Greetings, and welcome to the Edwards Lifesciences Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Good afternoon, and thank you all for joining us. With me on today's call is our Chief Executive Officer, Bernard Zovighian, along with our Chief Financial Officer, Scott Ullem.

Also joining us for the Q&A portion of the call are Larry Wood, our Group President of TAVR and Surgical Structural Heart; and Daveen Chopra, our Global Leader of TMTT. Katie Szyman, our Global Leader of Critical Care is out of town today, but she'll be with us on future earnings calls.

Just after the close of regular trading, Edwards Lifesciences released second quarter 2023 financial results. During today's call, Management will discuss those results included in the press release and accompanying financial schedules and then use the remaining time for Q&A.

Please note that Management will be making forward-looking statements that are based on estimates, assumptions, and projections.

These statements include, but aren't limited to, financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters, and foreign currency fluctuations.

These statements speak only as of the date on which they are made and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties 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 2022 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 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 this call are available in today's press release.

And with that, I'd like to turn the call over to Bernard for his comments.

Bernard?.

a portfolio of differentiated therapies, positive clinical trial results to support approvals and adoption, and favorable real-world clinical outcome. TMTT second quarter global sales of $48 million increased nearly 17% on a constant currency basis versus the prior year.

Growth was driven by continued strong overall procedure volumes, adoption of our differentiated PASCAL Precision platform, and activation of more centers across the U.S. and Europe. We continue to hire, train, and grow the field team to deliver on our high-touch model, as we expand.

In mitral, enrollment is going -- is ongoing in the Class IIF pivotal trial for functional mitral patients. We are also pleased with the enrollment in the ENCIRCLE pivotal trial for the SAPIEN M3 mitral valve replacement and remain on track to complete enrollment around the end of this year.

In tricuspid, the Class IITR pivotal trial with PASCAL continues enrolling well. With the completion of TRISCEND II enrollment, continued access for EVOQUE allows U.S. centers to continue to offer this therapy for tricuspid patients. We remain on track for a European approval by the end of 2023 and U.S. approval around the end of 2024.

In Surgical, second quarter sales of $256 million increased 13% on a constant currency basis, driven by the adoption of our premium RESILIA products across all regions. Physicians and patients value the feature and benefit of this advanced tissue technology for both aortic and mitral surgical valve procedures.

Patient enrollment continued in the second quarter for our MOMENTIS clinical study designed to demonstrate the durability of the RESILIA tissue in the mitral position. We expect that confidence from our -- from the recently presented seven-year data of our upcoming clinical trial will continue to support adoption of our RESILIA family of products.

In Critical Care, second quarter sales of, $235 million, increased 13% on a constant currency basis, driven by contributions from all product lines. Growth was led by our Smart Recovery portfolio and healthy adoption of our Acumen IQ sensor.

Sales momentum for our HemoSphere monitoring platform was also positive in the second quarter with a healthy pipeline of future opportunities. Before I turn it over to Scott, I also want to mention our expectation for the upcoming TCT Conference in October.

During the conference, we expect several important presentations regarding our transcatheter technologies. In TAVR, we are expecting a presentation of five-year clinical data from the PARTNER 3 low-risk pivotal trial. In TMTT, we anticipate the presentation of a one-year full cohort of the CLASP IID pivotal trial results.

Additionally, we anticipate the presentation of the planned interim analysis of the TRISCEND II randomized cohort. I look forward to seeing many of you at the Investor Event we plan to host at TCT. Our Investor Relation team will communicate details as we get closer to the event. And now, I will turn the call over to Scott..

Great. Hi, thanks a lot, Bernard. We are pleased with our sales performance in the first half of the year, posting our second consecutive quarter of double-digit constant currency growth.

All product groups grew double-digits and sales were balanced across regions, with the exception of Japan, which was impacted by the trialing of competitive TAVR products. We achieved total sales in the quarter of $1.53 billion, which represents 12% year-over-year constant currency growth. We achieved adjusted earnings per share of $0.66.

Contribution from our better-than-expected sales performance was partially offset by higher performance-based compensation and investments in our transcatheter operations in support of our growth strategy. Our GAAP earnings per share of $0.50 was impacted by the intellectual property agreement I commented on last quarter.

We previously had a long-term Intellectual Property Agreement with Medtronic that expired last year and in consideration for the new agreement, we paid $300 million, approximately half of which has been expensed, and the other half will be amortized over the next 15 years.

A reconciliation between our GAAP and adjusted earnings per share for these and other items is included with today's release. I'll now cover some additional details of our second quarter sales results and full year 2023 outlook by product group.

A continuation of double-digit global TAVR growth reflected a more stable hospital staffing environment, as well as strong adoption of the SAPIEN family of valves. U.S. TAVR sales growth was driven by the launch of SAPIEN 3 Ultra RESILIA, which remains on track to represent the majority of our U.S. TAVR sales before year-end.

