愛德華生命科學 (EW) 2022 Q1 法說會逐字稿

Greetings, and welcome to the Edwards Lifesciences First Quarter 2022 Results Conference Call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the conference over to our host, Mark Wilterding, Vice President of Investor Relations and Treasurer. Thank you. You may begin.

Thanks, Diego, and thank you all for joining us this afternoon. With me on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, Chief Financial Officer. Just after the close of regular trading, Edwards Lifesciences released first quarter 2022 financial results. During today's call, management will discuss the results included in the press release and accompanying financial statements and then use the remaining time for Q&A.

Please note that management will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but 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 safety information may be found in the press release, our 2021 annual report on Form 10-K and Edwards' other SEC filings, all of which are available on the company's website at edwards.com.

Finally, a quick reminder that when using the terms 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 for his comments. Mike?

Thank you, Mark. Let me begin by saying I remain very proud of our team's steadfast dedication to our patient-focused strategy. Throughout the first quarter, our supply chain delivered, and our field team continued to support the skilled clinicians and patients who count on Edwards. We continue to believe that 2022 will be an important year for Edwards Lifesciences as we expect low double-digit sales growth and meaningful progress on our pursuit of significant opportunities to improve patient care.

Looking beyond 2022, we remain confident in our long-term strategy and our pipeline of innovative therapies. Our patient-focused culture drives us and motivates our employees around the world and our R&D targets breakthrough therapies that can create significant value for patients and health systems, enabling strong organic sales growth.

As we are hopeful the worst of the pandemic is behind us, we're constantly reminded of the importance of our work as we pursue solutions for cardiovascular disease, which continues to be the #1 killer in the U.S. and the world, well ahead of cancer and other deadly conditions.

Turning now to our first quarter financial results. Sales of $1.3 billion increased 13% on a constant currency basis versus the year ago period. Despite the impact that Omicron had on hospital capacity, resources and procedure volumes in January, especially in the U.S., Q1 global sales were moderately better than our expectations. Sales were lifted by performance outside the U.S., where we experienced a less pronounced impact from the pandemic. Underlying sales growth was double digit across all regions and benefited from improving trends as we progressed through the first quarter.

In TAVR, first quarter global sales were $881 million, an increase of 14% on an underlying basis, with continued strong growth outside the U.S. We estimate the global TAVR procedure growth was comparable with our own growth, and average selling prices were stable globally.

In the U.S., our first quarter TAVR sales grew approximately 10% versus the prior year, and we estimate total procedure growth was comparable. TAVR adoption was broad-based across hospitals, and our SAPIEN valves continue to demonstrate distinguished clinical performance.

Outside the U.S., in the first quarter, our underlying TAVR sales grew approximately 20% on a year-over-year basis, and we estimate total procedure growth was comparable. We continue to see excellent opportunities for OUS growth as international adoption of TAVR therapy remains low.

In Europe, Edwards' sales growth was driven by the continued strong adoption of our SAPIEN platform and was broad-based across all countries. Our treatment rates recovered nicely throughout the quarter although they differed by country, reflecting variable COVID impacts. We estimate that our competitive position was stable.

In Japan, we also experienced strong TAVR adoption, and the number of TAVR procedures performed exceeded surgical aortic valve replacement. Following reimbursement approval last year for the treatment of patients at low surgical risk, we remain focused on expanding the availability of TAVR therapy throughout the country. And broadly across the globe, we continue to see encouraging TAVR adoption in many underpenetrated countries.

In addition to geographic expansion, we remain focused on helping more patients gain access to TAVR therapy. In Q1, we continued to advance 2 pivotal trials aimed at expanding indication. First, our early TAVR trial for the large group of patients with severe AS and no diagnosed symptoms. And second, our PROGRESS trial that is evaluating patients with moderate AS which represents a group that is much larger than those with severe AS. We also remain on track to begin treating patients this quarter in our ALLIANCE pivotal trial for our next-generation TAVR technology, SAPIEN X4.

In summary, assuming no new COVID headwinds and a gradual improvement in U.S. hospital staffing shortages throughout the year, we continue to plan for underlying TAVR sales growth to be in the range of 12% to 15%. We remain confident that this large global opportunity will double to $10 billion by 2028, which implies a compounded annual growth rate in the low double-digit range.

Now turning to TMTT. To transform patient care and unlock the significant long-term growth opportunity, we continue to make steady progress on 3 key value drivers: a portfolio of differentiated therapies, positive pivotal trial results to support approvals and adoption and favorable real-world clinical outcomes. We're pleased with our high procedural success rates, and we continued our strong momentum with more patients than ever treated with our TMTT technologies this quarter.

In mitral repair, we continue to achieve excellent clinical outcomes with PASCAL as we expand commercially and treat more patients in Europe. We remain on track for U.S. approval of PASCAL PRECISION for patients with degenerative mitral regurgitation late this year, supported by our Class IId pivotal trial. We continue to advance the enrollment of Class IIf pivotal study for patients with functional mitral regurgitation. And later this year, we expect European approval of our new PASCAL PRECISION system, which is engineered for enhanced navigation and an intuitive user experience, extending our differentiated platform.

