Edwards Lifesciences Corporation

Good afternoon and welcome to the Edwards Life Sciences third quarter 2022 results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the 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 Wilterding, Senior Vice President, Investor Relations and Treasurer. Thank you. You may begin.

Thank you very much, Diego. And good afternoon, and thank you all for joining us. With me on today's call are Mike Musalem, Chairman and Chief Executive Officer, and Scott Ullum, Chief Financial Officer. Also joining us for the Q&A portion of the call are Larry Wood, our Global Leader of TAVR, Bernard Zavegian, our Global Leader of TMTT, Devine Chopra, our Global Leader of Surgical Structural Heart, and Katie Zyman, our global leader of critical care. Just after the close of regular trading, Edwards Life Sciences released third quarter 2022 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 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 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. And with that, I'd like to turn the call over to Mike Massalem for his comments. Mike?

Thanks, Mark. The third quarter strengthened our conviction in our company's patient-focused innovation strategy. Globally, structural heart procedures grew less than we expected in the third quarter, but that didn't slow us down, as our team accomplished numerous important milestones and made good progress on our multiple clinical trials and next-generation technologies. In August, we received European regulatory approval for Pascal Precision. This unique system is designed for transcatheter-based edge-to-edge leaflet repair in patients suffering from mitral and tricuspid regurgitation. Shortly thereafter, in September, we received early U.S. FDA approval for Pascal Precision for the treatment of patients with degenerative mitral regurgitation which was welcome news for clinicians who appreciate this differentiated platform. And in TAVR, last month we announced approval to begin selling the Sapien 3 Ultra Resilia Valve in the U.S. Our industry-leading Sapien 3 Ultra Transcatheter Aortic Heart Valve now incorporates Edwards Breakthrough Resilia technology. Additionally, during the third quarter, enrollment accelerated in our two TAVR pivotal trials, progress evaluating patients with moderate AS, and alliance for our next generation TAVR technology, Sapien X4. These transformative developments reinforce our confidence in the continued growth of transcatheter-based structural heart interventions. We will continue to aggressively pursue breakthrough technologies with the potential to help even a broader group of patients and in turn drive significant future value. Now, turning to our financial performance, third quarter total company sales of $1.3 billion increased 7% on a constant currency basis versus the year-ago period. Our broad portfolio of innovative technologies drove this growth, although it was at the lower end of our expectations, reflecting persistent U.S. hospital staffing shortages and COVID headwinds in Japan. Adjusted EPS grew 13%, even while aggressively investing in R&D and commercial infrastructure to support new therapies. For full year 2022, we expect total Edwards sales will be negatively impacted by foreign exchange and be at the low end of our previous range of $5.35 to $5.55 billion dollars. We anticipate hospital staffing challenges and a predicted difficult winter COVID and flu season will continue into next year. In TAVR, third quarter global sales of $862 million increased 6% on a constant currency basis. Sales were below our expectations due primarily to the persistent U.S. hospital staffing shortages and COVID headwinds in Japan, which intensified the typical impact of summer seasonality. In the third quarter, we're pleased that well over 30,000 patients were treated with Sapien across our more than 2,000 global TAVR centers. We estimate that global TAVR procedure growth was comparable with Edwards growth in the third quarter. Local selling prices were stable, although the average global selling price declined due to the weakening euro and yen. In the U.S., our TAVR procedures increased in the mid single digits versus the prior year. We estimate that our share of procedures was stable. As expected, our third quarter U.S. TAVR procedure volumes continued to be impacted by regional U.S. staffing constraints, which were somewhat worse than we anticipated. There were a high level of variability in growth rates across centers around the country. And while staffing issues limited overall growth during the quarter, nearly half of our TAVR centers grew double digit in Q3. Outside the U.S., in the third quarter, our TAVR sales grew in the low double digits on a constant currency basis, and we estimate total procedure growth was comparable. Our underlying three-year compounded annual growth rate outside the U.S. remains in the mid teens. In Q3, Geographies outside of Europe and Japan grew even faster in the quarter. Long term, we see excellent opportunities for OUS growth as we believe international adoption of TAVR remains quite low. In Europe, sales were down sequentially as expected. Even though we compete with a broad range of competitors, our competitive position remains stable. Scattered staffing shortages, slightly exacerbated summer seasonality. We anticipate some lingering regional impact on that. In Japan, third quarter procedure growth was impacted by a widespread seventh wave of COVID, which created a significant strain on hospital capacity and limited TAVR procedure volumes. As you might expect, procedure volumes in Q3 varied across the country, as patients and the providers were incentivized to turn their focus again to the treatment of patients with COVID. We saw TAVR procedure volumes improve as COVID hospitalizations decreased late in the third quarter. We remained 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, We anticipate the continuation of staffing shortages in a difficult winter COVID and flu season. We expect Q4 TAVR sales to be around $850 million and full year 