In Europe, Edwards' sales growth was driven by the continued demand of our SAPIEN platform and was broad-based by country. We still see some health system capacity challenges, but are encouraged that centers are adapting to continue to treat their patients.

In Japan, although growth was below our expectations in Q2, we anticipate that growth rates will improve, driven by the ongoing launch of SAPIEN 3 Ultra RESILIA. For global TAVR sales, we are adjusting the low-end of our outlook slightly higher to $3.85 billion to $4.0 billion.

We now expect full year TAVR growth to be 10% to 13% on a constant currency basis versus previous guidance of 10% to 12%. TMTT growth in the second quarter was driven by strong procedure volumes, adoption of our differentiated PASCAL Precision platform, and activation of more centers across the U.S. and Europe.

Overall, we're pleased with our continued progress toward bringing a portfolio of TMTT therapies, combined with contemporary clinical data, in order to achieve our vision of transforming the lives of patients with mitral and tricuspid valve disease.

We now expect full year 2023 sales of $180 million to $200 million versus our previous expectation of $170 million to $200 million.

In Surgical Structural Heart, 13% constant currency sales growth in the quarter was driven by the adoption of Edwards' premium products as well as strength in valve surgery procedures as hospital staffing levels have continued to improve.

Based on positive year-to-date performance, we now expect that our full year sales will be in the range of $960 million to $1.02 billion versus previous guidance of $870 million to $970 million. This revised range implies low double-digit constant currency growth in 2023. Finally, turning to Critical Care.

We continue to expect full year 2023 sales of $870 million to $940 million. For total Edwards, based on the strong first half of the year, we now forecast full year 2023 sales to be in the range of $5.9 billion to $6.1 billion versus prior guidance of the high-end of $5.6 billion to $6.0 billion.

We now expect full year total Company sales growth to be in the 10% to 13% range on a constant currency basis versus previous guidance of 10% to 12%. Lastly, we now expect our full year adjusted earnings per share to be between $2.50 and $2.60. We are projecting third quarter sales to be between $1.44 billion and $1.52 billion.

We are also projecting third quarter adjusted EPS of $0.55 to $0.61. I'll now cover additional details of our P&L. For the second quarter, our adjusted gross profit margin was 77.7% as expected, compared to 80.5% in the same period last year. This reduction was driven by a less favorable impact from foreign exchange.

We continue to expect our full year 2023 adjusted gross profit margin to be between 76% and 78%. Selling, general and administrative expenses in the quarter were $469 million or 30.6% of sales compared to $409 million in the prior year.

This increase was driven by performance-based compensation and investments in transcatheter field-based personnel in support of our growth strategy. We continue to expect full year 2023 SG&A as a percent of sales to be 29% to 30% as we invest in field-based personnel and our therapy adoption initiatives.

Research and development expenses in the second quarter grew 8% over the prior year to $270 million or 17.7% of sales. This increase was primarily the result of continued investments in our transcatheter aortic valve innovations, including increased clinical trial activity.

For the full year 2023, 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. During the second quarter, we recorded a $27 million reduction in the fair value of our contingent consideration liabilities, which benefited earnings per share by $0.04.

This benefit was excluded from our adjusted earnings per share of $0.66. This reflects an adjustment of assumptions regarding potential milestone payments for a previous acquisition. Turning to taxes. Our reported tax rate this quarter was 9.7% or 13.1% excluding the impact of special items.

Our rate benefited from higher R&D tax credits and a 200 basis point excess tax benefit from stock-based compensation. We continue to expect our full year tax rate, excluding special items, to be 13% to 17%. Foreign exchange rates decreased second quarter reported sales growth by 70 basis points or $8 million compared to 2022.

At current rates, we continue to expect an approximately flat year-over-year impact to full year 2023 sales compared to 2022. Foreign exchange rates negatively impacted our second quarter gross profit margin by 220 basis points compared to the prior year.

Relative to our April guidance, FX rates had a minimal impact on second quarter earnings per share.

Adjusted free cash flow for the second quarter was $286 million, defined as cash flow from operating activities of $34 million, less capital spending of $48 million, and excluding a $300 million payment related to the Medtronic Intellectual Property Agreement I mentioned earlier.

We continue to expect full year 2023 adjusted free cash flow will be between $1.0 billion and $1.4 billion. Before turning the call back over to Bernard, I'll finish with an update on our balance sheet and share repurchase activities.

We continue to maintain a solid and flexible balance sheet with approximately $1.5 billion in cash, cash equivalents, and short-term investments as of June 30th. We continue to expect average diluted shares outstanding for 2023 to be between 610 million and 615 million.

We have approximately $650 million remaining under our current share repurchase authorization. And with that, I'll hand it back over to you, Bernard..

Thank you, Scott. So, based on our strong first half result, we have increased confidence that 2023 will be an important year for Edwards and we expect to deliver 10% to 15% sales growth while making meaningful progress on our innovations to improve care for many more patients.

Longer-term, I have great confidence in our team to further extend our leadership position by bringing our differentiated technologies to patients globally. In closing, we are well positioned for success. With that, I'll pass it back to Mark to open up Q&A..

