Edwards Lifesciences Corporation (EW) Q4 2022 Earnings Report, Transcript and Summary

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

Thank you very much, Diego, and good afternoon, and thank you all for joining us today. With me on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, our Chief Financial Officer. Also joining us for the Q&A portion of the call are Bernard Zovighian, President of Edwards Life Sciences; Larry Wood, our Global Leader of TAVR and Surgical Structural Heart; Daveen Chopra, our Global Leader of TMTT and Katie Zimon, our Global Leader of Critical Care. Just after the close of regular trading, Edwards Lifesciences released fourth quarter 2022 financial results. During today's call, management will discuss those results included in the press release and the accompanying financial statements and then use the remaining time for Q&A. Please note that management will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but aren't limited to, financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters and foreign currency fluctuations. These statements speak only as of the date on which they were made, and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in the press release our 2021 annual report on Form 10-K and Edwards' other SEC filings, all of which are available on the company's website at edwards.com. Finally, a quick reminder that when using the terms constant currency, underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP results. Reconciliations between GAAP and non-GAAP numbers mentioned during the call are included in today's press release. With that, I'd like to turn the call over to Mike for his comments.

Thank you, Mark. During 2022, our company stayed focused on the long term, making meaningful progress on strategic milestones with the potential of transforming patient care. While the challenging environment negatively impacted sales, we still grew 8%. Looking forward, we remain optimistic that the health care environment will gradually improve and we expect 9% to 12% sales growth in 2023. We didn't pull back on investing in innovation because of the pandemic, and we didn't pull back because sales fell a little short. We continue to aggressively invest during this challenging period, which positions the company for sustained leadership in a new era of structural heart and critical care innovation. Looking back at 2022, in TAVR, we made important strides in executing our long-term strategy. We received approval and launched the innovative SAPIEN 3 Ultra RESILIA valve. In TMTT, each of our platforms demonstrated promising clinical performance, and we received approval for PASCAL Precision in the U.S. and Europe. In Surgical Structural Heart, we extended our leadership position through the launch of MITRIS in the U.S. And in Critical Care, we continue to drive adoption of our transformative smart recovery technologies. Although our initial sales expectations for 2022 anticipated a better environment, we delivered balanced contributions across each of our product groups and regions. We achieved 12% growth in adjusted earnings per share while maintaining R&D at more than 17% of sales, which reflects our commitment to driving durable organic sales growth. Consistent with our cash deployment strategy, we opportunistically repurchased stock at an accelerated level in 2022. We continue to invest in our production capacity in anticipation of future growth. and we made a series of external investments in promising early-stage technologies. Turning to our fourth quarter financial results. Consistent with our guidance, total company sales grew 7% on a constant currency basis to $1.3 billion. Our broad portfolio of innovative therapies drove this growth despite the health care disruptions in a number of our key geographies. In TAVR, full year 2022 global TAVR sales of $3.5 billion increased 7% on a constant currency basis, building on nearly 20% growth in the year ago period. Sales were below our original guidance of $3.7 billion to $4.0 billion due to foreign exchange headwinds and Covet induced health care challenges in key countries. In 2022, we announced the approval of SAPIEN 3 Ultra RESILIA in the U.S. Separately, we continue to advance enrollment in our PROGRESS pivotal trial for moderate AS patients and gained significant learnings from our alliance pivotal trial to study the next-generation TAVR technology, SAPIEN X4. These transformative developments reinforce our long-term confidence in the strong growth of transcatheter-based aortic valve interventions. In the fourth quarter, our global TAVR procedures were comparable with Edwards growth. Our global -- I should say, global TAVR procedures were comparable with Edwards growth. Our global TAVR sales of $868 million increased 5% year-over-year on a constant currency basis, consistent with our expectations. Sales were up slightly over Q3 in dollars and on a constant currency basis and local selling prices were stable. In the U.S., Edwards fourth quarter TAVR procedures grew in the mid-single-digit range. As expected, our fourth quarter U.S. TAVR procedure volumes were impacted by the U.S. hospital staffing constraints and the holiday season slowdown. We estimate that our share of procedures was stable. Growth in the U.S. was higher in larger volume centers and in states with fewer COVID restrictions as measured by the Daxferns Containment and Health Index. We're encouraged by recent hiring trends, which suggests that hospital employment is rebounding. As we mentioned, we began the introduction of SAPIEN 3 Ultra RESILIA in the U.S. the Resilient issues anti-calcification technology addresses one of the primary causes of reintervention following heart valve replacement and is demonstrating a strong track record of performance in Edwards Surgical house. As of now, this newest valve has been introduced in approximately 10% of U.S. TAVR centers and physician feedback has been encouraging. Outside of the U.S., in the fourth quarter, Edwards TAVR procedures also grew in the mid-single digits, and we estimate total procedure growth was comparable. In Q4, geographies outside of Europe and Japan grew even faster in the quarter. Long term, we see excellent opportunities for growth as we believe international adoption of TAVR remains quite low. In Europe, fourth quarter procedures grew in line with the global rate. Market growth continued to be impacted by a bump in the COVID cases and staffing shortages, which reduced hospital capacity, particularly in larger countries such as Germany. And even though there are a broad range of competitors, our leadership position and local selling prices remained stable throughout the year. Importantly, a cost-effectiveness study published earlier this month demonstrated that TAVR with SAPIEN three was economically beneficial when compared to surgical aortic valve replacement in treating German patients with low surgical risk. The data suggests that TAVR enhances