In mitral replacement, we continue to broaden our experience with both of our transcatheter mitral replacement technologies through the ENCIRCLE pivotal trial for SAPIEN M3 and the MISCEND study for EVOQUE Eos. This early experience with the sub-30-French transfemoral therapies gives us confidence that these platforms have the potential to transform treatment for the many patients in need.

Turning to transcatheter tricuspid therapies. As we continue to build a body of clinical evidence for PASCAL in the tricuspid position, we are pleased with the recently presented late-breaking data at the ACC meeting last month. We are encouraged by the sustained significant reduction in tricuspid regurgitation and improvements in quality-of-life measures experienced by patients and look forward to bringing additional clinical evidence through our Class II TR pivotal trial, which is currently enrolling.

In addition, we continue to make progress in enrolling our TRISCEND II pivotal trial of the EVOQUE system. We expect a late 2022 approval for EVOQUE tricuspid replacement in Europe and remain committed to providing solutions for these patients who have a very poor prognosis and few treatment options today.

Turning to our results. First quarter global TMTT sales were $27 million, driven by the continued adoption of the PASCAL platform in Europe. Although there was an impact from COVID early in the quarter, we exited March with positive momentum. As we expand in Europe, physicians continue to achieve high procedural success rates and excellent clinical outcomes.

Assuming a diminishing COVID-related impact, we are planning a gradual ramp in Q2 and a significant acceleration in the second half of the year to reach our 2022 sales guidance of $140 million to $170 million. We look forward to continuing our progress toward advancing our vision to transform the lives of patients with mitral and tricuspid valve disease.

In Surgical Structural Heart, first quarter 2022 global sales of $221 million increased 6% on an underlying basis over the prior year. Despite a soft start to the year associated with COVID, we are encouraged by the steady improvement across most regions over the course of the quarter, driven by increased penetration of premium technologies and procedure growth. Although hospital staffing shortages remain a concern, we believe that life-saving surgical therapies continue to be prioritized.

At the end of March, we announced the U.S. FDA approval and commercial launch of our MITRIS RESILIA valve, which adds to the portfolio of durable RESILIA tissue products with a valve designed for the heart's mitral position. Built upon previous generations of proven mitral valve technology, MITRIS offers greater ease of use and is designed to facilitate potential future transcatheter interventions.

Today, nearly 60% of the world's surgical mitral valves are mechanical. RESILIA tissue should allow patients to thrive without the quality-of-life compromises that may come from having a mechanical valve. Initial feedback from U.S. surgeons has been very positive.

In summary, we remain confident that our full year 2022 underlying sales growth will be in the mid-single-digit range for a Surgical Structural Heart driven by market adoption of our newest premium technologies.

In Critical Care, first quarter sales of $212 million increased 11% on an underlying basis driven by balanced contributions from all product lines. Demand for our state-of-the-art HemoSphere monitoring platform remains strong and lifted our sales. Our broad portfolio of Smart Recovery sensors and our TruWave disposable pressure monitoring devices supported the increased number of patients in the ICU in the first quarter. Additionally, we continued enrollment in the HPI SMART-BP trial, focused on generating additional clinical evidence to support the adoption of our hypotension predictive index software.

In summary, we continue to expect mid-single-digit underlying sales growth for 2022, which are moderated by the strong prior year comparisons over the remainder of the year. 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.

Thanks, Mike. We are encouraged by our start to the year. Despite the impact from Omicron early in the quarter, all product groups performed well, and sales were balanced across all regions. We achieved total sales in the quarter of $1.341 billion, which represents 12.7% year-over-year underlying growth. This strong sales performance fell through to our operating income, and we achieved adjusted earnings per share of $0.60.

Assuming no new COVID headwinds and a gradual improvement in U.S. hospital staffing shortages, we are projecting second quarter sales to be between $1.36 billion and $1.44 billion, which represents sequential organic growth from the first quarter, partially offset by foreign exchange headwinds. We expect our year-over-year sales growth in the second quarter to be our lowest of the year given our strong prior year sales performance. We are also projecting second quarter adjusted earnings per share of $0.61 to $0.69.

Although we haven't fully overcome the January Omicron impact, we are maintaining all of our previous full year guidance ranges for 2022 despite more pronounced foreign exchange headwinds and COVID-related hospital staffing challenges in the U.S. As a reminder, for total Edwards, we expect sales of $5.5 billion to $6 billion; for TAVR, $3.7 billion to $4.0 billion; for TMTT, $140 million to $170 million; for Surgical Structural Heart, $870 million to $950 million; and for Critical Care, $820 million to $900 million. We are also maintaining our full year adjusted earnings per share guidance of $2.50 to $2.65, representing mid-teens growth over 2021. And now I'll cover additional details of our results.