Thanks a lot, Bernard. With that, we're ready to take questions now. In order to allow for broad participation, we ask that you please limit the number of questions to one, plus one follow-up. If you have additional questions, please re-enter the queue and Management will answer as many participants as possible during the remainder of the call.

Operator, please go ahead with additional details on accessing the Q&A portion of the call..

Thank you. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Please state your question..

Okay. Great. Thanks for taking the questions and congrats on a nice quarter. Maybe to start, global TAVR growth around 10%, a little weak in Japan.

Where do you think we are in the recovery process in terms of stabilizing the system, stabilizing timelines, and staffing in the system? And when do you think we'll get to a new normal in TAVR procedures and diagnosis and treatment?.

Yes. Robbie, this is Bernard here. Thank you for the question. We are pleased with our global TAVR result in Q2. 10% constant currency growth, comparable U.S., OUS, basically, and it has been driven by continued strong demand for our leading SAPIEN platform. Also, what we have experienced is that improvement in the hospital staffing level in the U.S.

and globally, but I'm going to let Larry add some comments here..

Hi, Robbie. Yes, it's what - deciding what the new normal is probably a little bit tricky, but I feel like the system has continued to get better. I think when we track staffing, we're not where we should be and we're not where we would have projected to be in absence of the pandemic.

But I think patients are certainly coming in and they're getting their visits, and I think when we look at some of the leading indicators, we - diagnosis are up and patients are moving through the system. We still feel constrained somewhat at the Cath Lab level. That's still a place that we still struggle.

And I think centers have made tremendous strides, but it's still an adjustment coming out of COVID and we're not back to what I call pre-COVID normal levels. And so, I think we still have a little ways to go. But to consider the - and I think we see that a little bit globally.

It varies a lot across Europe and we see it a little bit in Japan, depending on - I think there are still dealing with a little bit more COVID here and there. But I think the encouraging thing is, we're at 10% globally and we know we haven't fully recovered yet.

So, I think there's still some opportunity for us to continue to do better and we know the under-treatment remains huge and we still think there's a lot of opportunities to continue to grow this over the long-term..

Great. Thanks for that. And maybe just kind of a similar question. TMTT, you beat in the quarter. That seems like it was even a bit more imperative over the past few years than the whole TAVR complex.

Maybe just talk about mitral and tricuspid, particularly the launch of PASCAL in the U.S., how you think adoption is going versus plan, how you're seeing the competitive situation play out, and just your thoughts in TMTT in general relative to TAVR normalization. Thanks a lot..

Yes. So, let me start, Robbie, and then I will ask Daveen to add some comments here. So, we are pleased about Q2, as you see globally. What we are seeing is that the market, the mitral market has done well in Q2, is back to growing and almost a double-digit, something like that. The adoption of PASCAL Precision is going very well.

It's going very well in U.S., it's going very well in Europe and we are activating more centers across U.S. and Europe. So, obviously, the way to think about it, we had some great momentum from the market from PASCAL Precision and for us activating more centers.

But Daveen, you want to add anything here?.

Yes, definitely. Thanks, Bernard. I think as Larry and Bernard talked about, in the market, we continue to see recovery from the staffing portion of it and I think you're right that maybe we got hit a little bit more on the staffing side during COVID.

But coming out, we're also still seeing recovery, but I still think there is opportunity to keep getting better on that component. With that being said, with such a large number of - such a large number of patients looking for new therapies, we continue to see relatively a strong market growth.

That being said, as we dive into it, we continue to open up new centers in both the U.S. and Europe. Specifically in the U.S., I think we're continuing to hear great feedback from physicians about the differentiated features and benefits of the PASCAL system. We're ramping-up the team. We're opening up new centers each week.

We're going through kind of the value-add value analysis committees in the contracting processes with each new center in the U.S. week-in and week-out. And we're really focused, as you can imagine, on the largest accounts in the U.S., not -- who do the most here so far. And so, I'm pretty excited about where we go in the U.S.

Maybe just to comment, both on Europe, I think, as Bernard said, we've been again opening up new centers in Europe and I want to make a comment that, tricuspid especially in Europe, continued to see very strong growth.

It's a newer therapy, smaller obviously in market size, but continue to see very strong growth, where we're seeing that the market is growing and that people are really seeing that PASCAL actually in this situation, the tricuspid space, is really got these differentiated features for atraumatic and tailored-treatment really for tricuspid tier.

So, overall, we continue to be excited about where PASCAL is going in it's lunch..

Thank you. And then about the financial implications of everything that Bernard and Daveen just talked about, which is, we're feeling good about how TMTT is developing in 2023. And you saw our original guidance for sales was $160 million to $200 million. We've bumped up the bottom-end of the range by $10 million last quarter.

We're bumping at another $10 million this quarter and it's an indication of how positive we feel about our progress this year..

Thank you. And our next question comes from Matt Taylor with Jefferies. Please state your question..