quality of life and offers a cost-effective option over the long term. These findings are consistent with the cost-effective outcomes for the use of SAPIEN 3 in France, Italy and Spain. In Japan, fourth quarter procedure growth was much slower than expected due to an extended COVID wave and continued restrictions, which limited hospital staffing and capacity. We expect these factors to diminish substantially over the course of 2023 and look forward to launching SAPIEN 3 Ultra RESILIA in Japan later this year. We remain focused on expanding the availability of TAVR therapy driven by the fact that AS remains a significantly undertreated disease amongst this large elderly population. In summary, our outlook assumes COVID-related challenges improved during 2023 as hospital resource constraints decrease. We remain positive in our outlook for 2023 underlying TAVR sales growth of 9% to 12%, consistent with the range we shared at our December investor conference. We remain confident in this large global opportunity that will double to $10 billion by 2028, which implies a compounded annual growth rate in the low double-digit range. Turning to TMTT. Since launch, we have proudly treated more than 10,000 patients with the PASCAL repair system. We achieved significant milestones in 2022 and made meaningful progress toward achieving our vision to transform care for patients with mitral and tricuspid disease. Following the Class II presentation at TCT and FDA approval in Q3, we initiated the introduction of the PASCAL Precision system in the U.S. Initial feedback from clinicians has been positive, and we're pleased with the patient outcomes to date. Class IID full cohort of 300 patients with 1-year follow-up will be presented in the second half of 2023. In Europe, the PASCAL Precision launch is ongoing with a focus on bringing this latest advancement to our existing centers as well as expanding into new centers. Also aligned with our commitment to generate high-quality scientific evidence we continue to advance enrollment in our Class IIF pivotal trial for patients with functional mitral regurgitation. In mitral replacement, we're making good progress on the enrollment of the ENCIRCLE pivotal trial for SAPIEN M3 and expect to complete enrollment of the main cohort around the end of 2023. The sub French transfemoral valve leverages the SAPIEN 3 platform with a recapturable repositionable dock. Separately, we've completed enrollment in the MISCEND early feasibility study with the Eos valve and are incorporating the learnings from this early experience into our next generation. We believe the Eos platform has the potential to be an excellent option for mitral patients, who have a poor prognosis and limited treatment options. Shifting to tricuspid and our strategy of advancing the body of clinical evidence, we are currently enrolling two pivotal trials studying both tricuspid replacement and repair, TRISCEND II and the Class II TR. We prioritized enrollment in our TRISCEND II study, that study trial that's studying EVOQUE as it addresses the large population of patients who are suffering from debilitating systems and have few treatment options. TRISCEND II is on track for completion of enrollment in the first half of 2023, and we expect Evoke CE mark by the end of this year and U.S. approval around the end of '24. We're very pleased with the recent tricuspid data presented at PCR London Valves meeting which we reported favorable results from both our TRISCEND study of EVOQUE and the TriCLASP post-market clinical follow-up for PASCAL. In Europe, clinicians are very positive about the performance of our differentiated PASCAL Precision system in their tricuspid patients, and we're looking forward to bringing this therapy to patients in the U.S. following the Class II TR trial. Turning to the sales performance of TMTT. Fourth quarter sales of $32 million were consistent with our latest guidance and driven by the continued adoption of PASCAL in Europe supported by the early initiation of PASCAL Precision in the U.S. Full year global sales were $116 million, up nearly 50% on a constant currency basis versus the prior year. In 2023, we expect TMTT sales of $160 million to $200 million. We look forward to advancing our vision to transform the lives of patients with mitral and tricuspid valve disease through the milestones outlined in our recent investor conference. We remain committed to bringing this differentiated portfolio of therapies to patients with these life-threatening diseases and believe our strategy positions us well for leadership. In Surgical Structural Heart, full year global sales were $893 million, up 6% on a constant currency basis versus the prior year. Fourth quarter 2022 global sales of $224 million increased 8% on a constant currency basis over the prior year. We are encouraged to see strong global growth driven by the increased penetration of our premium RESILIA products despite COVID challenges in certain regions. Although hospital staffing shortages continue to be a concern, we believe that heart valve surgery was prioritized. We have seen strong momentum of the RESILIA portfolio globally. We believe that surgeons value the features and benefits of this advanced tissue technology for both aortic and mitral surgical valve replacement procedures. We saw adoption of the MITRIS RESILIA valve in the U.S. increased in the fourth quarter. And built upon previous generations of proven mitral valve technology, MITRIS offers greater ease of use and is designed to facilitate potential future transcatheter interventions. We are growing the large body of RESILIA evidence with our new Momentis clinical study to demonstrate the durability of this tissue in the mitral position. Enrollment in this study was initiated earlier this month. In summary, we remain confident that our full year 2023 underlying sales growth will be in the mid-single digits for Surgical Structural Heart, driven by the adoption of our most advanced technologies and growth of overall heart valve surgeries. Turning to Critical Care. Full year global sales of $855 million increased 7% on a constant currency basis versus the prior year. Fourth quarter Critical Care sales of $225 million increased 13% on a constant currency basis over the prior year. Growth was driven by contributions from all product lines and regions led by HemoSphere and Smart Recovery. In our Smart Recovery portfolio, adoption of FloTrac and ClearSight sensors featuring our unique hypotension prediction index algorithm RECONNECT remains strong. Demand for our pressure monitoring devices used in the ICU due to elevated hospitalizations in the U.S. As discussed at our recent investor conference, sales growth in 2023. We remain enthusiastic about our pipeline of critical care innovations, highlighted by smart recovery technologies designed to help clinicians make better decisions and get patients home to their families faster. And now I'll turn the call over to Scott.

