Edwards Lifesciences Corporation (EW) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Edwards Lifesciences First Quarter 2020 Results. At this time, all participants are in a listen-only mode. After the formal presentation, we will follow with a question-and-answer session and instructions will be given at that time. [Operator Instructions].Without any further ado, I will now turn the call over to Mark Wilterding. Mr. Wilterding, you may begin.

Thanks, Victor. 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. Just after the close of regular trading, Edwards Lifesciences released its first quarter 2020 financial results. During today's call, management will discuss the results included in the press release and accompanied financial statements and then use the remaining time for Q&A.Please note that management will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but aren't limited to financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters and foreign currency fluctuations.These statements speak only as of the date on which they are made and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties including but not limited to those associated with COVID-19 pandemic that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product that safety information may be found in the press release, our 2019 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 underlying and adjusted, management is referring to non-GAAP financial measures, otherwise they’re referring to GAAP measures. Reconciliations between GAAP and non-GAAP numbers mentioned during this call are included in today's press release.With that, I'd like to turn the call over to Mike Mussallem for his comments. Mike?

Thank you, Mark. Before we dive into our first quarter results and updated 2020 outlook, I'd like to give you a broader sense of what's happening at the company in light of COVID-19 and how Edwards has responded during these challenging times. As you'd expect, our priority has been to continue to serve patients counting on us, support our clinical partners and protect the wellbeing of our employees.We are striving to maintain continuous access of our lifesaving technologies, as well as offering frontline in-hospital support. Most importantly, on behalf of everyone at Edwards, I want to express our gratitude to our clinician partners and the global healthcare community for their tireless dedication to serving patients during this challenging time. We appreciate their strong leadership and brave commitment to patient care and we're dedicated to supporting them as they address this global health crisis.I'm encouraged by the recent indication of plateauing and even declining infection rates and deaths from COVID-19 in many areas around the world. But we know that healthcare workers on the frontline continue to face unprecedented challenges.In the words of Dr. Craig Smith from Columbia University, I am confident that we will sail through this together in due time. I also want to recognize the extraordinary actions of our 14,000 employees around the world that have taken to overcome the unique challenges associated with COVID-19.Edwards is proud to be a member of the critical healthcare infrastructure and I admire the agility, resourcefulness, and passion of our employees in maintaining their important work on behalf of patients and also volunteering their help in our communities during this difficult period of time. Thanks to our global supply chain team and our government and regulatory partnerships around the world.Despite significant challenges, our manufacturing operations have continued to deliver and we've been able to supply our technologies to more than 100 countries around the world. Our dedicated manufacturing employees have been able to consistently meet the global demand for our structural heart technologies.As noted at our December investor conference, we focused energy and resources to improve the capacity and agility of our global production facilities over the last few years and it's really become apparent at this time. In Europe, there's been an increased need for supply of our pressure monitoring products in critical care. We're grateful to our employees, who’re making progress to more than double our production to keep up with this demand and serve critically ill patients in need.Our valued third-party suppliers are a critical piece of this infrastructure and we work closely with them in an effort to avoid disruption. We are proactively managing capacity, assessing alternative logistic options and closely managing the supply of components. Our team's commitment to delivering life saving technologies to patients is unwavering. I also want to commend our clinical field teams for their work providing real time support for patients and frontline clinicians at this time when it's needed most. Their courage and resiliency in assisting clinicians and patients has been truly impressive. In March alone, Edwards provided clinical support for TAVR procedures in all 50 states in the U.S., and in almost 60 countries around the world.At all times, we have adhered to important measures to protect the safety of our employees, while also continuing the critical work of providing life saving technologies for patients. We'll continue to rely on trusted global health sources, governments and local hospital policies to inform our decision making. Because of our strong team and patient focused culture, I have absolute confidence in our ability to successfully navigate this unprecedented global crisis.Finally, I want to recognize the important role and impact of our charitable partners in meeting both local and global community