2022 TAVR sales to be at the low end of our previous range of $3.5 to $3.7 billion. We remain confident about the long-term potential of TAVR as the rapidly evolving evidence recognized by policymakers around the world supports continued adoption of this therapy for the many patients suffering from aortic stenosis. This broad-based, favorable evidence, combined with the undertreatment rate and growing elderly population, supports our expectation that this global TAVR opportunity will reach $10 billion by 2020-age, which implies a low double-digit compounded annual growth rate. Turning now to our transcatheter mitral and tricuspid therapies product group. Recently, we received US FDA and European CE mark approval of Pascal Precision. This next generation system designed to facilitate precise navigation and an intuitive user experience will enable us to initiate our commercial presence in the US for the treatment of patients suffering from degenerative mitral regurgitation and also expand Pascal adoption in Europe for both mitral and tricuspid patients. This exciting news was followed by the presentation of first results from the class 2D pivotal trial at the recent TCT conference. This first-of-a-kind head-to-head randomized pivotal trial further established the safety and efficacy of mitral transcatheter edge-to-edge repair. We were pleased that this data demonstrated that Pascal is a beneficial therapy expanding transcatheter treatment options for DMR patients. In addition, we continue to advance enrollment of our class 2F pivotal trial for patients with functional mitral regurgitation. Separately, we continue to treat patients with our two transcatheter mitral replacement therapies through the ENCIRCLE pivotal trial for sapien M3 and the MYCEN study for EVOKE-EOS. We are pleased with our progress and believe these sub-30 French transfemoral therapies will help transform treatment for patients and expand the mitral opportunity. Turning to tricuspid, we continue to make progress in rolling the TRISEN-2 pivotal trial of the EVOC replacement system and the CLASP-2R pivotal trial with the Pascal repair system in patients with symptomatic severe tricuspid regurgitation. We no longer anticipate CE mark approval for evoke tricuspid replacement in Europe this year. As uncertainties remain around the MDR process, we now expect a CE mark approval late in 2023 with sales contribution in 2024 when we expect to have reimbursement in place. We're excited about this therapy for the many tricuspid patients who have few treatment options today. Looking ahead to PCR London Valves Conference in November, we expect numerous late-breaking data presentations across the TMTT portfolio. Especially noteworthy is new one-year follow-up data on our early experience with the Evoke tricuspid valve. We expect these presentations to contribute positively to the growing body of compelling clinical evidence for our comprehensive portfolio of transcatheter mitral and tricuspid therapies. Turning to the sales performance of TMTT, third quarter sales of $30 million grew sequentially from the second quarter despite summer seasonality. Adoption of the PASCAL system in Europe increased as we initiated a limited introduction of PASCAL precision. And we continue to have excellent outcomes for patients as we progress on a gradual expansion into more centers in Europe. We forecast to increase the number of procedures in Q4, yet expect reported Q4 sales to be similar to Q3 as a result of FX headwinds and a spike in COVID in Germany, our largest region in Europe. We're pleased with our continued progress toward bringing a portfolio of therapies combined with contemporary clinical data in order to achieve our vision of transforming the lives of patients with mitral and tricuspid valve disease. In surgical structural heart, third quarter global sales of $220 million increased 8% on a constant currency basis over the prior year. We were encouraged to see strong global growth driven by increased penetration of our premium Resilia products despite staffing challenges in certain regions. And although staffing shortages continue to be a concern, we're observing that cardiac surgeries are being prioritized. We continue to see strong momentum of the Resilia portfolio globally as we bolster the overall body of evidence, including four abstracts recently presented at the European Association for Cardiothoracic Surgery annual meeting in Milan. We continue to believe that physicians value the features and benefits of this advanced tissue technology for both aortic and mitral surgical valve replacement procedures. Adoption of the Mitras valve launched in the U.S. in April, now represents the majority of our mitral valve sales in this region. Separately, we've decided to exit our Harpoon surgical mitral repair system and stop enrollment in the related clinical trials. Given our experience to date, we made the difficult decision to focus on developing other innovative therapies to better serve patients and continue to be the partner of choice for cardiac surgeons. In summary, we remain confident that our full year 2022 underlying sales growth will be in the mid-single digit range for surgical structural heart driven by market adoption of our newest premium technologies and surgical market growth. In critical care, third quarter sales of $207 million increased 3% on a constant currency basis over the prior year. The growth rate was impacted by a very strong prior year comparison. Sales growth was driven by increased adoption of our broad portfolio of smart recovery products, including flow track and clear sight sensors with our unique hypotension prediction index algorithm. Additionally, demand for our hemisphere monitoring platform remains strong. In summary, we continue to expect mid single digit underlying sales growth for the full year 2022. We remain enthusiastic about our pipeline of critical care innovations highlighted by smart recovery technologies designed to help clinicians make even more informed decisions for patients. And now I'll turn the call over to Scott.