For the first quarter, our adjusted gross profit margin was 77.8% compared to 76.0% in the same period last year. As we expected, this improvement was driven by the positive impact of foreign exchange, primarily the strengthening of the dollar against the euro and the yen.

We continue to expect our full year 2022 adjusted gross profit margin to be between 78% and 79%. This guidance range reflects our assumptions of a favorable impact from foreign exchange hedge gains and improved product mix and partially offset by supply chain inflationary pressures.

Selling, general and administrative expenses in the first quarter were $370 million or 27.6% of sales, reflecting field-based personnel-related costs and commercial activities in support of our growth. We continue to expect full year 2022 SG&A as a percent of sales to be between 28% and 30% as we continue to invest in our high-touch model for TAVR and ongoing build-out of the TMTT commercial team.

Research and development expenses in the quarter grew 10% to $229 million or 17% of sales. This increase was primarily the result of continued investments in our transcatheter innovations, including increased clinical trial activity. For the full year 2022, we continue to expect R&D to be 17% to 18% of sales as we invest in developing new technologies and generating evidence to support TAVR and TMTT.

Turning to taxes. Our reported tax rate this quarter was 14.3% or 14.4%, excluding the impact of special items. This is slightly higher than the midpoint of our full year guidance range because it included the unplanned impact of U.S. tax regulations published in Q1. These regulations potentially limit the amount of foreign taxes that are creditable against U.S. income taxes. We continue to expect our full year tax rate, excluding special items, to be 11% to 15%, including an estimated benefit of 3 percentage points from stock-based compensation accounting.

Foreign exchange rates decreased our first quarter reported sales growth by 2.5 percentage points or $27 million compared to the prior year. At current rates, we now expect an approximate $170 million negative impact or about 3% to full year 2022 sales compared to 2021 versus our previous expectation of a $100 million negative impact. We forecast this additional $70 million negative impact to sales will occur over the remainder of the year. FX rates positively impacted our first quarter gross profit margin by 240 basis points compared to the prior year. Although this benefits our operating margin rate relative to our January guidance, FX rates had a minimal impact on first quarter earnings per share.

As we mentioned at the investor conference, in periods of a strengthening dollar like this, sales are negatively impacted. But as a result of financial and natural hedges, margin rates benefit, resulting in little impact to the bottom line. At current rates, our operating margin in 2022 is benefiting by approximately 200 basis points from foreign exchange.

Free cash flow for the first quarter was $221 million, defined as cash flow from operating activities of $294 million, less capital spending of $73 million. We continue to expect full year 2022 free cash flow will be between $1.2 billion and $1.5 billion. This includes approximately $200 million of accelerated tax payments due to a change in the tax treatment of research and development expenses.

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 $1.5 billion in cash, cash equivalents and short-term investments as of March 31, 2022. In the first quarter, we repurchased approximately $400 million in stock through an accelerated share repurchase agreement and pre-established 10b5-1 programs. As a result, average diluted shares outstanding during the quarter declined by approximately 3 million to 629 million. We continue to expect average diluted shares outstanding for 2022 to be between 630 million to 635 million.

And with that, I'll pass it back over to Mike.

Thank you, Scott. So we're confident in our long-term outlook for strong sales growth, and our teams remain passionate about helping more patients around the world. We continue to focus on driving organic growth with leading innovative technologies, while aggressively investing in our future. Our foundation of leadership, coupled with a robust product pipeline, positions us well for continued long-term success and greater shareholder value as we pursue significant opportunities to improve patients' lives.

And with that, I'll turn it over to Mark.

Thanks a lot, Mike. With that, we're ready to take questions. (Operator Instructions) Diego?

(Operator Instructions) Our first question comes from Larry Biegelsen with Wells Fargo.

Congratulations on a nice start to the year. Just 2 for me. One, just on the progress of the recovery and one on the guidance. I'll ask them both upfront. So for Mike, just a little more color on the recovery and what you're seeing in March and April in the different geographies, particularly in your TAVR business.

And Scott, regarding the guidance, should we be thinking about the midpoint of the revenue range or a little bit lower because of the incremental currency impact? And regarding Q2, Scott, I heard your comments. It looks like about 6% underlying growth, assuming an FX headwind of about 4%, but it's only up about 4% sequentially, which seems conservative based on the historical quarter-over-quarter trends and the Omicron impact you talked about in January. So just help us understand how you're thinking about the year and Q2.

Yes. Thanks, Larry. So let me start out with the progress of the recovery. It's a little different, obviously, when you go around the globe. And I think the recovery that I'll talk about first is the U.S. recovery. And I think that probably has the biggest impact on Edwards results and why it would be meaningful. Big picture, we're not sure that U.S. hospitals have really fully recovered from COVID.