needs at this time. To respond to these needs driven by the pandemic, the Edwards Lifesciences Foundation issued emergency grants to more than 20 partner organizations and communities where our Edwards employees live and work around the world.Additionally, Edwards is providing donations of critical care technologies during this crisis to help physicians care for underserved patients. We will stay closely connected to our charitable partners to understand other ways that we can help in our communities. Also, in the first quarter our foundation achieved its longstanding goal of screening and treating more than 1.5 million underserved people in over 35 countries, through our Every Heartbeat Matters initiative. It’s truly a remarkable effort by our charitable partners, and one that inspires me personally.We're using our knowledge gained from our first phase of Every Heartbeat Matters to set a new bold goal to improve the lives of 2.5 million more underserved structural heart and critical care patients by the end of 2025.Finally, before I get into our results, it was 20 years ago this month we rang the bell at the New York Stock Exchange, marking the spin off from Baxter and officially beginning our journey as Edwards Lifesciences. And it's been an incredible journey and we are not done yet. Not even close. While we continue to actively monitor COVID-19 and its potential business disruptions, we remain confident in our long-term patient focused strategy and innovation pipeline. There are still many patients in need. I remain very confident in our global team and culture that once this crisis passes, and it will pass, together, we will achieve many more successes.Now turning to first quarter results. Despite challenges associated with COVID-19, we reported $1.1 billion in sales this quarter, representing 14% sales growth. In Transcatheter Aortic Valve Replacement or TAVR, our first quarter global sales were $742 million, up 25% on an underlying basis. Our global TAVR sales growth through early March was consistent with our strong fourth quarter global growth rate. This was dramatically impacted in the last few weeks of the quarter as procedures fell as a result of the COVID-19 disruptions. As you might expect, procedure volumes in March varied greatly by geography, even by hospital as patients and providers turned their focus to the pandemic.Estimating TAVR procedure growth is more challenging than ever in the current environment. We anticipate being able to better position -- to be in a better position to estimate TAVR procedure growth and our competitive share once the global situation begins to normalize. Globally, average selling prices were stable.In U.S., our TAVR sales grew approximately 30% on a year-over-year basis in the first quarter. Our U.S. TAVR sales growth through early March was consistent with our strong fourth quarter growth rate driven by a step up in TAVR treatments as new patients entered the system independent of their surgical risk.During the last few weeks of the quarter, procedures dropped precipitously, and were highly variable across the country.The rollout of SAPIEN 3 Ultra continued to be very positive in the first quarter and clinician feedback on improved paravalvular leak performance remains outstanding. Ultra accounted for more than 30% of our U.S. and European TAVR volumes exiting the first quarter. To ensure the safety of our employees and clinician partners from the threat of COVID-19 however, we've decided to pause proctoring of centers that are not already trained on the device. We anticipate resuming the SAPIEN 3 Ultra rollout as soon as we go back to a more stable environment.As you may recall, we committed to following the PARTNER 3 patients for 10 years and in March, the two year follow up was presented at the virtual ACC Conference. Overall, we were extremely pleased that the clinical outcomes of SAPIEN 3 in low risk patients continues to be excellent at two years.Outside the U.S. in the first quarter TAVR sales grew in the mid-teens year-over-year on an underlying basis. In Europe, Edwards’ growth was even stronger than our fourth quarter and better than expected through early March, before being impacted by dramatically slower procedure growth related to COVID-19. Despite this headwind, we were encouraged by the strong adoption of TAVR across most countries.In Japan, we saw very good TAVR adoption. First quarter procedures in Japan were not meaningfully impacted by COVID-19, although we expect it to negatively impact Q2 sales there.In summary, based on what we know today, we assume the impact of COVID-19 on our TAVR sales will be the most severe in the second quarter, followed by a gradual recovery in the third quarter and in fourth quarter that resembles our original expectations for sales. Although we're encouraged by recent news of improving infection rates from COVID-19, we also recognize the high degree of continued uncertainty in terms of hospital procedure volumes.We now estimate global TAVR sales growth for 2020 to be flat to 2019, with a range of minus 5% to plus 5%, versus our previous expectation of approximately 15% sales growth.However, what we know for certain is that severe aortic stenosis is relentless, and Edwards remains committed to delivering critical solutions to these patients even in the face of the extraordinary challenges caused by COVID-19. We remain confident that the opportunity will exceed $7 billion by 2024.In transcatheter mitral and tricuspid therapies or TMTT, first quarter global sales were approximately $10 million. From a commercial standpoint, we experienced strong momentum and accelerated adoption of PASCAL in Europe. We