Good afternoon, and welcome to the Edwards Lifesciences Third 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, 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 Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, Chief Financial Officer.

Also joining us for the Q&A portion of the call are Larry Wood, our global leader of TAVR; Bernard Zovighian, our global leader of TMTT; Daveen Chopra, our Global Leader of Surgical Structural Heart; and Katie Szyman, our global leader of Critical Care.

Just after the close of regular trading, Edwards Lifesciences 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 Mussallem 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 2 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 inventive. 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 billion to $5.55 billion.

We anticipate hospital staffing challenges and a predictive 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 3-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, and 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 remain focused on expanding the availability of TAVR therapy driven by the fact that AS remains a significantly undertreated disease amongst this large elderly population. In summary, we anticipate the continuation of staffing shortages and 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 billion 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 2028, which implies a low double-digit compounded annual growth rate. Turning now to our transcatheter mitral and tricuspid therapies product group.

Recently, we received U.S. 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 U.S.

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 IID 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 IIF pivotal trial for patients with functional mitral regurgitation. Separately, we continue to treat patients with our 2 transcatheter mitral replacement therapies through the ENCIRCLE pivotal trial for SAPIEN M3 and the MISCEND study for EVOQUE 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 enrolling the TRISCEND II pivotal trial of the EVOQUE replacement system and the Class IIR pivotal trial with the PASCAL repair system in patients with symptomatic severe tricuspid regurgitation. We no longer anticipate CE Mark approval for EVOQUE 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 1-year follow-up data on our early experience with the EVOQUE 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 to our bring 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 are 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 4 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 MITRIS 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 FloTrac and ClearSight sensors with our unique hypotension prediction index algorithm. Additionally, demand for our HemoSphere 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. GAAP EPS was $0.55, which included a net $57 million pretax charge or $0.07 per share related 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 billion to $5.55 billion. And TAVR sales also at the low end of our previous range of $3.5 billion to $3.7 billion.

We continue to expect Surgical Structural Heart sales of $870 million to $950 million, and Critical Care sales of $820 million 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 noncash 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 5 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 30.

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 million 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 8, 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 questions..

[Operator Instructions]. Our first question comes from Larry Biegelsen with Wells Fargo Securities..

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 there'll be -- maybe that will raise some concerns about growth next year.

So Mike, can you provide some framework for how to think about '23? Any catalyst to call out and stop P&L considerations that we should take into account? I heard the FX headwind, the 250 basis points, just any high-level thoughts given the shortfall last quarter and this quarter? And I had one follow-up..

So Larry, it's 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. 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 fall over the next year that will 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 for 2023, but we don't have the quarter-by-quarter breakout yet. Mike, do you want to talk about next years....

Well, I'd just briefly just go through the portfolio. I mean, we feel like the business -- 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 IID.

Is it reasonable to assume that you'll employ a similar [indiscernible] design for your tricuspid pivotal trials, the 2 you mentioned? And just how are you thinking about that opportunity? Our check suggested it should be bigger than mitral, maybe somewhere between mitral and aortic..

Yes. Thanks, Larry. 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 [indiscernible] 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 legal fashion with the regulators, but it's not clear.

I don't know, Bernard, do you have anything you want to add to that?.

Yes. Just a small thing. Obviously, any study, any trial has different design. 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 IID and applying that to the other studies..

Our next question comes from Robbie Marcus with JPMorgan..

Maybe first, I think it would be helpful. Maybe walk us through some of the differences between why TAVR 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?.

Yes. So let me kick it off, Robbie, and then I'll turn to Larry and Daveen 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 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. Daveen, do you want to add anything from a surgical perspective? And then we'll kick it over to Larry..

Yes, sure, Mike. I appreciate that. Yes, 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 Brazilian 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 like I 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 within the world of surgical operating rooms and surgery beyond cardiac surgery.

Cardiac surgery being an area that surgical operating rooms kind of prioritize resources to a surgical operating rooms. So we generally see that led to that slow-low single-digit kind of market growth..

Yes. This is Larry. As it relates to TAVR, there's more upfront work that has to happen with a TAVR patient than a surgical patient, both in terms of the imaging that has to be done, 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 for a surgical patient. And so when we talk about staffing issues, 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, procedures grew faster than surgery. So it's -- and a lot of the growth drivers in surgery, I think, go beyond aortic procedures..