There's still a bit of a hangover of protocols, and more importantly, we -- this issue that relates to the significant labor crunch and churn in the workforce is meaningful. Those workforce shortages are real. They're having an effect on staffing and their costs, and they're just in the front of mind of a lot of the help and some of this is churn, and some of this is just openings that are yet to be built.

Now in our conversation with hospital executives, systems are aggressively working to address these challenges, and they expect the dynamic to improve. But we're anticipating gradual improvement in our forecast. And I'd say, overall, Edwards' procedure growth, we fared pretty well on a relative basis. So we're mindful that these systems have been extraordinarily challenged, but we're still able to grow pretty handily in this tough environment.

Larry, on your second question regarding guidance. We always guide people to the middle of our range just for modeling purposes. So at $1,360 or $1.36 billion to $1.44 billion, the midpoint of that is $1.4 billion. So that's a good modeling assumption. Your math is right, which is year-over-year underlying growth for Q2 with that range is in the range of about 5.5%.

And yes, it's 4.4% of these exchange rates sequentially from Q1. So sequentially up from Q1. And really for the full year, it doesn't change our underlying growth rate in our guidance of low double digits. And so while FX is impacting our dollar guidance ranges, it hasn't had a big impact to our underlying growth expectations.

Our next question comes from Robbie Marcus with JPMorgan.

I'll add my congratulations on a nice start to the year as well. Maybe a follow-up on Larry's question. I was hoping to get a better sense of where some of the bottlenecks are in the patient recovery here. In some of, let's call it, the easier to schedule and diagnose procedures. We're seeing a little faster recovery or maybe a little more positive commentary. So maybe walk us through where you're seeing the biggest bottlenecks here. And I imagine it's not a patient demand issue. It's probably more a logistics issue. So I think that would be helpful just to hear from you.

Yes. Thanks, Robbie. We don't have perfect visibility into the patient funnel. It's just kind of limited, and we get a lot of our data from conversations with health care providers and our own frontline clinical specialists that really helped give us some perspective. And certainly, we believe that there's a small COVID-related backlog at this point. But we think that, that's relatively small by comparison. So if you were to go to turn the clock back to Q2 of last year, we think there was a much larger backlog of patients.

That might have been a year's worth of patients that were in the backlog, whereas maybe we have a backlog that looks a little bit more like happened during Omicron over those few months. And so we don't think the backlog is so big, but really it seems to be impacting the system is the capacity of hospitals to be able to really handle the patient inflow. And we're seeing that one gradually improves, but we're not seeing it improve instantly. There are still constraints in the system.

Got it. And maybe for Scott on the P&L. You mentioned in gross margin that supply chain and costs were a little bit of a headwind. But the way I look at Edwards is I don't necessarily see a lot of pain points for the big-ticket items for inflation or cost. So maybe if you could just size that for us and how you're thinking about inflation and supply chain for the rest of the year?

Sure. In terms of sizing, it's probably less than 50 basis points of gross profit margin for the full year. So think something like 2% impact to our cost of sales in that neighborhood. And while challenges exist, certainly, we've been able to manage those through a whole bunch of really concerted activities and efforts from our global supply chain and partners in that supply chain.

And as a result, we've had a minimal impact to Edwards and most importantly, minimal disruption to customer deliveries, which is a real focus. We've seen broad-based wage and materials inflation. We've seen inflation in areas like semiconductor chips, resins, shipping and logistics. And we expect these conditions to continue or maybe even worsen during the course of the year and looking forward.

Yes. I think it's fair to say, Scott. So far, we've been able to handle those pretty well, and we're hopeful to be able to do it, but it's not clear what the future holds.

Our next question comes from Vijay Kumar with Evercore ISI.

Maybe my first one on the guidance here, Scott. Did I hear you correctly on the underlying ranges haven't changed? But if I look at the TAVR guidance for our 2Q ex FX, underlying, I think perhaps it's implying high singles. I'm curious, if you get to midpoint of the guidance of 12% to 15%, it would imply a meaningful pickup in back half. I'm curious, am I thinking about it the right way of the cadence and what would cause the second half acceleration?

I didn't hear the last part of your question, but yes, you're thinking about it right, generally. We said that the second quarter is likely to be our lowest quarter for underlying growth largely because of what Mike talked about earlier, where we had this big second quarter in 2021 as this COVID backlog cleared and as vaccine became available. And so yes, we're expecting a bigger second half and growth to continue to increase in TAVR and for the whole company as the year goes on.

Yes. And something just to be mindful of, Vijay, is we're expecting TAVR sales -- for example, our TAVR sales in the U.S., almost any way you want to slice it to be greater in the second quarter than it is in the first quarter. So it's not like it's going to be a peak quarter even though the sales rate itself is going to look lower. The absolute sales are going to be all-time highs for us.

That's helpful, Mike. And maybe one on gross margin, Scott here. I know you said FX benefited operating margins by 200 basis points. How much was that was a gross margin versus operating expense benefit?