continue to be pleased with PASCAL's acute clinical outcomes and physician feedback remains positive. We were tracking to our expectations until the last few weeks of the quarter, when sales declined abruptly due to the impact of COVID-19.As previously announced, we've temporarily paused new enrollments in our mitral and tricuspid active pivotal clinical trials. We are coordinating closely with the trials’ investigators and the decision to resume enrollment will be made in consultation with each investigator and hospital. We remain laser focused on our vision of transforming care for patients with mitral and tricuspid valvular disease by developing a portfolio of innovative therapies supported by a growing body of clinical evidence.We continue to gain experience and make meaningful progress across the portfolio and you can expect to hear informative updates regarding PASCAL, Cardioband and EVOQUE at the upcoming EuroPCR medical meeting. In Q2, we expect a significant negative impact on transcatheter mitral and tricuspid procedures as healthcare systems focus on fighting the pandemic since these procedures currently require general anesthesia and an ICU stay.We anticipate recovery beginning in Q3 and remain committed to our strategy of ensuring procedural success and differentiated patient outcomes through our high-touch support model. We are revising our revenue range to $30 million to $45 million for the full year from our previous expectation of $50 million to $70 million. We feel confident that we're well positioned to navigate and manage through these unprecedented challenges with our long-term strategy and dedicated focused team.We continue to estimate the global TMTT opportunity will reach approximately $3 billion by 2024 and are passionate about bringing solutions for these deadly diseases and improving patients’ lives around the world. In Surgical Structural Heart, first quarter sales of $193 million declined 9% on an underlying basis. As expected, driven by the rapid adoption of TAVR, the U.S. surgical aortic valve procedure headwinds experienced in the fourth quarter persisted into the first quarter.During the last few weeks of March, we experienced a sharp deceleration in procedures related to COVID-19. We remain very encouraged by the continued adoption of our premium INSPIRIS RESILIA aortic valve, which is driving an increasing share of surgical aortic valve procedures. Based on favorable patient outcomes and positive physicians’ feedback, it's not surprising that in INSPIRIS valve has become the number one implanted surgical aortic valve in the U.S. and Japan.In Europe, HARPOON, our beating heart mitral valve repair system is now available commercially and we plan to launch it as the environment stabilizes. In addition, we're also pleased to report that we recently received FDA approval to begin our U.S. pivotal IDE study and begin enrollment to begin -- and expect enrollment to begin in the second half of 2020. Recall that HARPOON offers the potential for earlier treatment of degenerative mitral valve disease with faster recovery and more consistent outcomes for surgical patients.In summary, because of the impact associated with COVID-19, we now expect Surgical Structural Heart sales for full year 2020 to decline 5% to 15% from 2019 versus our previous expectation of zero to 3% growth. Our expectation is that lower case rate at the end of Q1 in the U.S. and Europe will continue in Q2.We anticipate that our Q4 sales will return to positive growth, driven by market adoption of our newest technologies. As we move beyond COVID-19 and even as transcatheter technology expands, we're excited about our ability to provide innovative surgical treatment options for more patients and extend our global leadership in premium Surgical Structural Heart technologies.To summarize, TAVR, TMTT and Surgical, as the COVID disruption subsides there ultimately are structural heart patients who delayed their treatment and will get treated. However, sadly, we expect that because of these delays, some patients will worsen and not survive the delay given the deadly nature of these chronic conditions. It's difficult to quantify the impact on patients at this time but recall data published in the Journal of Thoracic Surgery suggests that patients waiting for aortic valve replacement have a 4% mortality risk at one month, 8% at three months, and 12% after waiting six months. This is a very difficult time for structural heart patients as they weigh the risk of COVID-19 versus the severe effects of progressive heart valve disease.In Critical Care, first quarter sales of $183 million increased 1% on an underlying basis. Growth in the first quarter was driven by greater demand in Europe, primarily for our TruWave disposable pressure monitoring devices, partially offset by lower demand for our enhanced surgical recovery products. Recall that our Critical Care product line is focused on helping two distinct groups of patients. The larger of which require hemodynamic monitor -- monitoring in the surgical setting, and the smaller group who require support in the ICU.While the pandemic remains active, revenues from our enhanced surgical recovery products will be significantly lower, partially offset by increased demand for ICU products. We have also seen some delay in HemoSphere orders in the U.S., as hospitals limit their capital spending as they focus on COVID-19.In summary, because of the uncertainty related to COVID-19, we now estimate Critical Care sales growth for 2020 to be flat to 2019 with a range of minus 5% to plus 5%, versus our previous expectation of 6% to 9% growth.And now I'll turn the call over to Scott.