Hi guys. Thanks for taking my question. So, I just wanted to ask one about the margins basically. So, you had nice gross margins here in Q2. I know you're making a lot of ongoing investments and so, two things I guess.

What are kind of the key puts and takes to think about in terms of gross margins and OpEx landing through the second half of the year in terms of phasing or anything discrete to call out? And then just conceptually at a higher level, how should we think about operating margin progression over the course of the next couple of years, especially as you might have some of your bigger clinical study starting to wind down?.

Yes, thanks for the questions. I'll start with gross margin. Gross margin, we're seeing some benefit of mix in 2023, but it's more than offset by the impact of foreign exchange, that actually hit us last year in 2022 and is flowing through our income statement in 2023. You asked about phasing.

It's going to get more impactful negatively in Q3 and Q4, based upon current exchange rates. Now, if exchange rates change, that may change a little bit as well. But we're expecting gross margins to come down a little bit in Q3 and Q4 relative to the first half.

All that said, we expect to end up right where we thought we would, in the range of gross margin guidance for 2023, so really nothing changed.

In terms of operating expenses, you're right, we've been putting more investment into especially field based personnel in Europe, in U.S., and even outside, and that's weighing on operating expenses, but that's okay.

It's part of a deliberate plan to really drive top-line growth by making sure that we've got the right people in the right places, supporting our clinician partners, and making sure that patients are getting the right kind of care, especially as we're introducing these new products in places like TMTT, and what Daveen talked about earlier.

As it relates to operating margin progression over the next couple of years, we continue to see opportunities to expand our operating margin and we're looking for ways that we can do that. We've identified areas where we can make changes, and gradually incrementally expand our operating margin. But really it's a secondary focus.

The primary focus is investing for long-term top-line growth. We have some clinical trials wind-down over the next couple of years, but we've got other ones spooling up.

You know about what trials Larry is running in TAVR, and Daveen has gone in TMTT, and this is a super important area of investment for us, again to drive top-line sales by contributing to this really robust body of clinical evidence that we have supporting the growth in those two transcatheter businesses..

Thank you, Scott..

Thank you. And our next question comes from Vijay Kumar with Evercore ISI. Please state your question..

Hi guys. Thanks for taking my question. Bernard, maybe my first one on the TAVR guidance here. I think the underlying was raised at the high-end at 13%. The first half TAVR underlying has been 10% to 11%.

I'm curious, why the high-end was raised? Was there something within the quarter that you saw, some phasing or is there something coming in the back half, which gives you the confidence perhaps 13% is even possible?.

Go ahead, you know, Scott..

Yes. Vijay, maybe I'll jump in here and give you a sense of how we see it. The change in guidance, the expansion on the top-end of the range, largely reflects better-than-expected performance in the second quarter and the first half results compared to what we originally expected back at the time of the Investor Conference.

And so, because we over-achieved in the first half, we are introducing this higher top-end of the range to accommodate a potential faster growth scenario the way we saw earlier in the year. We're still modeling and planning around the midpoint of that 10% to 13% range, but that's the reason why we expanded the top-end..

Understood. And maybe one sort of related question here. First half, we've seen TAVR grow mid-teens, how much of that is volume versus price? Why are we still seeing SAVR outgrow TAVR - I think I heard Larry mention the macro-environment staffing is improving. I was just -- and that's - so it's hard for us to see SAVR outgrow TAVR.

Is this a fundamental change in the market or perhaps new product introductions that's driving SAVR or some color on SAVR versus TAVR, would be helpful..

Yes. So, Vijay, let me start and then I will ask Larry to add his comment here. So, both, our SAVR and TAVR business are growing nicely. And you have SAVR growth has exceeded TAVR because of a combination of things.

Market growth, SAVR market growth, but not only, premium pricing of our innovative, price premium technologies, and because of all of that, we saw a better competitive position. So, again in SAVR, what you have is a number of things happening. Wherein TAVR, it is mainly due to positive growth. Maybe Larry you want to add anything here..

Yes. I think that's right. We sort of have the three components that help contribute. So you can look at the growth rates and turn it all into procedures because for the TAVR side it is overwhelmingly majority procedures, but it's more of a combination of things, on surgery.

I will say, as we move through the COVID recovery though we probably saw hospitals prioritize their surgical programs probably most and I think that deal is a little bit with patient acuity and just the need to get those patients treated, probably a little bit sooner.

So I think cath lab recovery has maybe lagged a little bit beyond the surgical recovery. But again, we're very happy with where we saw TAVR procedure growth. this last quarter..

Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Please state your question..

Yes, good afternoon and thanks for taking my question, two on the pipeline and the TCT updates on this call. Let me start with the TRISCEND II comments, it's big news here. Arguably, EVOQUE is your most important pipeline product, so I guess my question is, Bernard, just a couple here.

One, is the trial stopped yet? Second, what would success look like to you, given the TRILUMINATE results showed only a quality-of-life benefit, but no positive trends on hard outcomes? And lastly on TRISCEND II, if positive, I would think approval could come in mid-'24, not late-'24, and I did have one follow-up..