Thanks a lot, Mike. Today, I will provide a wrap-up of 2022, including detailed results for the fourth quarter as well as provide guidance for the first quarter and full year of 2023. So as Mike mentioned, our sales of $1.3 billion in the fourth quarter grew 7% on a constant currency basis, despite the health care disruptions in a number of our key geographies. Our gross profit margin was healthy, even excluding the temporarily inflated rate due to FX. Combined with sales growth and disciplined spending, this resulted in adjusted earnings per share growth of 25% to $0.64. GAAP earnings per share was $0.65. Obviously, we were disappointed with our stock performance last year. The only upside to the poor stock price performance was that it provided an opportunistic time to repurchase shares more aggressively. During the fourth quarter, we repurchased $750 million of stock through an accelerated share repurchase program. And in total, we repurchased $1.7 billion of stock last year. Average shares outstanding during the fourth quarter fell to $616 million. We have approximately $900 million remaining under our current share repurchase authorization. For the full year 2022, sales increased 8% over the prior year on a constant currency basis to $5.4 billion. Adjusted earnings per share grew 12% and we generated nearly $1 billion of free cash flow. We expect our sales growth rate to expand in 2023 with a gradual improvement in hospital staffing. Although still early in the year, we saw encouraging signals during Q4 and a good start so far in Q1, which reinforces our confidence about the 9% to 12% full year range. We are maintaining all of our previous sales guidance ranges for 2023. Absent big moves in FX, we expect total company sales of $5.6 billion to $6 billion, TAVR sales of $3.6 billion to $4 billion, TMTT sales of $160 million to $200 million, Surgical Structural Heart sales of $870 million to $970 million and critical care sales of $840 million to $940 million. For the first quarter, we're projecting sales of $1.37 billion to $1.45 billion, and adjusted earnings per share of $0.58 to $0.64. Now I'll cover details of our results. Our adjusted gross profit margin in the fourth quarter was 81% compared to 76.8% in the same period last year. This improvement was driven by the expected positive impact from our FX program which includes hedge contract gains and natural hedges that offset the negative sales impact from the weakening of the euro and the yen against the dollar. At current foreign exchange rates, we continue to expect our full year 2023 adjusted gross profit margin to be between 76% and 78%. At current exchange rates, the reduction in this year's forecasted gross profit margin versus 2022 reflects 250 to 300 basis points of reduced benefit from FX plus some incremental inflation. SG&A expenses in the fourth quarter decreased 3% over the prior year to $411 million or 30.5% of sales, primarily due to the weakening of the euro and the yen against the dollar and partially offset by continued investments in the ongoing build-out of the U.S. TMTT commercial team and our high-touch model for TAVR. We continue to expect full year 2023 SG&A expenses as a percent of sales to be between 29% and 30%. Research and development expenses in the quarter were consistent with the prior year at $232 million, or 17.2% of sales. We continue to expect R&D expenses in 2023 to be between 17% and 18% of sales as we invest in developing new technologies and generating evidence to support TAVR and TMTT growth. Turning to taxes. Our reported tax rate this quarter was 13.3% and or 14%, excluding the impact of special items. We continue to expect our 2023 tax rate, excluding special items, to be 13% to 17%. Foreign exchange rates decreased fourth quarter reported sales growth by six percentage points or $73 million compared to the prior year. At current rates, we now expect approximately flat year-over-year impact from foreign exchange to full year 2023 sales. Foreign exchange rates positively impacted our fourth quarter gross margin by 230 basis points compared to the prior year. Relative to our October guidance, FX rates had a minimal impact on fourth quarter earnings per share. Finally, before turning the call back over to Mike, I'll finish with an update on our balance sheet and cash flow. We continue to maintain a strong and flexible balance sheet with approximately $1.2 billion in cash, cash equivalents and short-term investments as of the end of the year. Free cash flow for the fourth quarter was $214 million, defined as cash flow from operating activities of $283 million, less capital spending of $69 million. In 2023, we expect free cash flow to grow to $1.0 billion to $1.4 billion. And with that, I'll pass the call back over to Mike.