Yes. And Robbie, just to quickly comment on Japan. Yes, the total impact in the shortfall was only from COVID. COVID hit hard. I don't know how close you were to how hard it hit in Japan, but it is hard. And we are doing great in Japan, and we continue to do great in Japan. But we really felt the impact of that.

It was probably worse towards the middle of the quarter, and it started getting better. So it's -- 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?.

Yes. 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 into lower U.S. dollars..

Our next question comes from Vijay Kumar with Evercore ISI..

Maybe my first one is, Mike, for you, specifically 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 the remaining half of the center, you're 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?.

Yes. 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 yes, 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..

Yes. 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, [indiscernible] centers in Texas 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 -- it 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 that you have $2 billion of cash on the balance sheet. Why not announce a big ASR? I think your peer has done this. Just [indiscernible] market that Edwards still believes in the long-term underlying growth of TAVR markets.

Clearly, there's some nervousness [indiscernible] the guide cut this evening?.

Well, you're right. We have a lot of cash on the balance sheet. 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 -- ability that we're able to fund external growth.

And then yes, we're going to continue to buy back shares. And we've done accelerated share repurchases, including earlier this year. In total this year, it's been our biggest share repurchase year ever at over $800 million.

And so the only good thing about the stock price haven't 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..

Our next question comes from Joshua Jennings with Cowen..

Hoping 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 we -- do you think that U.S.

TAVR 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 PROGRESS opening up to symptom moderate?.

Larry, why don't you take that?.

Yes. Thanks, Josh. There's -- just because of the nature of the trials and the 2-year end points 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 World places, they're just really just getting started and Japan is very undertreated. So I think it's just a matter of getting through some of this COVID lag that we've had, getting some of the staffing a little bit healthier.

And then I think 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. And just a follow-up on the RESILIA tissue incorporated in 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 than the SAPEIN franchise in the U.S.

in 2023 or in the coming quarters and into 2023?.

Sure. Well, 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 in [indiscernible], I think the leading heart valve in the world now, and that's largely based on the RESILIA tissue and how receptive people have been to the benefits that it brings. For SAPIEN 3 UR, 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 I think people are excited about it. And we are going for a price premium on that. We've increased our list price by about $1,500.

Now 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 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..

Our next question comes from Joanne Wuensch with Citibank..

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 2 to improve it. There were probably 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 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?.

Yes. 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 frustrated as anybody else is. And I think 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 use the new staff to replace the traveling nurses to try to help out their own P&Ls.

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..

Next question comes from Rick Wise with Stifel,..

A couple of follow-up questions. And I apologize, it's hard to not focus on the U.S. growth numbers. Larry -- it is actually sort of a question for Larry, really, but I'll just [indiscernible], Mike. The -- I was -- expand on 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 patient gathering change? And related to that, one of the thing I still can't quite understand and wrap my brain around is to I mean, [indiscernible] stenosis are very -- patients are sick.

How are they not being treated? And it's so hard to make imagine these people being in backlog. Maybe you could just talk around those points..

Yes. Why don't I start, Rick, and have Larry jump in. Yes, 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 multistep process. Maybe Larry, you can get a little bit deeper on that..

Sure. Yes. I think referrals are increasing. I mean, what we hear anecdotally is that backlogs are growing at hospitals, which would seem to indicate 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 as I talked about earlier, there's just a multiple set of tests and screening 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 I think we certainly have heard from centers that have said they kind of have to juggle patients with the more sick patients moving up the waiting list and then pushing the less sick patients down a little bit. But 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?.

Yes. Thanks, Rick. Yes, we're definitely building up that team, and we're growing the team in Europe as well as the U.S. So 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 an 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. We have done some few cases in the U.S.

with great patient outcome. And you know that for us, it is our #1 objective. So -- and we are initially focusing on the site that we are part of the clinical trial with us. So that's basically where we are in the U.S..

Our next question comes from Pito Chickering with Deutsche Bank..

First one is 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 at that capacity is all the new growth coming from the smaller or newer centers?.

Yes. Yes, I can start. It's quite -- it's really a mixed bag, Pito. But Larry, you want to make a few comments and [indiscernible].

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.

And -- but I think bigger centers maybe start 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, its largest -- most mature market in Europe, and I know that's sort of been COVID throughout the year.