Thank you, Larry. I see that you are aggressive. That's good. Look, we are - yes, indeed we completed the enrollment of the full cohort of TRISCEND II. I think we have been sharing that already in the past. We need to wait - we need to wait one year follow-up and then putting together all of the data, presenting that to the FDA.

So, this is going to take some time, so which is why we still believe that around 2024 approval in the U.S. is reasonable. Are we going to go faster, for sure, but I think end of 2024 is reasonable. Now, I'm sure, your question about how do I - how do we feel about steady results is in light of what we have seen with TRILUMINATE.

It is tough to comment because TRILUMINATE was using one technology. TRISCEND II is using a different technology, different devices. We don't know very little about tricuspid disease. So, it's very tough to comment on that, but I have to say that quality-of-life is super important for patients.

So, we will - but again, we will have to see what the result of this study and we are confident.

Daveen, you want to add anything here?.

Also two small points, thanks for the question. If that - this interim analysis was a part of the statistical plan. So, that's already been planned out and was always a part to kind of show these results. So we're excited to share these results with the clinical community.

And I'll make a comment that, for us, I'm actually pretty excited by what we've seen actually previously with TRILUMINATE.

It helps really confirm outcomes that have come from other studies with Tier Technologies that we have on PASCAL device, that - that Tier in tricuspid delivers great Trikafta reduction with meaningful quality-of-life improvements and we are excited to see randomized data.

So to me, these are all great positive tailwinds in tricuspid and we're excited to see what the TRISCEND II interim planned analysis will show..

That's helpful. Just for my follow-up, the other one on the PARTNER 3 five-year data, what do you think physicians will be focused on here? There has been some concern among investors and clinicians, given the curves converging between TAVR and SAVR between year one and two in the two-year data.

Is there anything you can say that could lay concerns? Thank you..

Larry, I can't speak to the - to the data or what's going to be presented. I think what people are going to be looking at is, what the trial was powered for, and what it was designed to do. And we have a composite endpoint of death, or stroke, and rehospitalization and those are the three components.

So, I think first and foremost, you look at the primary and then I think people are going to look at the sub-components of that and say what do they see happening in the trends in the trial. And I think, that's what people are going to be looking for.

But we're excited that the data is coming forward, and the team is going to continue pulling it in and once it's all adjudicated, the clinicians will obviously take the steering wheel and they'll present the data.

But, I think overall every time we have one of these data reports, it just adds to our body of knowledge and adds to the body of evidence and I think that's what we do for the clinical community. So, again, that's - I think primarily we focus on the primary endpoint, just like we did in the trial and we'll see where we are..

Thank you. Our next question comes from Travis Steed with Bank of America. Please state your question..

Hi, thanks for taking the question. I just wanted to follow-up on U.S. TAVR growth. I wanted to understand a little bit better.

I think you said price was stable, but it sounds like RESILIA has gone past and expected, so I don't there's any way to kind of parse out that U.S., it sounds like 10% TAVR growth in the U.S., how much of that was actually price versus RESILIA in the quarter..

Yes, thanks for your question. Yes, the price is a pretty small factor in the U.S. growth number. It's overwhelmingly driven by the procedure growth. When you look at what we're going for RESILIA, for S3 UR.

We're still in the - I call it the - I wouldn't call it necessarily the early part, but we haven't even reached halfway in the launch of RESILIA yet. And while we did go for a list price increase of 1,500, if you look at that as a percent of the total device cost, it's a lot smaller than what we did on the surgical side of things.

So it's certainly a contributor and it's a long-term contributor for us, but it's pretty small in comparison to the procedure growth. And remember, too, as people's volumes go up, they continue to hit rebate tiers and they get discounted accordingly. So you got to factor all that in as well..

Great. That's helpful. And then I did have a follow-up on the raised TAVR guide for the full year.

Is there anything you're seeing in July? Just curious like what's giving you the confidence to raise the full year guide? And when you think about Q3, should we think about this being down sequentially versus Q2 in dollars like it has been historically?.

Yes. It's Scott. A couple of things. The increase in the guide was largely reflective of our stronger-than-expected first half performance and the prospect of potentially overachieving what we had modeled for the second half, although we're still modeling the midpoint of that range that we provided.

As far as the July expectation, I guess we'll just leave it as the range that we put out for total company sales in the third quarter incorporates what we see so far month to-date. But we're not going to get into the month-to-month report. In terms of what the later in the year trend may look like, a lot of it depends upon seasonality.

We get hit by the summer vacation season and not just in Europe but also in the U.S. And so we'll be able to talk more about that impact when we get to our third quarter call, both for looking back on the third quarter and what the run rate looks like going into Q4..

And your next question comes from Josh Jennings with Cowen. Please state your question..

Just two TAVR questions. One, first, just on the Japan recovery. Can you just talk about or share any insights into [technical difficulty].