Thank you, Scott. [indiscernible] informational therapies covering solid financial performance. We expect higher growth and meaningful in 2023 with a gradual improvement in hospital. We believe to serve our patients -- we're confident that our patient-focused innovation strategy can transform care and bring value to patients and health care systems worldwide. With that, I'll turn the call back over to Mark.

Thank you, Mike. Thank you, Scott. With that, we're ready to take your questions. [Operator Instructions] Diego?

And at this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan.

Great. And before I ask, Mike, we couldn't hear your closing remarks before. So I don't know if you're a little far away from a microphone or not.

Okay.

There we are. Okay.

If you like, I'd be happy to give you the conclusion, why don't I give that for a second. Thanks, Robbie, and we'll she'll be first in line here. I just said, in conclusion, we're proud of the significant progress we made in advancing 2022 and the new transformational therapies for patients and delivering solid financial performance. We expect higher growth and meaningful progress in '23 with a gradual improvement in hospital staffing and growth across all major regions. And as the global population ages and cardiovascular disease remains the largest health burden, we believe that the opportunity to serve our patients will nearly double between now and 2028, and we're confident that our patient-focused innovation strategy can transform care and bring value to patients and health care systems worldwide. Thanks, Robbie. You're back up.

Great. Maybe to start, you talked about improving trends in TAVR and what you're seeing so far in first quarter. Maybe you could spend a little more time and give us detail on exactly what some of those improvements were throughout the quarter, how the quarter trended and what gives you confidence in the 2023 TAVR guide based on what you've seen so far?

Yes. I'm not going to get really deep into the quarter. As Scott mentioned, we had some really positive times during the quarter, where we saw some weeks were really strong. We had the normal seasonality that we see in a quarter where things get soft around the holidays. But if I just elevate, I think what's on the mind of some of our investors that we had a few quarters of single-digit growth, but that certainly does not dampen our enthusiasm for our strategy. COVID just wasn't kind to structural heart patients. And we know that there are many consequences of COVID affected global growth companies, including Edwards. So if we just replay, 2020, COVID drove pretty much flat sales growth for us. In 2021, it was a big growth year. Edwards grew 18%. And in '22, although we experienced the lingering impact of COVID, tough comparisons and all that we still grew 8% and more importantly, in '23, we remain confident that sales are going to grow 9% to 12%. So we just think the environment is going to improve. We feel strongly that COVID's impact is transient and that treating these structural heart patients is going to again become a priority.

Great. And maybe as a follow-up, you're a couple of months into the PASCAL launch in the U.S. I'd love to get the initial feedback of what you're hearing from implanters from hospitals and how the first quarter has gone for you so far?

Yes. Sure, Robbie. This is Daveen. I'll take that question. So far at a high level, feedback from physicians in the Pascal precision launch has been really positive, right? I think people love the ease of use, the navigation improvements of this new system and we know that we received early approval in the U.S. and Europe. So we're ramping the inventory to kind of improve these launches. And I think really in the U.S., our mantra is all about patient outcomes. And so we are really focused on our high-touch model. We're really focused on getting great clinical outcomes, gradual introduction have a really strong training program. So, so far to date, we've been really impressed with that. And finally, I'll say, I think we've got great Class IID data that came out, obviously, at TCT. And we're convinced that they'll have a positive impact in the tier market overall, and we think that more and more physicians would be interested in using the PASCAL Precision system.

Our next question comes from Larry Biegelsen with Wells Fargo.

I wanted to start with a high-level question. Obviously, there's a lot of concerns on the U.S. TAVR market, Mike, as you mentioned earlier, among investors. I wanted to ask about actually next year '24, because it looks like you have three major trials being presented potentially early TAVR for asymptomatic, the unload trial for moderate AS, TRISCEND II with EVOQUE for tricuspid. How do you guys rank these opportunities? And do you expect these three trials to accelerate your growth? And I have one follow-up.

This is Larry. Related to early TAVR, just as a reminder, that trial has a 2-year endpoint. So we just completed the 1-year follow-up at the end of last year. So we haven't -- these patients have another year to go. So that data wouldn't be available really until 2024. Unload is an IAS study, so that's really kind of out of our hands. We provide funding for that, but that's really up to the investigators in terms of when they present that data. And maybe I'll turn it over to Daveen for TRISCEND, or Bernard.

