed at a high level in the second quarter. Japan in a lockdown, but then at the same time, they have the approval for low risk, and we have optimism about the future. So each of these is positive, and even the rest of the world has put up very nice growth. So we don't have a You know, we don't have a hotspot that probably affects a major region more. Those are going to be smaller in their nature, if that makes sense, Matt.

Yeah, that's good comment. Thanks so much.

Thank you. And that's at the end of today's question and answer session. I'll now turn it back to management for closing remarks.

Okay. Well, thanks all for your continued interest in Edwards. Scott and Mark and I will welcome any additional questions by telephone.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.