Hey thanks a lot, Mike. Today I'll provide a perspective on the first quarter along with some additional directions on how the rest of the year may unfold based upon what we know today. I'm very pleased with the overall financial results in Q1, including our sales of $1.1 billion. Appreciate that our results reflected two very different periods during the quarter. Through early March, our total sales were running a little ahead of our expectations, with notable strength in TAVR in Europe. Pre-COVID we were running at underlying growth rates closer to the fourth quarter of 2019 than to our Q1 guidance expectations.The second phase of the quarter was when we felt the impact of COVID in Europe and the U.S. and sales in the last few weeks of March were substantially lower than we originally expected. Our sales in April remain depressed, even though COVID admissions appear to be plateauing.While our sales in Q1 were lower than expected, so was our spending, so that adjusted earnings per share in the first quarter was $1.51, which was within our guidance range. GAAP earnings per share was $1.47. a full reconciliation between our GAAP and adjusted earnings per share is included with today's release.Now, I'll cover the details of our first quarter results as well as discuss guidance for the balance of the year. For the first quarter, our adjusted gross margin was 76.7% consistent with the prior year quarter. This year's rate benefited from a favorable product mix offset by lower foreign exchange hedge gains and spending in support of the new European Medical Device regulations. COVID didn't have much of an impact our GP rate in the first quarter. Although we'll see the negative impact from COVID later this year as the higher cost inventory is sold.Regarding operating expenses, first quarter expenses were lower than expected primarily as a result of the COVID impact. Some expenses declined naturally due to less travel and meeting expenses, as well as delayed clinical trial activity. We are implementing cost control measures. And at the same time, we have intentionally not implemented actions to significantly reduce our investment plans supporting our long-term growth strategy. Our priority has been to keep our people safe, secure and focused on helping patients.Selling, general and administrative expenses in the first quarter were $308 million or 27.3% of sales compared to $280 million in the prior year. This increase was driven by additions we have made in field clinical personnel to support TAVR cases in the U.S. and TMTT in Europe.Research and development expenses grew 9% to $187 million, or 16.6% of sales, compared to $171 million in the prior year. This increase was primarily the result of continued investments in our transcatheter mitral and tricuspid therapies. As we announced previously, we made a strategic decision to pause TMTT clinical trials in response to the urgent COVID-19 response around the globe. This will have a moderate negative impact to sales and results in a corresponding reduction in planned research and development spending for the remainder of the year.Turning to taxes, our reported tax rate this quarter was 14.8%. This rate included a 270 basis point benefit from the accounting for employee stock based compensation, which was 230 basis points, or $0.04 unfavorable to our guidance expectation. Our rate this quarter also benefited from a favorable tax audit settlement. As a result of increased uncertainty, we now expect our full year 2020 tax rate, excluding special items, to be between 11% and 15%.Foreign exchange rates decreased first quarter sales growth by approximately 0.9% or $8 million compared to the prior year. At current rates, we now expect an approximately $50 million negative impact or about 1.5% to full year 2020 sales versus 2019.Foreign exchange rates negatively impacted our first quarter gross profit margin by 30 basis points compared to the prior year. Relative to our January guidance, FX rates positively impacted earnings per share by about a penny reflecting our effective currency hedging program.Turning to the balance sheet, we have a very strong balance sheet with approximately $1 billion in cash, cash equivalents and short-term investments at the end of the quarter. In addition, we have an undrawn line of credit up to $1 billion and our public bonds don't mature until 2028. Additionally, we continue to generate healthy cash flows. Consistent with our practice of opportunistically repurchasing shares, we purchased 3 million shares for $615 million during the first quarter.We started buying back stock in the open market in February. In March, shares were purchased by a bank on behalf of Edwards through a preestablished 10b5 program. This program automatically went into effect when Edwards’ stock price declined with the market selloff. We still have remaining share repurchase authorization of $625 million. Average shares outstanding in Q1 was 211.7 million and we are updating our guidance for average shares outstanding for the full year to 210 million to 212 million, down from 212 million to 214 million.Please note that we will host our Annual Shareholder Meeting virtually this year on Thursday, May 7th. As outlined in our proxy statement filed last month, one of the proposals to be voted on by our shareholders will be to increase the number of shares outstanding for the purpose of effecting a 3 for 1 stock split. We expect to make split adjusted financial information available under our Investor Relations website following the execution of the split.Adjusted free cash flow for the first quarter was $125 million defined as cash flow from operating activities of $207 million less capital spending of $82 million. Our first quarter free cash flow is traditionally our lowest quarter during the year. We are not updating our free cash flow guidance for the year. Although, we expect it will fall short of our original expectation of $1.0 billion to $1.1 billion.Now I'll turn to the guidance for full year 2020. As you know, we cannot accurately predict the progression of COVID nor the timeline or extent of the disruption to hospital procedures utilizing the therapies Edwards provides. As a result, there is a wide range of potential outcomes for sales and earnings and we will provide a wider-than-usual range of 2020 guidance based upon what we know today.We have modeled multiple scenarios based on the pace at which hospitals return to more normal treatment rates. Our guidance assumes the impact of COVID to be most severe in the second quarter followed by a gradual recovery during the course of the third quarter and a fourth quarter that comes close to our original expectations. Based upon our recovery assumptions, Edwards’ sales growth for the full year is estimated to be flat to 2019 with a range of minus 5% to plus 5%. That reflects TAVR and Critical Care growth of flat to 2019 with a range of minus 5% to plus 5%; Surgical, minus 15% to minus 5% versus 2019; and TMTT revenues of $30 million to $45 million.The recovery of our structural heart businesses will be influenced by many factors and tempered by the time it takes for patients to seek and receive treatment. It's common for the screening process alone to take two to three months. 2020 sales guidance for the total company is now expected to be $4.0 billion to $4.5 billion versus our previous range of $4.6 billion to $5 billion. For the second quarter, we estimate sales of $700 million to $900 million.We've also modeled more conservative recovery scenarios versus our base case, such as a recovery beginning later in the year, or a recovery followed by a resurgence in COVID that extend these conditions into 2021. We are not providing financial guidance related to those scenarios. But we are prepared to operate under those conditions if necessary. Our guidance does not anticipate a second wave of COVID-19.So overall, while providing guidance that’s subject to an abnormally high level of risk, we're providing you a transparent view of our forecast. We'll obviously continue to provide visibility into how our thinking evolves in the quarters ahead.Before I turn it back to Mike, I'll make one additional comment about our team at Edwards. In the last couple of months we've learned how to communicate in new ways internally and with all of our external partners, keep the global infrastructure and systems of Edwards running smoothly, and even close our books remotely. It has made us a stronger team and I'm confident we will continue to succeed with our patient-centered strategy and sustainable growth goals.