Yes, I'll just make a comment on TRISCEND. So for the TRISCEND II study, we expect obviously release the information in the second half of the year and release the information in the second half of the year. So we're excited about the data we think to help it. But as you pull up here, I think this all helps us make us feel good about this year and then driving into 2024.

Yes. And I'll just add -- this is Mike again, Larry. Yes, we're feeling positive about 2024. It's a long way off. So it's too soon to give guidance at this point. But when we look at the road ahead, we really think as the system learns to deal with COVID and it fades back into the rearview mirror that structural heart patients are going to get prioritized again. And we think that they're going to be anxious to treat these patients. We love our lineup of technologies, our lineup of clinical trials that are pointed in indication expansion. And so we see -- that's why we feel confident in that 2028 outlook.

Yes. And just to add on to that, we did see, as Mike mentioned, we saw some weeks in Q4 that were really strong. And I think it's just evidence that staffing is gradually improving, maybe not as fast as we want. And we certainly saw some impact, especially around the holiday period, but we still have the SAPIEN 3 UR launch. We have other things that we're really excited about, and we feel very good about next year -- or this year, sorry.

That's helpful. Just a quick follow-up. I didn't hear anything -- sorry if I missed it on the Alliance trial in Safety and X4, is there an update there?

Yes. No, we don't have any update there. I think what we said at the investor conference is we expect to be back in clinic this year, and we still anticipate that. But we don't have anything new to add.

Our next question comes from Vijay Kumar with Evercore ISI.

I think for the first question, Mike, on the TAVR trends, I think U.S. was up mid-singles overall TAVR up mid-singles, implies international was mid-single. So maybe talk was there any China impact or would happen in international. And I think on the last call, you noted half the centers in the U.S. were up double digits, half then were flattish. Was that a trend that you saw this quarter as well? Or how are you thinking about TAVR progression here?

Yes. I'll talk a little bit about OUS and then Larry can get a little deeper in the U.S. So outside the U.S., procedures grew in the mid-single digits. And as we mentioned, outside of Europe and Japan, it grew even faster. In Q4, we experienced some challenges that resulted in sort of, if you will, the U.S. and Europe in mid-single digit as expected, Japan was worse than we thought, and the rest of the world was better than we thought. So that's sort of the way that things kind of netted out. We expect contributions from all the regions to be better in '23 as we are projecting that 9% to 12% growth rate. Your other question was trying to differentiate what was different in the U.S?

Sorry, half the centers were up double digits, I think, last quarter. Was there a trend that you saw this quarter as well?

Yes. We saw significant variation on a site-to-site basis. Clearly, some centers, and I think it maybe reflects kind of localized COVID restrictions. Some centers certainly did better than other centers. And gradually, we see that improving over time. But larger centers probably did a little bit better than the smaller centers. You had a question on China as well. China was certainly impacted, but for our TAVR business, it's such a small base. It's not a huge driver one way or the other.

That's helpful, Larry. And Scott, maybe a quick 1 for you. I think Q1 guidance here at the midpoint almost, I think it's hinting at 10% organic, close to high single, low double organic -- what's driving the sequential acceleration from the high singles organic we saw in Q4? Has the visibility improved? Or just talk about assumptions around Q1?

Well, it ties to what we've been talking about so far on the call, our guidance for Q1 is $1,350 to $1,450 million, so call it $1.410 billion in sales at the midpoint of the range. Which is if you just sort of think about how the year is going to play out at the lower end of the 9% to 12% underlying growth rate guidance that we've given for sales. So your question is what happened between Q4 and Q1 and it ties back to we're just seeing generally a favorable environment, hospital staffing levels and health care disruptions gradually getting a little bit better. And it's really very similar to what we talked about at our investor conference and reinforces our confidence about the 9% to 12% growth rate that we can achieve for the full year in 2023.

Our next question comes from Matt Taylor with Jefferies. We'll move on to the next question. Our next question comes from Matt Miksic with Barclays.

So I'll keep it to one question. Just on some of the comments that you talked about, Scott, I think in your comments around starting to see some encouraging trends early this year, gradual improvements maybe towards the end of Q4. Given the sort of many things that have been talked about as potentially having this sort of slowing impact on U.S. TAVR trends around staffing availability of nurses and the confusion around some centers being double digits and some being slower. Can you maybe talk about a few things that you are seeing that sort of bring you to sort of point out this encouraging trend. Which of these things you're getting better? What gives you that encouragement?