Excuse me, Josh, you're cutting out.

Could you pick up your handset?.

Sure.

Can you hear me now?.

Yes, much better. Thank you..

Sorry about that. Just 2 TAVR questions. First one, on the Japan recovery trajectory. Maybe just help us better understand any factors that are limiting the recovery in Japan and how you see that market shaping up in the back half of the year. And then the second question on - just on the PROGRESS trial.

Any updates on the enrollment pace, I believe, first patient was enrolled in close to the end of 2021. So we've been about 1.5 years of enrollment and could that trial complete enrollment in 2023 or in 2024? Thanks for taking the questions..

Thank you, Josh. So in Japan, what we have seen is a positive, like I said, sequential and also year-over-year growth in the quarter. It was below our expectation, but we believe it is transient for a couple of reasons. One, of the market, as you know, the market is still impacted from COVID and is still recovering from COVID.

And also, we believe it is transient, because we are very pleased with the early feedback of the launch of SAPIEN 3 Ultra RESILIA in Japan. So, we feel like we grew year-over-year sequentially below our expectation, but we are confident that we are going to improve this in Japan.

Maybe, Larry, you want to add anything here?.

Yes, I think that's right. I think Japan certainly got more impacted during COVID waves, I think, even than some other regions in the last year probably. And so as that stabilizes, we think that, that helps. And as Bernard said, we did see growth year-over-year and sequential. We just probably had higher expectations.

And I think that's what's reflected in our comments. But we're optimistic in the back half of the year that we're going to continue to see recovery in Japan, and that's all factored into our guidance. On PROGRESS, we don't have any updates on enrollment right now. I will say, overall, we've been pleased with how that trial has gone.

But probably investor conferences when we'll probably provide a more fulsome update on that and probably some more projections, we'll have a lot more information under our belt then that we can probably be a little more fulsome probably a little bit more accurate about our projections..

Thank you. Our next question comes from Chris Pasquale with Nephron. Please state your question..

Thanks. Scott, the 3Q EPS guidance is a little bit lower than the Street was modeling. It looks like operating margin is expected to contract by a couple of hundred basis points versus where you were in the first half and then bounce back in 4Q.

Is there anything in particular about the third quarter that drives that margin dip?.

Well, the only thing particularly about Q3 is we pick up the summer seasonality, which hits us on the top line. And generally, the expenses continue to go through and are not as seasonal. That's really what it reflects..

Okay. And I know Cath is not on the call today, but just looking at the Critical Care guidance, that business has been running hot here double-digit growth first half of the year. It looks like guidance assumes a pretty meaningful decel in the back half.

Is that just tougher comps or is there something in particular you're looking at there?.

No, exactly. You got it. We had a great Q2 after a great Q1, very balanced across all product lines. And we didn't change the guidance even though we changed the guidance in the last quarter, but it is more about a tough year-over-year comparison in the second part of the year. Thanks for the question..

Thank you. And our next question comes from Matt Miksic with Barclays. Please state your question..

Hi, thanks so much for taking the question. So I wanted to follow-up on this very strong performances in SAVR and good, but not as strong performance in TAVR and as it pertains to staffing. And I know you talked about price a little and volumes.

But can you talk a little bit about given that TAVR interventional TAVR resources that sort of grew up during the clinical trials of TAVR across the clinical community in U.S., Europe kind of lost many of those folks who are maybe more proficient and are - good news, replacing them with other folks.

But bad news, maybe some of those folks are still coming up the curve.

If you could talk about - is that more of an issue on the TAVR side? And because SAVR surgical interventions are a bit more mature, that's less of an issue on - you've heard that from some centers that are sort of - are more productive, more skilled, more mature on one side versus the other, which is kind of one of the factors.

But it would be great to get some color and then I have 1 quick follow-up?.

Okay. Sure. Let me take a shot at that. So probably the biggest place we saw turnover on the TAVR side when things were about clinic coordinators. And I think we talked before about the number of valve clinic coordinators we train. And I think part of that is just a really demanding job.

There's a lot that goes into that in terms of screening and moving people through the system. And so, I think there's a lot. So we see a little bit more turnover than that than certainly. And we don't really have the same level of work on the surgical side because on the TAVR side, remember, patients have to get a CT.

They have to have a lot more work up. And not every patient gets the - most surgical patients, in fact, don't get a CT. And so, it's just easier to move surgical patients through the process because literally, if a patient comes in and they're deemed a candidate for surgery, they can move right to surgery within a matter of a few days or a week.

Where for TAVR, they're going to have to be scheduled for a CT, you got to roll out coronary disease and there's just other things that you have to do. So, there are pressure in staffing in the system that would have impacted across the whole system, but there's just more systems to impact on the TAVR side. We didn't lose our operators.

If not - those aren't the people we lost. We didn't lose our operators. We still have a lot of residents and a lot of people coming up through the system. So it's not so much the implanting positions as much as it is just general support staff..