Thanks, Scott. So whether you're new to our story, or you follow the company since we went public 20 years ago, you know that our talented and dedicated team at Edwards has always put patients first. Never has this been more important than today. As we stand together with the global community, I'm grateful for our extraordinary team and our partners, and I'm optimistic about the future of continuing to deliver innovations to patients around the world.And with that, I'll turn it over to Mark.

Thank you, Mike. 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 reenter the queue and management will answer as many participants as possible during the remainder of the call. Victor?

Thank you. You have now reached our question-and-answer session. [Operator Instructions]. Our first question comes from Bob Hopkins of Bank of America. You may proceed with your question.

Thanks, Mike. So glad to hear everybody is well and congratulations on the strong results. I guess my first question is just on the guidance that you're providing. It seems like the Q2 guide at the midpoint is down about 25% year-over-year. Just curious, is that the run rate that you're on currently or is your current run rate a little worse than that?

So the -- it varies different as you can imagine by geography. It also varies very different by business. I can summarize it this way Bob. Q2 is going to be a really tough quarter. It's come down hard, and we're living that right now. Even the numbers that we're providing for Q2 is probably moderately better than it is right now. I might add that our structural heart businesses feel it even more acutely than our critical care business.

And then the follow-up -- and thanks for that, is just on the Q4 guidance, you just -- Mike or Scott, what are the things you guys considered, what are the things that sort of informed your view that we'll be all the way back to a normal quarter in Q4, despite this kind of, once in a lifetime, once in a generation type event we're going through right now? I am just curious, what are the data points that gave you that confidence that by Q4 you'll be all the way back to normal?

So it's a good question, Bob. And this is very tough to do. So we know that it's challenging time to estimate revenues. We're starting to see positive signs already. And so in the tone of the tenor we really -- we hear people preparing themselves to start recovery. And we know that that's going to take some time. We also know that the diseases we treat are very serious and that we expect those diseases are not easy to postpone. And we know that many of the patients that might have been treated in Q1, Q2 and so forth, might indeed be treated in Q4. And so the combination of those factors that encourage us to say that we’re likely -- and again, there's a broad range of possibilities but we’re likely to be in a more typical volume situation in Q4.

Victor, next question, please.

Our next question comes from David Lewis with Morgan Stanley. You may proceed.

So one kind of just follow-up question and I’ve a quick second one. Mike, just thinking of the fourth quarter recovery and not really talking about 2021 yet, but a lot of investors are fixated on if fourth quarter is going to be normal, it probably implies some sense of procedure recapture. But given the age of these patients and as you think about the low risk referral channel, to what extent do you think about or to what extent should investors be concerned about disruption to that referral channel, just considering the age of that patient and their willingness to sort of re-access the system in a post-COVID world? And then a quick follow-up for you.

Yes, no, it's very real. One thing for sure David is our patients were scared. They're afraid of COVID and it's meant that they have in many cases decided to stay home. So, there's many factors that influence the recovery. But if you do think of it as a bowl, as a funnel, there's been a bunch of patients that are waiting. So beginning the screening process again, that really needs to begin months in advance of the fourth quarter, is going to be key. It's going to be a big effort by the whole community. But I think the community is going to come to grips with the fact that this these heart valve patients, and AS patients in particular, really need to be treated and that they're in a dangerous situation, and we think that they are going to respond to that.So right now, the screening rates have not returned to prior levels, not even close. But we're anticipating that that's going to happen. And that's what will cause Q4 to be what it is.

And I know it's challenging to think about share right now just given the moving dynamics. But if we assume the first 2.5 months of the quarter, we're running kind of close to 30% consistent with fourth quarter, it's pretty clear that you were taking share in the market certainly in certain regions. Can you sort of talk about what you're seeing out there in the channel in the early part of the quarter as it relates to whether you think share was tied to capitalizing better than peers on new center expansion? Or you think this is now sort of definitive evidence that the unique attributes of S3 and low risk patients are sort of shining through with the clinicians?

Yes, thanks, David. Well, you know how we feel about SAPIEN 3 platform. We think it's outstanding and we think the PARTNER 3 study reinforced that and it's even nice to see this data that was generated at two years. But as we said, trying to estimate overall procedure growth is just really challenging right now in the current environment. We're going to be in a much better position to do that sometime in the future, but right now trying to speak to competitive share just seems inappropriate to us and will be -- make a lot more sense to do that once things normalize.

Victor, next question please.

Yes. Our next question comes from Joanne Wuensch with Citi.

A couple of questions here. I wanted to spend a moment on the ACC data. What did you think about the two year data? We did get some pushback comments from investors that at the two year mark the TAVR versus SAVR results close the gap a little bit. I would like to see your thought or hear your thoughts on that? And then I just want to go back to your comments on procedures. I'm trying to get my head around this concept of a catch up in terms of the patients that are being delayed. Did you dial that in, in your thought process for sort of a normal fourth quarter and/or are these patients ultimately just left out of the system? Thank you.

Yes. So I'm going to have a little bit of a follow-up on your second question, Joanne. Let me try and get at your first one. Overall we were just -- we were extremely pleased with the outcomes of SAPIEN 3 in low risk patients at two years. Now remember what this was. This was a one -- it was a one year trial, right, with a one year endpoint. But we agreed to follow these patients for 10 years. And so you're going to get a snapshot each year into the future.Yes, the numbers did come closer together. But one of the things that's positive is numerically TAVR stays superior to surgery at two years. Then it gets -- and it's still numerically better. So the numbers are quite small at this point, Joanne. So just a couple of deaths or a couple of strokes can change that - can be the difference between statistical superiority and just being called equivalent. And so if it's very small differences, but no we weren’t discouraged by that at all. We continue to be very encouraged.And your second question is about catch up and resuming normal of expected treatments. So I want to make sure that I'm answering what you're asking, Joanne. Are you asking what about the patient? Even if we catch up, there's a lot of patients that won't have been treated during 2020. Are you asking me to comment on those?