So overall, in the first quarter, we had about 180 basis point increase in gross profit margin versus Q1 of 2021. In terms of FX, we're expecting for the full year FX benefits of over 200 basis points and operating margin benefit to be comparable to that, which is similar to what we talked about at the investor conference last year, maybe even a little bit more because we're now expecting more FX impact than we did back in December. Did that answer your question, Vijay? Or do you have something in addition to that?

No. So basically, the 200 basis points was -- it was all gross margin benefit, right? There was nothing on the operating expense line.

That's correct. In the first quarter, it was almost all foreign exchange.

Our next question comes from Joanne Wuensch with Citi.

Just a follow-up on the previous thought process. If you have a 200 basis point benefit this year to margins or operating margins to be specific, we should assume, I would assume, but that online next year?

Yes. So just to go back a little bit in time. Our operating margin for the full year 2021 was 30.5%. Our guidance for this year was 31% to 34%. And as we said in December, a big chunk of that increase from 30.5% was going to be foreign exchange. And so just take the middle of our range of 32.5% for gross -- for operating margin this year and assume that a good chunk of that is foreign exchange benefits.

We're seeing maybe a little bit of pickup in operating margin, excluding FX. And so if FX didn't change, we'd be able, we think, to project that those operating margins will be sustainable going forward. We've said that longer term, our objective is to gradually incrementally increase our operating margins. It's not our #1 priority, but we do think that operating margins will tick up excluding foreign exchange.

Yes, just to add, and I think Scott went out of his way to try and quantify this for 2022. We're thinking that the foreign exchange impact really bumps us up by 200 basis points on operating margins. And there's no reason to believe that that's reproducible going forward.

Just as a follow-up question. It sounds like everything is on track to get PASCAL data at TCT. How do you think, once the data is received and a product approved, uptake looks? Again, I'm thinking forward for 2023.

Yes. Thanks very much, Joanne. We're working this pretty hard right that. A lot of this is going to depend on what that data looks like. We have, in our own minds, really perceived the PASCAL product is a superior technology, and we're hoping to demonstrate that with our data. It's too soon for us to forecast 2023 in terms of what the impact is going to be. But we continue to feel comfortable with our timing that we should have approval by the end of this year and that it will have a meaningful impact because obviously, it's our first entree to the U.S. in '23.

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

Congrats on the good quarter. On the backlog, it sounds like the backlog is probably a lot smaller than it was last year. But curious if you've got any of that baked into the Q2 guidance? Or if you're leading that as upside from here?

Yes. We do -- it's hard to size this exactly, Travis, and I hope I'm clear on that. We don't have perfect visibility on how to size that backlog. And we didn't call it correctly so much last year, so I'll call ourselves out on that one. It surprised us in terms of how big the backlog was. But in our mind, the backlog is much smaller and probably just -- we felt like we had it cleared before Omicron hit.

So it was a backlog that didn't go back that very far. And we expect that to get bled off during the course of the year, not just in the second quarter. Our second quarter forecast certainly anticipates a recovery. We're anticipating moving to procedure per day kind of levels that we have not experienced in the past. So you can see that we are a beneficiary of some of that. So that's already in the forecast.

No, that's helpful. And looking at U.S. versus OUS TAVR trends, it's kind of the second quarter in a row where OUS has done a bit better than U.S., at least versus what the Street models. So I don't know -- I know there's COVID impacting that, too. But curious how you're seeing in the U.S. versus OUS dynamic for TAVR. And if you think we can still see an inflection from low risk or if that's still on the table?

Yes. Thanks very much, Travis. So it just felt to us that COVID had less impact in the first quarter outside the U.S. than it did inside the U.S. It impacted us much more. And there might have been even more COVID in the previous year for OUS. So OUS pretty consistently, almost all of our geographies around the world clocked in the range of almost up to 20%. So really strong growth OUS.

But you have to remember that the TAVR penetration outside the U.S. has a long way to go. We just have many untreated patients. And so some of this is just catching up to where we think that we ought to be. The U.S. is a different story. And I think we've talked about that quite a bit. So is there anything more that I can answer on that one?

Just curious if you have any thoughts in general on the low-risk penetration, if that's still a bolus that could be worked through or any color?

Yes. So it's a good point. So low risk was approved in the U.S. in 2019. It was approved in Japan just last year. And clearly, we get some kind of a lift that goes from it. But it's interesting. We don't feel like it's just low-risk patients that enter the system when we get a low-risk approval. I think it's almost more validation of the therapy being really great therapy. And it causes even patients that are in intermediate risk and high risk to feel more confident entering the system. And so it's -- it helps overcome some of the biases that are in the system today.

And so we're still going to be the beneficiary of that for some time to come. When we talk about what we think long-term TAVR is, we talk about this moving from $5 billion to $10 billion. And so that doubling is going to be many of these patients coming off the sidelines and being diagnosed like they haven't been diagnosed before and moving through the system like they haven't moved through the system before.