Got it. That's helpful. And then just on - it's a question about some of the investments you've made and maybe group Bernard and rest of the team, the investments that we see coming through the clinical programs now like the EVOQUE and PASCAL or investments and innovations that you made some time ago.

And I'm just wondering - are you at a stage where you've got what you need to address these TMTT markets and sort of more advanced other valvular disorders? Or are you still out there hunting for sort of better mousetraps or additional technology and IP that we should expect to kind of further flush out those programs going forward? Thanks..

Thanks, Matt. This is a very good question. So think about our vision in TMTT. Our vision is there are so many patients in need, mitral and tricuspid. And we believe that to be able to unlock this very large market opportunity, we need a comprehensive portfolio. And we are building this comprehensive portfolio.

So what you can expect is us investing in innovation, next-gen innovation. So PASCAL Gen 2, Gen 3, Gen 4, the same with EVOQUE, the same with mitral replacement. So this is on the technology side. Then we know from our experience in TAVR, it is - you need a technology with evidence.

In TAVR, we - I don't know how many randomized clinical study we did 3, 4, 5 or even more potentially in the space, probably close to 10 between us and our competition. So here, we will have to think about the same way.

So we are - in my mind, we are not done at all in TMTT clinical evidence, and we are not done in term of further innovating to be able to treat all of the patients, mitral and tricuspid patients. We like definitely our technology, we like so far, our clinical evidence that we are providing and more to come..

Thank you. And our next question comes from Danielle Antalffy with UBS. Please state your question..

Hi. Good afternoon, everyone. Thanks so much for taking the question. Bernard or maybe, Larry, just on TAVR, two questions there. Number one, one of the things everyone's sort of trying to figure out as we move through Q2, is it impacted backlog.

I know the high acuity nature of the TAVR procedure are likely not much backlog, and I know you did benefit marginally in Q1. Just curious if you think you saw any of that work down in Q2? That's the first question.

Second question is just over the last few quarters, you gave some color on high volume versus low-volume centers driving a lot of the growth. Just curious if you could give some color there, whether this is really broad-based across low and high-volume centers. Thanks so much..

Yes. Thanks, Danielle. Yes, we think as the front end of the funnel starts to fill back up again with referrals and that I think there is a possibility that we are actually seeing a little bit of a backlog growth as we talk about the last mile still being probably the part that we see the most pressure on staffing.

I wouldn't be able to quantify that and it's probably just sort of more of a directional thing.

But the fact that we've seen the growth in TAVR for the first couple of quarters of this year, and we've been back into double digits and it's not like our centers are out beating the bushes for patients, we're pretty pleased with our patient flow right now. So I think that, that's obviously really positive.

I think in terms of large centers, small centers, we saw a dynamic throughout COVID that when COVID would - with sort of the way it would come through that people - we tend to see the smaller centers growing faster indicating people maybe stayed a little bit more local.

When COVID tends to go away, then people tend to go back to the centers, the large centers of excellence and they're willing to travel a little bit more. So I think we saw a little bit more growth in the large centers in this past quarter than we saw in the small centers, but that's something that has varied a lot quarter-by-quarter.

But this last quarter would have been more in the large centers than the small ones..

Thank you. And our next question comes from Richard Newitter with Truist Securities. Please state your question..

Thanks for taking the questions. Two here. The first one, just on reconciling the raise to the high end of the TAVR range and your Japan commentary relative to expectations.

Do you need Japan in a dynamic way to improve in the second half to hit the midpoint of your guidance? Or is that kind of what's embedded to get to the upper end? I'm just trying to reconcile those two pieces..

Yes. We're expecting Japan to perform better in Q3 and Q4, and that's a contributor to our assumption about the midpoint of the range. Now Japan does better than we're expecting, that could get us into the higher end of the range. And if it does worse, then a lower end of the range.

All of that said, Japan is still a pretty small percentage of our overall sales in TAVR, but it's an important one, and it's an important growth driver for us longer term..

Okay. And then just secondly - thanks for that. Secondly, just as we think about - especially in the U.S. TAVR, if you're at about 10% now, you've got RESILIA pricing contributing some amount.

So I guess if you're 10% with RESILIA, as we just think out, whether it's '24 or just on a normalized basis, should we be thinking of your view that the TAVR market has approached high single-digit volume growth sustainably as we think back to normalized levels.

Is that the right way to think about it?.

I'll try to answer that, and Bernard or Scott can certainly jump in as well. No, we don't think we're seeing an overall slowing of growth in the TAVR space. We think we actually have a pretty long runway here. We think there's still a lot of untreated patients in the system, and we continue to try to get through that.

And as I said earlier, I still feel like we're somewhat constrained within the system for staffing and we still put double-digit growth on the board in the first two quarters.

So I feel like there's still a long-term opportunity, and we haven't even begun to talk about the long-term impact of things like early TAVR and things like progress trial that obviously go out much further. So I think - try to think that this is going to go the way of population growth anytime soon. That's just not how we see it..