But just curious, how is the German market growing in 2022 and any colors or where that grew specifically in the third quarter?.

So it kind of depends what we're talking about, Pito. 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. In particular, in Germany, they have been hit by COVID.

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

Yes. 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. just more widespread..

But having said all those things that I know sound it all sounds pretty negative. You also have great big German centers with dedicated KOLs who are really good and really motivated. 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..

Our next question comes from Cecilia Furlong with Morgan Stanley..

I wanted to ask about PASCAL, PASCAL PRECISION in Europe, really what you've seen either from further standard 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 2 PASCAL trials FMR and for TR, just if you could provide an update in terms of how you're thinking about recent progress with then in enrollment as well as kind of time lines to potential approval?.

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

Yes. So we began the conversion of center from PASCAL to the PASCAL PRECISION system and initial feedback from physician is very positive. And by the way, we got a great clinical outcome, patient outcome. So the physician appreciated the ease of use, the navigation improvement that the new system is bringing.

So this year, 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 [indiscernible] devices. So that's [indiscernible].

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

So the two -- we are continuing the [indiscernible] of these 2 pivotal studies with Class IID having completed enrollment. We believe that the sites are going to put more focus on these 2 remaining trials, but we are continuing. It is going well. And I am going to provide you a little bit more update here during the investor conference..

So the same trials that we're doing IID are probably doing IIF and IITR. So yes..

Mostly..

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 year push out, how you're thinking about just the process from your end going forward?.

Yes. Thanks.

We're very excited about the EVOQUE tricuspid valve replacement system and really think that it has the potential of being a game changer, but Bernard, do 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 EVOQUE. We continue to be very pleased with the performance of EVOQUE. At London Valve, you are going to see additional data with more patients, longer follow-up.

And so very much looking for 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 bring this important therapy to patients who have no options today..

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

I wanted a little more color on the TAVR guidance. It implies $850 million in Q4, which is down sequentially just wanted a better understanding of why down sequentially? And if that's a comment on both U.S.

and OUS, you expect kind of both to be down quarter-over-quarter?.

I'll start. Part of what we're experiencing is continuing foreign exchange headwinds. And so the $850 million 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..

Yes. We actually expect more procedures, both in the U.S. and outside the U.S. in the fourth quarter..

Okay. Do you think -- so U.S.

TAVR you expect to be up quarter-over-quarter?.

The procedures will certainly be up. We're not prepared to predict the [indiscernible] foreign exchange..

Okay. That's more a U.S. comment. But -- and I guess follow-up. Yes, you [indiscernible]. Okay. And the follow-up question was on kind of on spending OpEx and margins for next year given some of the FX flow-through. I know the Street's got you at like 6 to 7 earnings growth next year.

I just want to make sure big picture, we're accounting for all the puts and takes on the P&L as you consider models for 2023?.

Yes. And again, I'm going to have to ask you to hold off for the detail on the ticking and tying until we get to New York on December 8. 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 over $200 million in headwinds. We had $270 million 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 2 things, flowing down the P&L should get you to at least a preliminary range of what to expect earnings per share. And like I said, we'll talk more about [indiscernible].

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

Our next question comes from Richard Newitter with Truist Securities..

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 you say, flu and COVID picking up being a tough winter? What regions? I want to make sure I understand where and what's factored into the guidance for that? And the same question on Japan, it sounds like that was 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?.

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 November through January time frame.

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 variance.

So I don't know, does that get that answer your question?.

Yes.

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..

And if I could just 1 more. On I know that the -- 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 pushout into '24 and maybe less or more mitigation of that falloff in '23? Am I thinking about that right?.

You are thinking about that right. Some of what we're seeing -- 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 there will then be a headwind in 2024..

All assumes that exchange rate stay where they are..

Yes, assumes current rate, exactly. I just want to clarify one thing. It's a 250 basis point headwind to gross margin, it's nearly a 5 percentage point headwind on the top line..

And our next question comes from Adam Maeder with Piper Sandler..

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, there's -- 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 IID study? Obviously, we got the initial data set at TCT, but when should we expect additional readouts from that study?.

All right. This is Larry. So as it relates to ALLIANCE and PROGRESS, 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.

And 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 IID readouts is a good one. So far, this has really been an early readout of the Class IID, 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..

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

Okay. Well, 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..