Yes. Because we have been trying to think about, okay, patients who are deferred now, at what stage should they come back into the system and the answer may be at the end of the year, 2021 or sadly never?

Yes. So if this is a really tough time for patients. And ultimately, there may be some structural heart patients who’ve delayed the treatment, who never get treated. And just because of deadly nature, some are not likely to survive. If you just run the numbers here, it gets to be an extraordinary large group of patients and that distresses us greatly. It's just the difficult times, the disease is clearly progressive. And so we know about some patients already anecdotally who have passed away on the waiting list, which is very sad. But no, this is a tough time as the world has turned their attention to COVID. It's not a great set of conditions for structural heart patients.

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

I guess from that line of thinking, I was just hoping you might give us some color that you're getting from your customers, or that you're thinking about in terms of supporting them through kind of the different phases of recovery? Have you talked to your possible customers about how they're going to manage in triage, some of the structural heart cases in the early phases of recovery and how they'll move to more normal operations to kind of inform some of your assumptions here?

Yes, thanks. Yes, we certainly have had a lot of conversations about that. And so what I'll share here will be somewhat anecdotal. It varies a great deal by region. You can imagine the situation in New York City is very different than what you might see in other parts of the U.S. and in other parts of the world, frankly.In the U.S. there are many people that are turning their attention to trying to get back to doing procedures again. You know hospitals are very dependent on doing procedures to be able to maintain their income and they also know that there are patients out there with real needs, and so they want to get back to it. There are various state regulations that they need to work through and then there's just a lot of machinery to start again.And in our case, we have to influence patients to come in and get screened again and begin that whole process. And so when procedures stop, screening also stops. And so that's the restarting of the system that's going on right now. And it's going to take some time, but I think people are clearly motivated to get it going and it is going to be highly variable, depending on where you are.

Just one follow-up. I know you've paused the TMTT trial, which makes sense. Do you have any sense for in your framework that you laid out here when you might be able to get those restarted?

Yes, that's a challenging one for us. The way it was paused, we're going to be able to open up individual centers when they're ready. If you're going to ask us broadly, what does that mean? Probably around two quarters. It's going to -- you're going to have a site-by-site restart. But I think a fair estimate is something like that we'd be disappointed if it went much longer. And we know that we have a lot of really motivated clinical investigators who encourage us to stop, but I think they are going to be the same people that encourage us to get started again.

Thank you. Our next question comes from Rick Wise with Stifel. You may now proceed with your question.

Hi, Mike. A couple of questions. One bigger picture to start with. And you've touched on this a little bit but as you reflect on -- as I start to reflect on a post-COVID environment, and again, you've highlighted that patients are going to be anxious coming back to hospitals, et cetera. It seems to me there's an argument that the post-COVID recovery environment actually accelerate TAVR adoption, given the desire to get patients better, faster, get them out of the hospital quicker. The opposite side of that coin obviously is that could accelerate pressures on surgical valve growth outlook. Is there any merit in that accelerate TAVR and pressure on surgical valve thought?

Yes. Thanks, Rick. And as you might imagine, there is indeed a wide range of outcomes. And so although it's very hard to say, but I think there are a number of people that are going to be motivated to go. The resources and equipment to restart TAVR given the short length of stay and the fact that it doesn't need an ICU could encourage people to try and get that procedure going, particularly considering how serious AS is. And so yes, there is a scenario where it could come up faster. But the other thing that we have to be clear on is, we've watched the system really screech to a halt. And so this -- it's a restart process. And indeed, I'm sure you know from your own research that patients are scared. And so getting them to re-enter whether it's hospitals or whether hospitals create places that patients can go and feel more comfortable, this is going to be the test of getting the system restarted. It's just a -- it's a wide range of possibilities.

And just as a second question. You emphasized a couple of times that there will be informative updates, which sounds like, I don't know, strong language to me at EuroPCR on PASCAL, Cardioband and EVOQUE. Can you just share with us what you're thinking, what it could -- not what the data will be, but what the updates are likely to consist of and what we should expect? Thank you so much.

Yes. Thanks very much, Rick. Yes, there are going to be a number of things accompanying probably a late-breaker and some oral abstracts and some posters, but probably two of that we call your attention to, on EVOQUE in the tricuspid position. I believe the early experience is going to be shared, which I believe is going to be 19 patients at 30 days. And so that will be the first time that the community has had a chance to see how that valve performs. And then in PASCAL, the CLASS study, actually the CE Mark study that evaluated both DMR and FMR patients, we will have 62 patients at one year and 109 patients at 30 days and six months. So it will be a nice informative update on those product lines for sure.