Our next question comes from Adam Maeder with Piper Sandler.

Congrats on the good start to the year. Maybe first question is on TMTT. And if I heard the commentary correctly, it sounds like you expect a gradual ramp in Q2 relative to Q1 and more of a significant ramp in the back half of the year. Maybe just talk about kind of the go-to-market strategy in Europe, and what you have planned for the back half of the year. Is that purely just becoming aggressive in the field? Or are there specific activities, initiatives that you're going to really kind of undertake to steepen the curve and trajectory? And then I had one follow-up.

Yes. It's a good point. Thanks for the question, Adam. It's a combination of both the environment and our actions. First, on the environment, we felt like we got off to a slow start in Q1 and then recovered and had some pretty good momentum. And much of that was COVID driven. We think there's somewhat of a hangover that still continues into Q2. And so just the recovery of the hospital system is still a factor in Q2. We expect that to be less of a factor next year.

Now at the same time, Edwards is continuing to activate more sites, and we're getting increased adoption of PASCAL in existing sites. And so we're -- we've moved outside of where we initially launched, which was Germany and moved into, I don't know how many countries at this point, I think it's more than 10. So it gives you a sense for -- it's a combination of things that's going to cause it to pick up. We've been increasing our staffing at the same time. No impact from the U.S. is anticipated to really show up that's meaningful in 2022, that would be more of a '23 impact, but this would be more growth in Europe.

That's helpful color, Mike. I appreciate that. And then just one quick follow-up on the TAVR pipeline. It sounds like SAPIEN X4, the U.S. pivotal trial is expected to commence this quarter. Just anything you can share at this point in time on trial design, whether it's number of patients, length of follow-up. And then just any early, I guess, clinical feedback you can share on X4. I'm assuming there was some first-in-human work that's presumably been done. So just anything that you can share on clinician feedback would be great.

Yes. Thanks, Adam. No, we don't have much to share on X4 this point. We really -- we have -- we really don't have experience to speak of that we can share. And so this will most occur as we start this trial. It's a technology platform that we're very excited about and brings real advancements.

And I'm sure that you'll be hearing more about it. I understand we have not posted on ClinTrials.gov, but that should be happening over the next couple of months, and we'll make sure that, that gets out there in a fulsome way so that you're able to get a good look at the trial.

Our next question comes from Danielle Antalffy with SVB Leerink.

Mike, I just wanted to clarify something you mentioned on PASCAL and the data here coming in the U.S. So you do -- you have in the past referred to it as a superior product. The trial is powered for non-inferiority is my understanding. So I would just love to get your thoughts on, number one, how it's being received in Europe. Is it being received as a superior product? And then number two, what you think we need to see from the clinical data in September at TCT to justify your marketing here -- this as a superior product.

Yes. Thanks, Danielle. And I didn't mean to imply that I expect us to demonstrate superiority in the trial. As you appropriately pointed out, it was really powered for non-inferiority, and we expect that to be the case. Now we have consistently tried to position this as a superior product and we priced that way. And we also have gone out of our way to make sure that the results, not just in our clinical trials but in our commercial experience, are at a very high level.

We have a high-touch model, and we work very hard to make sure that we get great results. And we hope to be able to see that in the data. The adoption is continuing to increase just because of, I think, the positive experience, the clinical outcomes that people are having. But this is a story yet to be told, and so we're going to have to live this one.

Your next question comes from Matt Miksic with Credit Suisse.

Maybe one, if I could, on TAVR centers, where you stand now. I know we're sort of getting to maybe capacity of potential centers in the U.S., so where you're at now and what the pace of new centers look like. And then I just have 1 follow-up.

Okay. Yes, we think at this point, we're starting to approach about 850 centers in the U.S. And at this point, it's possible for there to be additional centers added. We still have some centers that approach us. But we think are going to be relatively few at this point. And we also think that they're going to probably tend to be smaller centers and probably not have a dramatic impact on the overall numbers. But hopefully, that gives you a sense of where we're at and what we're projecting.

Sure. Yes. No, that's super helpful. And then on sort of just the TAVR capacity. I know you have a labor-intensive model. You've been expanding obviously and investing. Maybe -- or Mike or Scott, if you could talk about what the pace of capacity build-out looks like compared to last year, maybe what it looks like this year and going forward.

Yes. So it's easy to get lost in the pandemic because we've had so many ups and downs. Maybe what I'll do is just remind you of what the company has been able to do over this period since 2019. And if you look at -- whether you're looking at the first quarter or full year 2022, we're looking at a 10% growth rate -- compounded annual growth rate. So 10% each year from 2019 to now on -- so 3 years, which gives you a sense that even with all of the constraints and incredible distractions and all the pressures that have been on systems, there's been a pretty continuous lifting of the TAVR treatment rates.