Great. Thanks, Mike. As Mike mentioned, our sales of $1.32 billion in the quarter, representing growth of 6.7% on a constant currency basis, fell short of our expectations driven by a slower than expected recovery of U.S. hospital staffing and COVID in Japan. Our strong underlying gross profit margin, combined with a minimal spending increase, resulted in adjusted earnings per share growth of 13% to $0.61. Gap EPS was $0.55, which included a net $57 million pre-tax charge, or $0.07 per share, relating to the harpoon discontinuation. We anticipate that the U.S. hospital staffing challenge is likely to persist, and we now expect total company sales at the low end of our previous range of 5.35 to 5.55 billion dollars, and TAVR sales, also at the low end of our previous range, of 3.5 to 3.7 billion dollars. We continue to expect surgical structural heart sales of 870 to 950 million dollars, and critical care sales of $820 to $900 million. For the fourth quarter, we're projecting sales and adjusted earnings per share to be similar to Q3. We now expect full-year adjusted earnings per share of $2.40 to $2.50, up from 2021 adjusted EPS of $2.22. I'll now cover additional details of our results. Our adjusted gross profit margin in the third quarter was 81.0%, compared to 76.3% in the same period last year. This improvement was driven by the expected positive impact from our foreign exchange program, which includes hedge contract gains and natural hedges that offset the negative sales impact from the weakening of the euro and yen against the dollar. At current FX rates, we continue to expect our full-year 2022 adjusted gross profit margin to be approximately 80%, This year's forecasted gross margin rate includes approximately 350 basis points of benefit from foreign exchange as compared to 2021. At current rates, FX is expected to result in an approximate 250 basis point reduction in our gross profit and operating margins in 2023. Selling general and administrative expenses in the third quarter increased 3.5% over the prior year, to $377 million, or 28.6% of sales, primarily due to a resumption of in-person commercial activities, partially offset by the strengthening of the dollar. We continue to expect full-year 2022 SG&A expenses as a percent of sales to be between 28% and 30%, as we continue to invest in our high-touch model for TAVR and the ongoing build-out of the TMTT commercial team. Research and development expenses in the quarter declined 2% over the prior year to $234 million, or 17.7% of sales. The decline reflects unusually high year-ago spending. We continue to expect R&D expenses in 2022 to be between 17% and 18% of sales as we invest in developing our new product pipeline and generating evidence to support TAVR and TMTT. The discontinuation of our surgical harpoon program resulted in a net $0.07 per share charge consisting of a non-cash impairment of intangible assets, a reduction of contingent liabilities, and other related exit costs. Additional details of the charge and a reconciliation between our GAAP and adjusted EPS is included with today's release. Turning to taxes, our reported tax rate this quarter was 15.7%, or 17%, excluding the impact of special items. This quarter's higher rate reflected a lower benefit from stock-based compensation. We continue to expect our full-year tax rate, excluding special items, to be at the high end of our 11% to 15% range. Foreign exchange rates decreased third-quarter reported sales growth by 6 percentage points, or $74 million, compared to the prior year. At current rates, we estimate a year-over-year FX impact to fourth quarter sales of more than $100 million. In total, we now expect an approximate $270 million negative impact, or five percentage points, to full-year 2022 sales compared to 2021. And we expect nearly the same negative impact to full-year 2023 sales. FX rates positively impacted our third quarter gross profit margin by 440 basis points compared to the prior year. Relative to our July guidance, FX rates had a minimal impact on third quarter earnings per share. Free cash flow for the third quarter was $250 million, defined as cash flow from operating activities of $310 million, less capital spending of $60 million. So 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 $1.7 billion in cash, cash equivalents, and short-term investments as of September 30th. Average shares outstanding during the third quarter were $625 million down from the prior quarter as we repurchased 1.1 million shares for $100 million. Year-to-date through the end of Q3, we repurchased 8.4 million shares for $861 million. We expect shares at the end of the year will be slightly below our previous 625 to 630 million share range. We now have $1.8 billion remaining under our share repurchase program. And with that, I'll pass it back over to Mike.

Thanks, Scott. Well, despite ongoing procedure headwinds associated with the pandemic, We're pleased with our year-to-date performance, which includes strong progress on strategic milestones. We believe hospital staffing constraints will gradually improve and are committed to aggressively investing in our focused innovation strategy for the broad group of patients still suffering from structural heart disease. We remain confident that the innovative therapies resulting from our investments will allow us to treat more patients and continue to drive strong organic growth in the years to come. And with that, I'll turn it back over to Mark.

Thanks a lot, Mike. Before we transition to Q&A, I want to remind everyone that our 2022 Investor Conference will take place on Thursday, December 8th at the New York Stock Exchange. Thank you to everyone who has confirmed your in-person attendance. We're really looking forward to seeing you soon at this historic venue. In addition to our 2023 financial guidance, you'll hear more about Edwards' focused innovation strategy and our comprehensive and exciting product pipeline. More information will be available on the investor relations section of the Edwards website at ir.edwards.com. With that, we're ready to take your question. As a reminder, please limit the number of questions to one plus one follow-up to allow for broad participation. If you have additional questions, please re-enter the queue, and management will answer as many participants as possible during the remainder of the call. Diego?

Thank you. And at this time, we'll conduct our question and answer session. To ask a question, press star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Larry Beagleson with Wells Fargo Securities. Please state your question.

Good afternoon. Thanks for taking the question. I wanted to ask one on 2023, just a framework and some things to consider, and then one on tricuspid, Mike and Scott. Just starting with 2023, I think people are going to look at the second half implied growth year, call it 7% by my math, and maybe that'll raise some concerns about growth next year. So, Mike, can you provide some framework for how to think about you know, 23, any catalyst to call out. And Scott, P&L considerations that we should take into account. I heard the FX headwind, you know, the 250 basis point. Just any high level thoughts, you know, given the shortfall, you know, last quarter and this quarter and had one follow up.