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

So Mike, how are you thinking about the pace of recovery for TAVR and may be SAVR compared to other types of procedures? Do you think valve procedures will come back faster because they're more medically necessary or do you think the advanced age of the patients make them reluctant to go to hospital? How do you think about that dynamic? And I had one follow-up.

Yes. Thanks, Larry. I don't have a strong view on other procedures. You know us, we're so focused on structural heart diseases, that's where we really put our energy. What we do know is that AS is particularly deadly and there is some data there that reinforces that. And so that makes us think that there is going to be a strong motivation for people to do this. And at a time when hospitals really want to get back to providing the care, and also I think they're frankly concerned about their economics, here is something that they can do that I think is really good for patients and it also helps them get back on their feet again.

That's helpful. And then, Scott, just on the guidance, just to put a finer point on it. Q3, should we be thinking about that as basically kind of flattish year-over-year or actually maybe down a little bit? Thanks for taking the questions.

Yes. Thanks for the question, Larry. It's tough to say, and we've intentionally not tried to breakout Q2 versus Q3 versus Q4. What we know is that our assumption is based upon second quarter being the most severe followed by a gradual recovery in the third quarter and a fourth quarter that ultimately better resembles our original expectation for sales. But where that crosses from being below our original expectations to meeting our expectations, there is something that we just can't put a fine point on it at this point.

Thank you. Our next question comes from Robbie Marcus with J.P. Morgan. Please proceed with your question.

Yes. Thanks for taking the question. I wanted to follow-up on Bob's question about second quarter. So we pretty much have one-third of the quarter in the bag here and $700 million to $900 million. I was hoping you could give us a little bit of what has to happen from this point to get to $700 million, what has to happen to get to $900 million? I know there is a wide range of outcomes. But just help us understand what hits the bottom end from here, what hits the top end? Thanks.

Yes. We're not accustomed to sort of slice it by month, Robbie, but I'll try and give you a little bit of color here. So the -- a lot of it is going to depend what COVID does itself and whether COVID keeps receding or not. Based on what we've seen so far, there needs to be improvement from where we are today to get to the middle of the range or certainly the top of the range. If we continue where we are today, we're going to be much closer to the bottom of the range. And it's just a wide range of possibilities in terms of how this quarter will play out. We probably never had a quarter that has a greater level of uncertainty as the second.

Got it. And Scott, I love hearing when companies do right by their employees during tough times. I was wondering if you help us think about some of the moving pieces down the P&L here for gross margin, SG&A and R&D, it sounds like you're investing in R&D. But maybe just help us put it all together down the P&L and how you reach the EPS? Thanks.

Yes, sure. So on gross margin, there are number of things that are really unusual that are happening right now, and it includes, obviously starting with reduced manufacturing volumes. We're proactively managing our capacity and our supply chain. We are looking for alternatives in terms of logistics and trying to offset expedited freight that will show up in our gross margin in a negative degree. And we just got other extra costs that are involved in supporting our manufacturing operations in our seven facilities around the world. So there will be pressure on gross profit.In terms of SG&A, we've had some natural declines just in travel and conferences and the timing on headcount growth because we're still a growth company. But there are just some natural headwinds to being able to complete those investments on the time schedule that we had originally envisioned.In R&D, most of it is just delays in clinical trial enrollment that we've talked about, and that's what's going to a certain extent gate our ability to invest in that R&D growth. And then you get into tax and shares outstanding, which we've talked about a little bit. I'm not sure those are really as dependent upon the recovery or specific to Q2 being so soft. Does that get to your question?

Yes. And I just might add that we have tried to really focus on prioritizing and protecting our employees and their jobs and we're not planning layoffs associated with this pandemic. And as I said earlier, we continue to support cases in every state and the countries around the world and we're going to do everything we can to continue to be a great partner through this entire process.

Thank you. Our next question comes from Matt Miksic with Credit Suisse. Please proceed with your question.

Hey, thanks for fitting us in. So a couple of follow-ups. One on new centers. Mike, if you could talk a little bit about -- that's been an important trend for developing the market and rolling out across the U.S., what were you seeing and what do you expect over the next couple of quarters as the system kind of restarts? And then I had one follow-up.

Yes. I don't have hard data on that one. We currently estimate that there is more than 700 centers and we said that -- and this was following the NCD that was approved last year that we're probably headed toward 850 in total. So I don't know the exact number to where we are right now. I can tell you that since COVID hit, we've stopped doing the training and are really focused on the existing sites. And so that’s probably going to change that adoption rate to some extent. But the bigger driver in terms of the way the Q1 was going before COVID hit was new patients coming off the sidelines. And that wasn't all concentrated in new sites, that was across the board.

That's helpful. Thank you for that. And then just the other on sort of some of the other geographies, and we're all quite focused obviously on what's happening in the U.S. and the hopeful signs that some hospitals that you mentioned are starting to open back up or thinking about opening back up to more like the surgeries. But in other geographies, can you give us some sense of either re-improving, reemerging elective procedures or the ability anywhere else in the world or how would you compare the rest, let's say, Europe and Asia to what you're seeing here?