And again, TAVR is a little faster than the rest of the company, but I don't have that number handy. But hopefully, that gives you a sense for -- it's been happening on a pretty steady basis, and we expect the system to continue to adapt and evolve and add capacity, although we don't expect it to happen kind of overnight, it will be more gradual in nature.

Our next question comes from Bill Plovanic with Canaccord.

I just wanted to circle back on one of the comments just on the international TAVR business, I think, approaching 20%. I'd be a little surprised that -- that would be a pretty significant change for Europe if it's starting to approach 20%. I'm just wondering if you could give us a little more clarity on kind of how that growth rate between Europe, Japan and maybe rest of the world looks?

Yes. We typically don't give country-by-country growth rates, but we did experience 20% constant currency growth outside the U.S. And that most of the geographies around the world were all in that 20% range, and that included Europe and Japan, and other places in the world were dramatically underpenetrated. So all that is a big positive. In the case of Europe, it was broad-based across many countries. I mean every country just grew in the first quarter. Now some of that might have been the fact that it was a little tougher last year. But nonetheless, it was very impressive to us.

And here it is, a product that was launched in 2007 and now it's 15 years later and still growing at this kind of pace tells you that in some ways, the system is still catching up with what the demand is that's out there and what gives us optimism for the future. So on a long-term basis, do we expect Europe to grow 20%? No, we don't. But we'd be very pleased if Europe can continue to be an important contributor to growth. We haven't tried to parse long-term growth rates out, but I have to tell you that it's exceeded our expectations in the recent past.

And I'd just add to that, Mike. One of the benefits of having this now significant TAVR business with a global footprint is we do have different regions contributing to growth at different times. And so we've got new technologies that get introduced to different markets, new indications that are issued on TAVR devices in different markets. And so it really helps to have this broad footprint. And if 1 business is performing maybe not as strong in 1 period, then that could be offset by another region that is.

Excellent. And then if I could, just on the U.S., I mean, I think as we're looking, the comps seem pretty tough as we get into Q2 on U.S. TAVR. U.S. -- the first quarter for U.S. was, looks like it was kind of flattish sequentially. And I'm just trying to figure out, do you expect something similar that you're seeing in TMTT is where we'll get more of a kind of keep recovering in Q2 on TAVR and then maybe that really steps up as we get into the back half of the year even in the U.S.? Is that how we should think about it?

Well, your point is a good one about a tough comp in Q2 for TAVR. We saw really strong growth and it was mind-boggling, something that we didn't expect Q2 of last year. Now having said that, so we expect a real step-up in our Q2 sales in TAVR. And again, we're going to see what we think is probably an all-time record for TMTT in the second quarter as well.

But we say TMTT is really going to take off in the second half. TAVR is not going to come down probably from Q2. We expect it probably to just continue to increase, be a little stronger in Q3 and stronger yet in Q4. So we expect a continuous ramp there of really setting all-time highs.

Next question is from Shagun Singh with RBC Capital Markets.

Mike and Scott, I just wanted to ask the guidance question in a different way. So your Q1 results and Q2 guidance, it does imply a pretty substantial improvement in the back half. And you've kept your guidance intact since December 9, despite a pretty dramatic shift in the operating environment, just given Omicron, inflation, supply disruption, staffing shortages, worse FX environment. And so I'm just wondering, what's improved on an underlying basis since your December outlook? Is it international TAVR, TMTT? Or was your guidance just conservative?

That's a good question. Back in December, it was before Omicron had really been introduced in the U.S., and we're still seeing Delta in Europe. But in January, we saw a pretty noticeable impact of Omicron in the U.S. And we talked about it a little bit on our fourth quarter call. We talked today about how conditions generally improved since January. But I don't think we'd say that conditions have improved all the way back to what we still saw back in our December investor conference. So things are better, but maybe not all the way back to what we had foreseen back in December at our investor conference.

Yes. And just to pile on there, and I don't have exact numbers behind this, but even though we've seen a pretty nice recovery here, I'm not sure that the hole that was created for Omicron has been filled at this point, and that's still in the future. So we have a pretty good size guidance range, and so we continue to feel comfortable that we'll be within that guidance range. But we haven't fully filled the hole from Omicron yet.

Got it. And just a follow-up on capital. Can you just comment on the capital environment in 2022, just given the exposure you have, I guess, on the Critical Care side? But just generally, as you talk to hospital customers, are you worried about slowing a capital purchasing environment, especially in the midst of labor cost inflation and high interest rate that's ongoing?

Yes, thanks for the question. We're not maybe the perfect barometer for capital. We have a pretty good capital business, but it's only about 20% of overall Critical Care. And so part of what we saw, we saw a pretty good recovery that started last year, probably in Q2, and a pretty big capital recovery. And part of that's in our comparables when we look at this year.

So we think that, that is -- has been pretty impressive, and we think that we expect it to repeat this year but not be greater than it was last year. It was a pretty -- it was pretty significant last year. And so from our view, at least the way people are purchasing HemoSpheres, we saw quite a recovery from what we saw in the early days of the pandemic.