Well, it's a good question. It's tough to isolate all the elements that are going into just the first couple of weeks of the year. But generally speaking, overall, it seems like the trends are favorable. And this is what we expected to happen in 2023 with hospital staffing constraints abating with overall disruptions in the health care system, getting a little bit better in the U.S. and outside of the U.S. And just the multiple different signals that we see and anecdotes that we hear give us confidence that we're on the right track. And again, looking to the 9% to 12% growth rate guidance for 2023. January, it's pretty early to say, but obviously, we wouldn't the signals that we've seen in January are reflected in the guidance that we've given in that $13.70 to $14.50 sales range for the first quarter.

Our next question comes from Joanne Wuensch with Citibank.

I have two quick ones. It looks like you have 81% gross margin in the fourth quarter, your guide for '23 is the reversal of your FX hedges. Can you walk us through sort of -- should we just straight line it down over the next couple of quarters, how we should think about that? And then the second question, it sounds like things are getting better. Are you seeing wait lists cropping up in different places?

Why don't I take the first piece, and then I'll let somebody else jump in on the wait list question. Just in terms of gross margin, it's pretty simple. I mean there are a bunch of little moving pieces. We always get a little bit of benefit from mix. We get a little bit of benefit from all of the activities we have to improve efficiency in global supply chain. But really, the difference between the gross margin in the fourth quarter of 2022 and the full year 2022 versus the guidance we've given for 2023 and is all FX. And FX hits us with both hedge contracts that we have as well as inventory valuations outside of the U.S. that's really the source of the decline from 2022 to 2023 gross margins.

And on the backlog question, Joanne, as we've mentioned before, we don't have great analytics on backlogs. And so a lot of it we just hear anecdotally from customers. But what we do here say, yes, indeed, there is backlog that's spotty and across the U.S. and other countries for that matter.

Our next question comes from Chris Pasquale with Nephron.

Mike, I wanted to go back to the COVID-related headwinds in the U.S. and one hypothesis that I think concerns investors what you guys really haven't talked much about is the idea that excess mortality in your patient population could have depleted your pool and that, that might take longer to normalize than something that's a little bit simpler like hospital staffing. Do you see that as a significant factor? Or do you still view it as a bottom of the funnel issue with capacity?

Yes. Just at the highest level, sadly, for these patients, it's true. There has to be some mortality that goes on. They just don't wait well. And we know that, that's a very serious consequence of the environment that we're in. Having said that, this isn't a small pool. It's a really, really big pool. And so even the sad mortality that comes from this is not close to really putting a dent in the number of patients that could legitimately use help through having their severe AS treated.

Okay. That's helpful. And then just one on mitral. Any line of sight into Class I and T completing enrollment of those studies have been going on for a while and I don't think you guys have provided a time line there.

Yes. So this is Daveen. So I'll follow up a little bit on Class II TR first and I'll talk about IIF separately. So first, on Class II TRs, you remember, we think that in our prioritization, while we think tier for tricuspid is really important, we actually believe that EVOQUE has the potential to be more important to tricuspid patients. But we know that this is a large and diverse population of people. So we've got to have a portfolio of options. So we were committed to running two different pivotal studies, obviously, the TRISCEND II for EVOQUE as well as the Class II TR for PASCAL. And many of these sites are actually -- many of our clinical sites, especially in the U.S. actually have both trials at that site. So what we did is we actually ask sites to prioritize TRISCEND II enrollment and actually drive that fastest. And so that's on track to kind of complete enrollment here in the first half of 2023, as we've kind of talked about before. So now as that finishes up, we're asking kind of sites to kind of drive enrollment in Class II TR hopefully, we'll then see enrollment in that trial then pick up. And moving on to Class IIF, right, our functional kind of trial a randomized trial. We haven't yet kind of shared expectation for kind of approval or commercialization yet on that. That trial is enrolling right now. It's a really important trial for us. And again, a lot of the sites that were actually in Class IID again, the other mitral, were also sites that are also in Class IIF. And as you imagine, we initially said, "Hey, guys, let's really drive enrollment in Class IID and which the sites did really well," they helped drive our approval. And now we've again asked them to kind of switch their prioritization to Class IIF. So we see kind of the enrollment in that trial, which is again, it's a larger trial, a 450-person trial kind of enrolling right now. So that's kind of an update on those two trials.

Our next question comes from Cecila Furlong with Morgan Stanley.

I wanted to ask just a follow-up question on TAVR in Japan. How you're thinking about a cadence in '23 following a bit more pressure. It sounded like in -- and then just as you think about the impact from low-risk patients, additional patients coming into the funnel there as well as RESILIA rollout, if you could talk to us about your strategy and pricing strategy there, too?

Maybe I'll start out with Japan and then turn it over to Larry for the others that he can sort of complete the thought. Japan had been a real lift to our growth rate for the past few years and even earlier this year. But when that wave of COVID came through in Q3, it really was a setback for that health care system. And the way that the Japanese system deals with it is to implement a lot of restrictions. And so that really had some pretty big impact in Q3, and that continued into Q4. It was even more dramatic in Q4 than we expected. The situation is much better in Japan. And so we see a very solid, substantial improvement during the course of 2023. So we expect Japan to be a real contributor to growth going forward. Larry?