So Larry, Scott, why don't I start with the financial piece of that and then turn it over to Mike to talk about some of the strategic things that we expect in 2023. You know, financially, we haven't gotten into the quarter by quarter FX impact or growth rates. Typically, we don't give guidance, as you know, for the next year until our investor conference. We'll give you more details then. But just we thought it was helpful because FX has been such an impact this year and it will continue to flow over to next year that we help quantify what the top line impact will be. which we think is near what is going to be this year. So this year we're at like 5% of sales and about $270 million. We think maybe it gets near to that at current rates when we forecast our 2023, but we don't have the quarter by quarter breakout yet. Mike, do you want to talk about next year's?

Well, I'll just briefly just go through the portfolio. I mean, we feel like our The businesses we don't talk about very much, like surgical and critical care, are strong and are going to continue to deliver. We're going to see catalysts coming from TMTT as we see a lift coming from the introduction of precision next year. And then TAVR, even though we're suffering right now from some staffing shortages, we think those are going to get gradually better, and I expect solid performance. I mean, we're not kidding when we say we still believe that there's a $10 billion opportunity in 2028. We're highly confident in that, and I think we're on a path to achieve it.

That's helpful, Mike. And actually, I wanted to ask about tricuspid. A lot of excitement around tricuspid. I know you know that. You employed a Bayesian design for Class 2D. Is it reasonable to assume that you'll employ, you know, a similar Bayesian design, you know, for your tricuspid pivotal trials, the two you mentioned? And Just how are you thinking about that opportunity? Our check suggested, you know, should be bigger than mitral, maybe somewhere between mitral and aortic. Thanks for taking the question.

Yeah, thanks, Larry. Well, we're obviously excited about our pipeline, and we work very closely with regulators around the world, including the FDA. We typically just don't comment on some of the real specifics of the regulatory process because they tend to change and be situational. And so I'm not going to really get into are we going to do Bayesian on a specific upcoming trial. I mean, we're well aware of all the tools that are available, and we'll try and do the smartest thing and work really in a collegial fashion with the regulators, but it's not clear. I don't know. Bernard, do you have anything you want to add to that?

Yeah, just, you know, small things. You know, obviously, you know, any study, any trial has, you know, different design. And some are comparing devices together. Some are comparing a device to medical treatment. So obviously, it is not as easy as taking what we did for 2D and applying that to the other studies.

Thank you, guys. Our next question comes from Robbie Marcus with JP Morgan. Please set your question.

Yeah, hi. Thanks for taking the questions. Maybe first, I think it'd be helpful, maybe walk us through some of the differences between why TAVR is so much more impacted than the surgical business. I know it's lots of similarities, but also differences. Is it just pure staffing? Is it the imaging? Is it the testing? Is it the patient pipeline? Any ideas there? And how should we think about the impact from the shortfall in Japan? It looks like Numbers came in below the street by about $15-plus million. Is that all Japan? Thanks.

Yeah, so let me kick it off, Robbie, and then I'll turn to Larry and Devine to supplement the answer. So actually, the TAVR procedures, we believe, grew faster than the surgical procedures if you look at what the market did in the quarter. When you look at Edwards itself, it looks like the surgical business was growing faster, but I think that's more Edwards specific performance rather than what was going on in the underlying market. So I think we have to be a little cautious. Devine, do you want to add anything from a surgical perspective and then we'll kick it over to Larry?

Yeah, sure, Mike. I appreciate that. Yeah, so to follow up what Mike was saying, Robbie, the growth driver of the surgical business, as Mike had mentioned, was really about driving adoption of the Resilia portfolio globally, as well as the U.S. launch of our new Mitral valve, Mitris, which provided a nice uplift. So Resilia and Mitris were really our top drivers. But as Mike said, we also had a little bit of market growth coming from us, maybe low single-digit market growth. And we're generally seeing that, you know, within the world of surgical operating rooms and surgery beyond cardiac surgery, you know, cardiac surgery being an area that surgical operating rooms kind of prioritize resources to rural surgical operating rooms. So we generally see that that led to that slow, low single digit kind of market growth.

Yeah, this is Larry. As it relates to TAVR, You know, there's more upfront work that has to happen with a TAVR patient than a surgical patient, both in terms of, you know, the imaging that has to be done. You know, you have to do a CT for sizing. Oftentimes you need to do angiograms to screen out for coronary disease so that you can do all of your TAVR case planning. So there's typically more workup that has to be done than for a surgical patient. And so, you know, when we talk about staffing issues, you know, a staffing issue at any link in the chain can cause patients to move a little bit slower through the system and take a little longer to recover. So I think that's one of the differences we see, but as Mike said, you know, procedures grew faster than surgery. So it's, it's, and a lot of the growth drivers in surgery, I think go beyond, you know, aortic procedures.

Yeah. And Robbie, just to quickly comment on Japan. Yeah. The, the total impact and the shortfall was only from COVID. COVID hit hard. I'm not, I don't know how close you were to how hard it hit in Japan, but it is hard to, and we were doing great in Japan, and we continue to do great in Japan, but we really felt the impact of that. It was probably worse toward the middle of the quarter, and it started getting better, so the wave is kind of passing now, if you will, so it's not continuing, but when it hit, it hit in a pretty significant way.