Sure. So we would say in Europe, we saw a phenomena that was very similar to the U.S., which is a strict drop-off in March. Within Europe, some countries got hit much harder than others. But the net-net effect was Europe wasn't so different than the U.S. and we actually think that the recovery in Europe and the U.S. may not be so different. Interestingly enough, procedures in Japan in Q1 were not meaningfully impacted by COVID-19. We think that there is going to be a more pronounced effect in Q2. And it just seems from our perspective that the kind of the wave of COVID-19 patients in Japan is trailing what's happening in the U.S. and Europe by a matter of maybe weeks of some sort tough to know for sure. Those are the biggest markets. I mean there are other places around the world where TAVR is still young, like Australia and Latin America where there is still growth and not much impact from COVID. But those are kind of small numbers by comparison.

Thank you. Our next question comes from Raj Denhoy with Jefferies. Please proceed with your question.

I just wanted to build on these comments you made about the fourth quarter and getting back to where you thought you would have been kind of prior to this. And so when one thinks about kind of 2021, right, do you think about a growth rate in 2021 that is kind of normalized or do you think we actually will be at kind of a heightened growth rate in that year as we maybe make up some of these loss procedures in 2021? When do you expect the fall off to be as significant on a dollar basis as we're going to see here in 2020?

Yes. Sorry Raj, I mean, we're -- obviously it's premature for us to get into 2021 in a big way, but you can tell. When we say that we're going to start approaching recovery in Q4, you'd like to think that in 2021 we've got some pretty favorable comparisons. And so I would anticipate that.

Understood. And maybe just as a follow-up, a little bit of a follow-up to the last question. Germany is getting set to open up in a broad way, I guess the entire country in just next week. Have you picked up anything in terms of in anticipation for procedures to start to ramp in Germany or any early feedback as that country gets ready to open up again?

Yes. We don't have anything broad at this point, Raj, but we do hear anecdotal comments. I mean the physicians there are very active researchers and many of them want to start conversations about getting going again. So there's a few anecdotal conversations about that, but really no hard data about how Germany will start up.

Thank you. Our next question comes from Vijay Kumar with Evercore ISI. Please proceed with your question.

Thanks for squeezing me in, and I'll try to ask both of them at the same go. One, Mike, back to ACC, your competition was making some noise on bicuspid data in low risk. Just curious to get your views on have you seen any impact in the market? And related, on the competitive front, any update on the mitral litigation side? Thank you.

Sure. Yes, thanks, Vijay. So there's a lot of data on bicuspid and there has been some extensive published real world experiences. At Edwards, you know we're not contraindicated for these patients that we treat bicuspid patients with SAPIEN valves all the time. And our real world outcomes and these patients have been outstanding with the balloon-expandable SAPIEN 3. So we think that body of evidence is just going to grow and we expect there will be more data at cardiology conferences in the future. Your other question was about the IP. Yes, so big picture, I think we believe that our IP positions and we're prepared to defend them. We don't believe litigations necessarily in the best interest of patients, and we're going to hope that we can move through this. But there is a lot of litigation going on in a lot of countries with a lot of dates. And so it will be a continued source of noise at this point.

Thank you. Our final question comes from Danielle Antalffy with SVB Leerink. You may now ask your question.

Just if I could -- I just have one question. Just if I could on the recovery and the commentary, Mike, around losing some of these patients. I appreciate that these patients are very sick. However, in my checks, I'm hearing that the most urgent patients, i.e. designated their disease will progress too much that there they'll be re-hospitalized or won't survive over the next few months are being done today. Therefore, will these patients necessarily be lost? I guess I'm a little more bullish on the recovery curve as you probably saw with my upgrade. So just trying to get a sense of how confident you are that, that is going to be the case, because it sounds to me like a lot of those very sick patients are actually getting done? Thanks so much.

So you're right. Danielle. Certainly, there are very sick patients that aren't being done, right, we're not doing zero. But it's much lower than we expected to be doing at this time. And what I was trying to express, if you just think about it in a growth sense and it's a little bit dehumanizing. But if you think about what we were going to do and how many patients we're going to be treated during 2020 compared to the number of patients that we believe we're going to treat now, it's a much smaller number and that's a deep concern. We know that many AS patients do not get treated. And that's why that's actually one of the reasons why we are so enthusiastic about our work because we can get after this population that's not treated. So that pool of untreated patients just gets bigger, and we know that there is mortality associated with that.

Thanks for your continued interest in Edwards. Scott and Mark and I welcome any additional questions by telephone.

We have one final question with Josh Jennings here. Mr. Jennings, your line is now open.

Thanks for fitting me in here. I guess, I'll just keep it to one. Just in terms of your outlook for the competitive landscape, when a competitor is in the market, potentially a new competitor with an approval later this year, any change in terms of all in terms of the competitive headwinds, because we just imagine that getting cases proctored and moving forward with the launch could be a little bit challenging for the competitors. I just wanted to hear your thoughts on that? Thanks again.

This is the conference operator. My apologies. I believe we may have just lost our speaker. Mr. Wilterding, can you hear me? Ladies and gentlemen, I apologize. I believe our speaker has concluded the presentation here. You may now disconnect your lines at this time. Thank you for your participation.