We can't hear Larry.

Sorry, can you hear me okay now?

Yes, go ahead.

Okay. So the -- there's a lot of things to be excited about in Japan. In addition to the recovery that Mike talked about more broadly, we do have S3 Ultra RESILIA that's coming probably right before the -- probably in Q2, then we'll begin rolling that out. Low-risk approval is also a big thing. We recently got approval for TAVR-in-TAVR, which is a big thing for Japan. So we're really looking for them to recover and get back to more of the historic growth rates.

Great. And if I could follow up to just RESILIA in the U.S., you talked about 10% center penetration at this point, but can you speak to just your strategy adoption interest in Q1 and how you think about at this point, the cadence of converting centers over the next few quarters?

Sure. Yes. So we're really pleased with how the launch has gone so far. Remember, this approval came earlier than we anticipated. So it felt like we had built up a ton of inventory, and so we had to build up that inventory as we roll it out. So we're pretty much right I think, where we plan to be, and we expect the rollout to continue through the entire year. But we're happy with outcome so far. The physician feedback has been positive. And we think it's good for us. We're also going for a price increase, which is the first price increase that we've done in -- since launch, which has been over 10 years. It's pretty modest. It's less than 5%, but we think it reflects the innovation and the value that we bring with the RESILIA technology.

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

A quick clarification and was on FX. I think the revenue guidance stayed the same, but FX was $100 million better. Just wanted to make sure I understood the moving parts on that? And then the question was also on U.S. TAVR. It's hard to tell exactly, but it looks like U.S. TAVR was down versus Q3. So I don't know if there's anything to call specific headwinds in Q4 that maybe weren't in Q3 and if it was actually down in Q3 versus Q4? And then how to think about Q1 in the U.S., can that still be up sequentially and grow kind of year-over-year in that 9% to 12% range?

Sure. So on the first question about FX, yes, you're right. We originally anticipated about $100 million headwind to sales based upon recent currency moves, we now think it's about flat. We do think there will be a headwind to sales in the first half. There will be a tailwind to the sales in second half of 2023, but it averages out to flat for the full year.

If the rates stays though.

At the current rate. Regarding TAVR, no, there was actual growth in TAVR in the U.S. over Q3, and we're expecting more growth in Q1 over Q4. So we're seeing sequential growth and year-over-year growth expansion in U.S. TAVR and global TAVR.

Okay. Great. I'll recheck the model on that. And then on SAPIEN 3 RESILIA. You mentioned a little bit of color on the launch. Curious how it's gone like price uplift versus volume discounts, you're actually getting all the price? Because I think the guidance is assuming stable pricing. So I just want to make sure I'm clear on how to think about pricing impact this year and maybe the pricing comes more in 2024?

Yes. So we are going for a price increase and we're going for a price increase across the board. What ends up happening with pricing is as volume goes up, we have rebates and those were built in, whether it was SAPIEN 3 pricing or whether it's SAPIEN 3 UR pricing but we are going for a net increase on every SAPIEN 3 UR valve that we have. Again, it's about $1,500 less than 5%, but we are going for that across the board.

Our next question comes from Josh Jennings with Cowen.

I want to just start with a question on the surgical valve business. It grew at a higher clip than the TAVR franchise in the fourth quarter. And just wanted to maybe get some -- a better understanding on this prioritization of heart surgeries that you called out. Do you expect that to continue and maybe be beneficial to understand price versus volume growth for the surgical valve business in 4Q? And then I just have 1 follow-up.

Sure. Well, I'll start and then if I have rent trouble on call my buddy to mean to help me out here. But overall, the thing with surgical patients is they don't require the same amount of work up as a TAVR patients. So they can move through the system faster because they don't require things such as the CT for valve sizing where that's been intraprocedural for the surgeon and so there's just much workup that has to be done for those patients. So maybe it's a little less impacted. I think there's also a mindset that when a patient needs open heart surgery, that, that just is more urgency in the system and those patients can move through a little bit quicker. We'll see how that continues over time. But we continue to drive RESILIA on the surgical side as well. We have the MITRIS launch, which is going, and we continue to advance RESILIA on the aortic side as well with INSPIRIS and those continue. I don't know if you have anything to add, Daveen.

Yes. The only other comment I'll make is we talk about heart valve surgery being prioritized within hospitals. We see a bit that, as Larry said, in the food chain of kind of surgeries, we see that people generally if they're short in cardiac surgery resources help start moving resources to these really high acuity really important patients from other parts, other surgery departments. So you actually see a little bit of resource moving, which I think has helped cardiac surgery keep its volumes overall. That being said, the macro picture, right, we always expect that TAVR is going to increase in aortic valve replacement. But we also expect, at the same time, the AVR market is going to continue to grow, and there'll always be these patients with complex disease that need surgery.