That's good to know. Maybe one more follow-up question here. The OPEX control in the quarter was some of the most severe we've seen probably since and ever second and third quarter of 2020 during the worst of COVID. How should we be thinking about where these pullbacks came from, how sustainable they are, and how fast it could pick up going forward? Thanks.

Yeah, thanks for the question, Robbie. Part of this was operating with a healthy sense of discipline about making sure we're running the company efficiently. But a lot of it was just the benefit of expenses that we incur overseas that translate in to lower U.S. dollars.

Simple enough. Thanks a lot. Thank you. Our next question comes from Vijay Kumar with Evercore ISI. Please state your question.

Hey, guys. Thanks for taking my question. Maybe my first one is, Mike, for you, especially on U.S. TAVR. I think that $850 million Q4, what's the underlying implied TAVR? Is that low singles? And I think you mentioned 50% of centers in the U.S. grew double digits. I'm curious, is that a comment just to assure people that this market is still double-digit growing and perhaps growing the remaining half of the century are seeing some of these staffing challenges. Just give us some context on why we're seeing double-digit growth in some centers and not in perhaps the others.

Yeah, I guess we need to check the numbers. I don't know that low single makes sense to me, Vijay, but nonetheless, let's just get into what's there, and I'll turn it over to Larry here in a second. But, yeah, indeed, we saw a great variance across the country in terms of how hospitals have been performing, and Larry could probably give us some color on that, but we saw some centers that were really growing significantly. We mentioned how many had double-digit growth and other centers that just weren't growing at all, but Larry, why don't you get into that a little bit?

Yeah, you know, when we looked across the country, I think anywhere we go and anybody we talk to, they talk about staffing challenges, and I think that's pretty consistent across the country, but clearly it seems to be impacting certain areas of the country more than others. I mean, just Anecdotally, I had some centers in Texas and in the middle of the country that were growing very, very well. And some of our big programs and more of the urban areas, the population density areas, they were a little bit flatter. And so we do see big differences. But it actually encourages me that as these things start to wane, the patients are there. And I think, again, anecdotally, we hear backlogs continue to grow. But I think there's still some challenges in working through these staffing issues.

Understood. And maybe, Scott, one for you. I think you have $3 billion of cash on the balance sheet. Why not announce a big ESR? I think your peer has done this just to assuage the market that Edward still believes in the long-term underlying growth of TAVR markets. Clearly, there's some nervousness after the guide cut this evening.

Well, you're right. We have a lot of cash on the balance sheet, and it gives us flexibility to invest for future growth. And so part of that is building additional physical infrastructure, supporting plant production capacity. Part of it is making sure that we're able to fund external growth. And then, yeah, we're going to continue to buy back shares. And we've done accelerated share purchases, including earlier this year, In total this year, it's been our biggest share purchase year ever, over $800 million. And so the only good thing about the stock price having been under pressure this year is it's given us a chance to go buy in shares, and we think that that's going to be a great long-term investment. We're going to continue to look for opportunities to do that.

All right. Thanks, guys.

Our next question comes from Joshua Jennings with Cowan. Please say your question.

Hi. Good evening. Thanks for taking the questions. I was open to just ask about U.S. TAVR growth and potential return to the CAGR that I believe is ingrained in the 10 billion by 2028 TAM calculation. I mean, do you think that U.S. TAVR's return to double-digit growth requires indication expansion? Is that essential, or could we see a return to double-digit growth prior to early TAVR opening up the asymptomatic indication and and progress opening up the symptomatic moderate. Larry, why don't you take that?

Yeah, thanks, Josh. Just because of the nature of the trials and the two-year endpoints that we have on these trials, they're not really big contributors to those numbers. And what drives those numbers is we still have only about 1 out of 10 patients with aortic stenosis that are getting treated in the U.S. And if you look at the penetration rates outside the U.S., they're much smaller than that. I mean, in a lot of rest of the world places, They're just really just getting started, and Japan's very undertreated. So I think it's just a matter of getting through, you know, some of this COVID lag that we've had, getting some of the staffing a little bit healthier, and then I think, you know, it's going to return back to normal. I sort of see the indication expansion as being things that give us legs beyond the $10 billion.

Great. Thanks, Larry. And just to follow up on Resilient Tissue Incorporated and the Sapien Ultra 3 and the price premium. Can you just talk about the reception as you've marketed that in the early days, and how should we think about, I guess, the penetration of Resilia tissue in the Sapien franchise in the U.S. in 2023 or in the coming quarters and into 2023? Thanks for taking the questions.

Sure. Well, you know, we're very fortunate that our surgical business has built a great brand around Resilia, and we get to follow that, all of the brand work that they've been able to do. And so when you look at the surgical side, Inspiris, I think, is the leading heart valve in the world now, and that's largely based on the resilient tissue and how receptive people have been to the benefits that it brings. For Sapien3UR, that approval came a little bit earlier than we expected. We're super excited to add it to our Sapien platform. We're really just getting started in the launch. We have to scale up inventory and do some of the other things we need to do, but it I think people are excited about it. And, you know, we are going for a price premium on that. We've increased our list price by about $1,500. Now, you know, people get rebates and there's different things around the country. So I don't know that I would model that in for everything. But, you know, I expect this is going to be a popular platform, but it's going to take us a while to get it all rolled out.

Thanks again. Our next question comes from Joanne Winch with Citibank. Please state your question.