Our next question comes from Cecilia Furlong with Morgan Stanley.

I wanted to ask on TMTT guidance for '22 and the expected acceleration in the back half, but really how much of that is coming from current sites and further penetration in those sites versus either additional site expansion or geographic expansion that you talked about.

Yes. So it's a great point. Part of this is not to have COVID interfere. Just it seems as though COVID has traditionally impacted mitrals a little bit more than it has TAVR by comparison just because we still require anesthesia and some ICU stays with the mitral procedures. And so some of it is that. But probably new sites is a bigger contributor than the increased adoption in existing sites. And so hopefully, that gives you a little color on what we're expecting.

That's helpful. And then just in terms of your TMTT, the sales force build-out that you've talked about in the U.S., can you just walk through where you are at this point and expected future investments over the coming quarters ahead of launch?

Yes. So we're in the process of building that U.S. field team. And we're building with the idea that we really want to ensure that we do a great job of training our own team and training the physicians and really doing this in a very deliberate fashion. So it's going to be a pretty gradual and deliberate build-out for us, and we're going to focus on having excellent procedural success and clinical outcomes.

And so we're taking a pretty thoughtful approach to this rather than broad-based. We're going to try and stay in accounts that already do quite a bit of a transcatheter and have real experience in doing it, and are likely to be able to attain a high level of competency and maintain that. So hopefully, that gives you some sense of how we're thinking about it.

Our next question comes from Josh Jennings with Cowen.

I just wanted to ask a follow-up on Adam's question pertaining to SAPIEN X4. Hoping you could maybe share the drive behind some of the design enhancements. The cat's about to be let out of the bag as you start the ALLIANCE trial. But the design enhancement was focused on eliminating mild PVL, facilitating future TAVR and TAVR procedures or the coronary access. So anything you can share would be helpful.

And my follow-up is just on the Alterra transcatheter pulmonary valve. Medtronic's had a Harmony valve recall today. It was announced or at least hit the tape. I mean how big is that transcatheter pulmonary valve market and what do you have baked in the guidance for Alterra this year? And then could there be upside with this recall?

Sure. Well, we have -- we certainly have design intent on SAPIEN X4. We believe that it's going to have improved paravalvular leak performance. We also think that it's going to have resilient tissue on it, which we think is a big plus and add durability. And it also just has a chance to address some of the variability that's in patients. And so we think it has a number of advantages, and we look forward to trotting that out. In terms of the pulmonic opportunity, yes, I really haven't gotten into the news today that's happened on that.

We're just now rolling out the Alterra product. We've been pleased with that. This isn't a really large group. I think compared to the overall TAVR market, it probably gets lost in the numbers. It's not really that big of an opportunity. But boy, these are patients that really need the help. And so we feel a real obligation to be able to help them through a tough time.

Next question comes from Rick Wise with Stifel.

Mike and Scott, one question for each of you. Mike, you're conveying very clearly your excitement about PASCAL and the acceleration you expect throughout the year. You said it's really going to take off. I was just hoping you could give us a little more color. Is this about the sales force expansion? Is it the number of centers opened? Is it about training? All of the above, I'm sure. But just maybe help us better understand the fundamentals behind your optimism.

Yes. Thanks, Rick. Maybe something that just a clarifying point is, remember, we're just selling in Europe at this point. And so when you talk about this transcatheter edge-to-edge therapy, the supporting evidence in Europe hasn't been overwhelmingly positive. It's been somewhat mixed. And so that's led to a growth rate in Europe that's been probably less than what it should be.

And we think there's going to be a real contribution when the family of CLASP trials become apparent. We think it has a chance to really lift market adoption. And that's going to be one of the pluses. And then as I said earlier, adding new sites is going to be a positive, us growing the team is going to be a positive and all those are going to be additional add-ons.

Great. And maybe just last for me, and I'm guessing this is for you, Scott. You bought $400 million worth of stock. Clearly, balance sheet's in excellent shape. Free cash flow is strong. Given the market, the pressures on the group, on Edwards' stock price, what's your appetite now? How are you thinking about stock repo as we move through the second quarter? And is anything else on your mind from a cash use perspective?

Sure. Thanks for the question. Thanks for bringing us home. We're a little bit over the time. So I'll try to go quickly here. But our cash priorities have not changed at all. First and foremost, we invest in the business. But eventually, we're also going to end up with a lot of cash, and we intend to at least offset the impact of incentive compensation dilution. But beyond that, we've been gradually, over time, buying down the overall share count.

And we're going to continue to look for opportunities to do that. We got off to a good start with a $400 million repurchase this year. We like where the stock was from a repurchase standpoint, and we still have over $700 million left in repurchase authorization. So you should expect that, that's going to be just part of our long-term capital deployment plan.

Okay. Thanks so much for your continued interest in Edwards. Scott and Mark and I are going to welcome any additional questions by telephone later on.

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