I'd just add to that, Larry, just to reinforce that, our confidence in a $10 billion total addressable market hasn't changed one bit in 2028.

And so while COVID interrupted our trajectory to that larger TAM, we still feel a lot of confidence that we've got big growth ahead of us, not just in with current indications in our current product portfolio but added to that, our new technologies and broader indications in the U.S., Europe and beyond..

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

Hi. Good afternoon. So two quick questions here. For the U.S.

markets, are there - is there any geographical spread for these large centers that are growing in markets that were still coming out of COVID versus the ones in the south that were faster coming out of COVID? Or was it broad-based geographically?.

Yes. When we were in the middle of COVID, we saw a lot of variation in the country based on where COVID was at any given point and because there was a lot of variation in health care policy for various different states in terms of how they reacted. So we saw a lot of different variations.

I would say most of those restrictions have sort of dissipated now. And I don't - we're not seeing anywhere near that high variability from state to state or region to region that we used to see, and that's certainly true in the U.S.

In Europe, we do see a little bit of regional impact a little bit more, where one regional enrolling faster than another region. But it's not anywhere near the exchange that we saw during COVID, where we saw huge swings now. They're much more muted now.

And I would say we -- if I look back through history, we've always seen a little variation in Europe from country to country. So it feels like it's maybe not normal, but it's getting pretty close to normal, I guess, I'd say..

Okay. Fair enough. And then like with the competitor talking about lower U.S. growth in mitral and they need to restart the referral network.

Can you talk about what you think the overall mitral market grew in the market, how your market share is looking and any changes to your long-term market growth of that market?.

So let me start here and Daveen, you can add some comments. What we have seen is a nice recovery in Q1 and in Q2 in the mitral market in the U.S. and even in Europe.

But I'm sure, Daveen, you have more precise commentary here to add?.

Yes, sure. No, definitely. I think I'll follow up and I say the overall TMTT market with both tricuspid and mitral continues to grow very well on a global basis, right, in that -- close to that maybe 20% kind of mark, globally. In the U.S., though, to specifically we're just in mitral, we do see strong growth.

I think, Bernard, were saying something like almost like double-digit growth, which is about the ballpark we kind of see in for U.S. mitral. So we think it's there, but not as strong as it is on the global nature. As you remember, in many countries of the world, these technologies are just coming for the first time in there.

We're still launching this technology into many, many countries. We're in very few countries - there are countries in Europe, countries outside of Europe that we haven't even launched into yet. So we continue to see, as we launch in new countries, that will help the market grow as well as the continued adoption of mitral in the U.S..

Thank you. Our next question comes from Adam Maeder with Piper Sandler. Please state your question..

Hi. Good afternoon, guys. Thank you for squeezing in here. Two TAVR-related questions, I'll ask them both upfront. First on the ALLIANCE study, it sounds like that's going to restart enrollment this quarter.

Can you just talk about the effects or improvements to get SAPIEN X4 back in the clinic? And remind us where we are in terms of enrollment with that study. And then the second question is just a clarification on S3 Ultra RESILIA. I know you're launching that, obviously, here in the States. I think that's approved in Japan in launching.

What is the status that - of that technology in Europe? Thanks for taking the questions..

Sure. Thanks. Well, in terms of the changes we made to X4, they were all delivery system related. So there weren't any changes made to the valve or anything along those lines, which is why we were able to make the changes pretty quickly and get back in the clinic. And so we're really pleased where we are. And we're all approved to begin enrollment.

Now all the centers have to go back in and go back to the IRBs and whatnot. But we have a number of centers that are already greenlight and ready to go. So we expect to begin enrollment again very, very shortly. And I'm not ready to give an update on enrollment, much probably like PROGRESS.

We'll probably do that at the investor conference once we have a little bit more of a run because it's not really about where we are, it's projecting where we think we're going to finish. And so I'd rather give you a more fulsome answer on that a little bit later. S3 UR, we're working with European regulators on that.

But remember, there's been a huge change in the regulations in Europe to the MDR process. And there's also just a huge bottleneck in terms of the number of devices that are working their way through the system there. So we don't have any timing on that.

Frankly, all the notified bodies are sort of learning about how the new regulations play and as are all the sponsors. So we don't have any timing on that yet. But we do have it approved in Japan, and that launch is well underway. We do have it approved in the U.S., and that's underway.

And in both of those markets, we expect that to be the majority platform as we exit the year..

Thank you. And ladies and gentlemen, we have now reached the end of the question-and-answer session. I will now turn the call over to Bernard Zovighian for closing remarks..

Thanks, Diego. So let me close this meeting by saying I am excited about our performance so far in 2023 and confident in our outlook for the rest of the year. In addition, beyond the numbers, I am pleased with our progress on pipeline development, clinical trial and confidence in our long-term strategy to help even more patients.

Thank you for your continued interest in Edwards, Mark, Oliver, Scott and I welcome any additional questions by phone..

Thank you. And that concludes today's conference. All parties may disconnect. Have a good evening..