Thank you very much. So I wanted to spend a little bit of time on hospital staffing because by our due diligence, it's getting better but not expected to get great anytime soon. So should we think about next year TAVR growth being more high single digit growth in the U.S. versus double digit growth? I just want to get my head around how to think about the lingering effects of this.

So I can start us out, Joanne. So you're right. We don't expect staffing to be cured overnight. It's highly variable, as Larry indicated, just by the fact that we have almost half of the U.S. hospitals in TAVR that were growing at double digits. So there's a bunch of people not really suffering from staffing. And then, again, there's another large swath of people that are really suffering from it. The conversations that we have with those folks in many cases say, Oh, we're making progress. It's improving. Some say it might take them up to a year or two to improve it. There were, you know, pretty widespread use of traveling nurses. That's had such a burden on the P&L of hospitals that they've curtailed that in long ways, in many ways, and been able to move beyond that. But this is going to be a process that takes some time. So does it hamper our growth next year? Probably some. I mean, we do anticipate probably a tough winter. Joanne, just because of what's predicted here with COVID and the flu. But beyond that, it's tough to say. We're going to be providing guidance at the investor conference so that you can get deep on that. And so we'll be prepared to go a little deeper at that time. Larry, you have anything to add?

Yeah, you know, I think it's important to remember, I mean, the patients are out there and they need to be treated. And the physicians are still very, very motivated to get these patients treated. And so they're as frustrated as anybody else is. And I think You know, hospitals are incentivized for doing procedures, not for not treating people. So I think everybody wants to get the situation resolved. I just think as hospitals have added staff, one of the first things they try to do, as Mike mentioned, is, you know, use the new staff to replace the traveling nurses to, you know, try to help out their own PNLs. And so that's maybe why we haven't seen as much lift from the staffing. But hospitals are working super hard on this to get this resolved. It's going to take time because you can't just create nurses from scratch quickly. But people are working really hard on getting this into a better place.

Okay. Thank you very much.

Next question comes from Rick Wise with Stifel. Please state your question.

Good afternoon. Sorry about that. A couple of follow-up questions, and I apologize it's hard to not focus on the U.S. growth numbers. Larry, it's actually sort of a question for Larry, really, but I'll just do Mike. I was expanding your comments on the U.S. referral chain. You talked about one aspect of getting patients treated, the imaging, but has COVID or anything about the current dynamics slowed patients showing up to clinics where they can be diagnosed in some way or is there some aspect that we can sort of focus on and imagine that it might get better sort of at the front of the the the patient gathering change chain and related to that i one thing i still can't quite understand and wrap my brain around is to i mean aortic stenosis are very patients are sick how are they not being treated And it's sort of hard to imagine these people being in backlog. Maybe you could just talk around those points.

Why don't I start, Rick, and have Larry jump in. Yeah, you know, in the early days of the pandemic, I really do think it scared patients away from engaging in the system and getting treated. I think for the most part we're in a different place now where the AS patients actually, they want to be treated. They're willing to go into the system. but they're just finding the system grinding along slowly and they're being pushed off and they're being postponed. And it's a multi-step process. Maybe Larry, you can get a little bit deeper on that.

Sure. Yeah. You know, I think referrals are increasing. I mean, what we hear anecdotally is that backlogs are growing at hospitals, which would seem to indicate that patients are still getting referred at least from what we hear from the physicians that we talk to. So I think that part of the system is starting to get better. But, you know, as I talked about earlier, there's just a multiple set of tests and screenings and imaging that patients have to do before they get their TAVR, and I just don't think that system has come back to full health yet. But, you know, I think we certainly have heard from centers that have said they kind of have to juggle patients with the more, you know, sick patients moving up the waiting list and then pushing, you know, the less sick patients down a little bit. But, you know, again, hopefully this improves with time as staffing gets back to normalcy.

One last quick follow-up. Mike, you alluded to the buildup of the TMTT commercial team. Just curious, where are we, and maybe specifically related to the Pascal rollout, where are we, where are you hoping to be over the next few months as we approach 23? Thank you.

Yeah, thanks, Rick. Yeah, we're definitely building up that team, and we're growing the team in Europe as well as the U.S. We have Bernard right here, so Bernard, why don't you update us where we are?

Okay, so maybe let me start with the U.S. We are obviously very pleased about having gained early approval with Pascal in the U.S. We are executing our plan, which is training and expanding our field organization. We already started to train some physicians. We are negotiating some hospital contracts. You know, we have done some few cases in the U.S. with a great, you know, patient outcome. And you know that for us it is our number one objective. So, you know, and we are initially, you know, focusing on the site that we are part of a clinical trial with us. So that's, you know, basically, you know, where we are, you know, in the U.S.

Thank you. Our next question comes from Pito Chikering with Deutsche Bank. Please, to your question.

Hey, guys. Thanks for taking my questions. First of all, looking at the U.S. TAVR growth this quarter, and I apologize for all the questions on this topic, looking at the larger urban centers, are those centers growing at all or are they at capacity? And is all the new growth coming from the smaller or newer centers?

Yeah, I could start. It's really a mixed bag, Petal, but Larry, you want to make a few comments?

Yeah, it really is a mixed bag. I mean, certainly some of those centers are sort of more flattish, but we also have some of those big centers that are growing actually really well. So it's just really, really hard to generalize or to make broad, overreaching comments. But As we said before, probably about half of our centers were growing in double digits. But I think bigger centers maybe struggle a little bit more than some of the smaller centers. But again, I have big centers that are growing well. I have small centers that aren't growing. So these are just sort of some general comments.

Okay, fair enough. And then looking at the German market, it's the largest, most mature market in Europe. And I know this has sort of been COVID throughout the year, but just curious, How is the German record growing in 2022 in any colors or where that grew specifically in the third quarter? Thanks so much.

So it kind of depends what we're talking about, you know. So if you're talking about surgery or you're talking about TAVR or you're talking about the transcatheter mitral, they each have their own growth rates. You know, in particular in Germany, they have been hit by COVID, and we tended to see it more in the ICUs. in Germany, maybe more than any other country in Europe, which tended to hurt our transcatheter mitral, probably market growth a little bit more than some of the other segments. But I don't know, Larry or Bernard, do you have anything you want to add to that?

Yes, you know, correct, Mike. You know, we have seen a spike in COVID wave specifically in Germany, you know, mainly in October, late September, you know, in October. So we don't know yet, you know, how it is going to resolve here. Is it going to be an acute, you know, only October? Is it going to get better in November? That's yet to be seen.

Yeah, I think generally speaking, Q3 in Europe is always a little bit tougher because we have the seasonality that we typically see. with holiday vacations and those sorts of things. But we certainly have seen some challenges there, but I would say the staffing issues are a little bit more scattered there than they are in the U.S., or it's more widespread.

But having said all those things that I know it all sounds pretty negative, you also have great big German setters with dedicated KOLs who are really good and really motivated, and they're truly global leaders and key opinion leaders. These guys are just cranking. They're just going. we probably see more energy out of them than we've ever seen in the past.

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

Great. Good afternoon and thank you for taking the questions. I wanted to ask about Pascal, Pascal precision in Europe. Really what you've seen either from further center penetration versus expanding new centers, how you're thinking about the growth drivers going forward, the bigger growth drivers, and then Just turning to U.S. as well, the two Pascal trials, FMR and for TR, just if you could provide an update in terms of how you're thinking about recent progress within enrollment as well as kind of timelines to potential approval.

Okay. So we'll start out by talking about precision in Europe. Okay. And then we'll also comment on your question regarding the trials. So, Bernard, do you want to?

Yeah. So we began, you know, the conversion of center, you know, from, you know, the Pascal to the Pascal precision system. And the initial feedback from physician is very positive. And, you know, by the way, you know, we got, you know, great, you know, clinical outcome, you know, patient outcome. So the physician appreciates the ease of use, the navigation improvement that this new system is bringing. So we are very excited about it, even though we are at the beginning of it. So we see a lot of promise from this innovation with tier devices.

And the other question was, is there any update related to the PASCAL-TR or the functional patients that are being studied with PASCAL?

We are continuing the enrollment of these two unipivotal studies with class 2D having completed enrollment. We believe that, you know, the site are going to put, you know, more focus on these two remaining trials. But we are continuing. It is going well. And I am going to provide you a little bit more update, you know, during the investor conference.

So the same trials that we're doing 2D are probably doing 2F and 2TR. Yeah.

Great. And if I could just follow up really quickly your comments on Evoque in Europe and just the MDR process. Can you talk through what you're seeing today and really what kind of drove the about your push out, how you're thinking about just the process from your end going forward, and thank you.

Yeah, thanks. You know, we're very excited about the Evoque tricuspid valve replacement system and really think that it has the potential to be a game changer, but Bernard, you want to comment on MDR?

So as you know, this MDR process is a new process. And like everyone, we are navigating this new process. And this new process is uncertain, specifically for breakthrough therapies like EVOC. We continue to be very pleased with the performance of EVOC. At London Valve, you are going to see additional data with more patient, longer follow-up, So very much looking forward to this one. So for sure disappointed by not being able to have an approval this year, but we are very excited about the promise of this technology. We are working very closely with our notified body, answering questions. And so we are very much looking forward to bringing this important therapy to patients who have no other options today.

Great. Thank you for taking the questions.

Our next question comes from Travis Steed with Bank of America. Please go ahead.

Hey, thanks for taking the question. I wanted a little more color on the TAVR guidance. It implies 850 and Q4, which is down sequentially. I just want a better understanding of why down sequentially. And is that a comment on both U.S. and O.U.S.? Do you expect kind of both to be down quarter over quarter?

Part of what we're experiencing is continuing foreign exchange headwinds. So the 850 incorporates sales from outside of the U.S. and in the U.S. And outside of the U.S., you've seen the euro and the yen just get weaker and weaker during the course of the year. And so that's part of what's hitting us in the fourth quarter.

Yeah, we actually expect, you know, more procedures both in the U.S. and outside the U.S. in the fourth quarter.

Okay. So you asked how we expect to be up quarter over quarter.

The procedures will certainly be up. We're not prepared to predict the swamps for an exchange.

Okay. That's more a U.S. comment. And I guess the follow-up. Yeah, U.S. up. Okay. And the follow-up question was on kind of on spending OPEX and margins for next year, given some of the OPEX flow through. I know the streets got you at like six to seven earnings growth next year. I just want to make sure, you know, big picture, we're accounting for all the puts and takes on the P&L, you know, as we consider models for 2023.

Yeah, and again, I'm going to have to ask you to hold off for the detail and the ticking and tying until we get to New York on December 8th. But we wanted to at least help you on modeling the top line and the gross margin. So top line, we're expecting, as we mentioned, similar headwinds to what we've seen this year. So call it, you know, over $200 million in headwinds. We had 270 this year. And then you add to that lower gross margin. So we go down about 250 basis points from where we expect the full year this year, which would take you to 77.5% just from a modeling perspective. So the combination of those two things flowing down the P&L should get you to at least a preliminary range of what to expect for earnings per share. Like I say, we'll talk more about that.

Yeah, well, we had an inflated gross margin this year because of the impact of hedge contracts, and that will largely go away. Yeah.

Okay, great. I look forward to December. Thanks for taking the questions.

Our next question comes from Richard Newiter with Truist Securities. Please state your question.

Hi, thanks for taking the questions. I just wanted to come back to a couple of points that you guys made about certain trends related to flu and COVID and then Japan specifically. Just to be sure about what's getting better, what's just not getting worse, and then what is getting worse, into 4Q, and then you keep saying the winter months. It sounds like the early part of 23. So can you clarify what exactly, when you say flu and COVID picking up, being a tough winter, what regions? I want to make sure I understand where and what factor is the guidance for that. And the same question on Japan. It sounds like that one's getting a little better. You're through the worst of it, but What's assumed in guidance specifically into 4Q, and how should we think beyond that? Thank you.

All right. So there's several questions in there. Let's see if I'll take a shot at getting after a few of them. First, let me start with the end here. In Japan, we said yes. Japan, we believe, is getting better. The seventh wave has peaked and is coming down. Will they have another wave in Japan? I don't know. Very difficult to say. We'd say generally the intelligence, and this is particularly U.S. and Europe oriented, is that we expect it to be a rugged COVID and flu season. And that we haven't fully experienced that yet, that that's probably more expected to come in the November through January timeframe. So yes, your question of could that also affect early 2023? Yes, it could. And some of this is just from the experience that we have all had. around the world and a number of predictions about what's likely to happen based on the current variants. So I don't know, does that get at answering your question?

Yeah, and I guess what's assumed for that in your guide? Did you assume that that gets worse into the fourth quarter already?

Rich, we assumed it in our guidance. And so there is an appropriate amount of expectation and I guess conservatism that we are expecting continuing headwinds from respiratory illnesses, whether it's COVID or flu or something in between. We expect that that's going to continue to play a factor in the fourth quarter and into 2023.

Thanks. And if I could just one more. On FX, I know that you said a 250 basis point year-over-year headwind, so that's clear. But as FX rates continue to go against you, I know that that also pushes out the hedge impact into next year. So would that actually cause there to be a little bit even of a further push out into 24 and maybe less or more mitigation of that fall off in 23? Am I thinking about that right?

You are thinking about that right. Some of what we're seeing and a lot of what we're seeing in 2023 is what we would have otherwise incurred in 2022. And similarly, we're going to see some FX benefit in the first part of 2023 and that will then be a headwind in 2024.

All assumes that exchange rates stay where they are.

I just want to clarify one thing. It's 250 basis point headwind to gross margin. It's nearly a five percentage point headwind on the top line. Thank you.

Thank you. And our next question comes from Adam Mader with Piper Sandler. Please state your question.

Good afternoon, and thank you for taking the questions and squeezing me in here. Just two quick ones from me. First, just any update on the enrollment for the moderate AS trial or Alliance trial? I think if I heard correctly, you saw some uptick in enrollment pace recently, but I was hoping you could flesh that out a little bit more. And then second, how should we be thinking about the cadence of future data from the Pascal 2D study Obviously, we got the initial data set at TCT, but when should we expect additional readouts from that study? Thanks so much.

This is Larry. So, as it relates to Alliance and Progress, you know, we just really got those trials going this year, and we have seen an acceleration in enrollment, which is really encouraging for us to get these trials moving forward. Given the overall environment, you worry that clinical trials just really add on, and it's a little bit counterintuitive. But our trials are actually starting to enroll at accelerated rates, and so we're very encouraged by that. And I think people are excited about the X4 platform, and I think the moderate AS trial is potentially a groundbreaking trial in terms of how we think about this disease and what is the optimal way to treat it. And I think there's just been a lot of engagement from the physicians to study that in a rigorous randomized trial.

And Adam, your question about additional 2D readouts is a good one. You know, so far, this has really been an early readout of the class 2D, which was sufficient to get U.S. approval. But as we follow all of the patients in this trial for the full year, there will be additional data. Bernard, do you want to give us a sense of when that data might be available?

Absolutely. You can expect to see additional data, more patients, more follow-up, starting as early as next year.

Okay.

Thank you. Okay. Ladies and gentlemen, that's all the time we have for questions. I'll now hand the floor back to Mike Massalam for closing remarks.

Okay. Thanks, everybody, for your continued interest in Edwards. Scott and the IR team and I certainly welcome any additional questions by telephone. Thanks so much. Thank you. This concludes today's conference. All parties may disconnect. Have a great day.