And just a follow-up on the early TAVR results are not in the very near term, but thinking about the asymptomatic severe aortic stenosis bucket and just the percentage of total severe aortic stenosis patients in the United States. You guys have any new kind of estimates in terms of is that a 30% of total, 40% of total or lower? I just wanted to better understand what early TAVR could unlock?

Yes, it's a difficult question because the literature is all over the place on this topic, and there's not great studies on this in terms of how it gets looked at. There's a lot of studies out there that say for every asymptomatic -- or for every symptomatic patient, there's an asymptomatic patient, so that's probably on probably the higher end. There's other studies that says that it's a little bit lower. But I think regardless, it's significant, but I think the bigger issue here is it impacts how patients flow through the system because patients come and the doctor says, how are you feeling? And maybe that day the patient feels fine, but two weeks ago, they were struggling and that doesn't necessarily get picked up. I think if we could take the symptom assertation just out of the equation for patients and if your echo says that you have severe AS, you move directly to therapy. I think it would just be a game changer for how patients flow through the system. And it's one of the reasons we took on EARLY TAVR is we think we need to have the definitive data that shows what happens when you really stress echo these people, what happens when you really follow patients that are asymptomatic, and that's really the purpose of the trial, but we think it's a significant opportunity to change how aortic stenosis is treated.

Our next question comes from Adam Maeder with Piper Sandler.

The first question is on ACC, which is coming up in a couple of weeks. I'm wondering if there's anything that you'd call out from an Edwards standpoint in terms of notable clinical data. And then there's a competitor study in the tricuspid space with TRILUMINATE. Do you think that study could potentially catalyze the transcatheter tricuspid market, both repair and replacement? And then I had one follow-up.

Yes, this is Daveen. I'll hit a little bit on the -- obviously, the tricuspid trial, specifically the TRILUMINATE study. We actually wouldn't be surprised if TRILUMINATE shows positive results and gets approved by ACC or around ACC. To me, this would be an amazing opportunity and great opportunity for patients to continue to get more data and have better patient treatment. But that being said, we see actually in Europe right now that clinicians are actually very positive about the performance of our differentiated PASCAL Precision device there and seem to really like it for tricuspid patients. So we look forward to that to obviously bring that technology to the U.S. in the future. But we think for the therapy overall, obviously, more data is helping patient care.

And then a high level, we'll be at ACC in full force. It's a chance for us to be close to customers. But we don't have any real groundbreaking trials that are going to be introduced at that time.

Okay. And then just for a quick follow-up. One actually on capital. allocation. And clearly, you're going to remain focused within structural heart. But I also think you've talked recently about having interest in a potential new adjacency. And I think referring to heart failure, you have an internal atrial shunt program, and you also have some investments in external assets. So when should we expect to learn more here about these initiatives and just the broader path forward?

Yes. Thanks for that, Adam. We don't end up talking about these until some of the risk has been taken out. At these early stages, these are big transformative therapies that have big potential, but they also have pretty big risk at the early stage of the program. And we feel like it's more appropriate to share it with investors when we have more uncertainty. So for example, like we're already in human trials. So we're not likely to talk about this for competitive reasons, but it is something that's very much a priority for our company. We think the kind of skill sets that Edwards has could be applied really, really well to this big group of patients that's the #1 health care burden and cost and mortality both. Operator Our next question comes from Richard Newitter with Truist Securities.

And thank you for the color on the quarter-over-quarter growth, U.S. TAVR expectation in 1Q. But I'm hoping to just parse out the expectation around cadence for improvement U.S. versus international in three seems like international, a little bit more kind of COVID surge impacted maybe a little more visibility into the turning of the tide there. U.S. more hospital staffing it feels more gradual. A, is that correct? And do you think it's right for us to be modeling a little bit faster recovery and acceleration perhaps in 1Q and the first part of the year internationally and then maybe a little bit more of an acceleration for the U.S. in the back half and keep it more gradual in the first half? Is that a good way to think about it? And do we have the pieces right around your visibility?

So Rick, first, on the sequential growth. I want to go back to something Travis asked about before. Q3 to Q4 and 2022, there are sequential growth globally. I said U.S., it was true globally. Q4 through Q1 and 2023, sequential growth in the U.S. and globally. As it relates to the full year 2023 I'll start and then others chime in. We're expecting contributions both in the U.S. and outside of the U.S. It's tough to pin down exactly which regions are going to grow what rates. But we think that we're going to get contributions from all of our major regions to that 9% to 12% underlying growth in '23.

That's right. I mean if we just look at what's happened here in the recent past, whether it's the U.S. or Europe or Japan, our three biggest regions, they've been lower than what they should be based on the struggles that they've had with the aftermath of COVID, and we expect that to improve throughout 2023.

Okay. I guess -- but it's not like you have better visibility into the two factors. The COVID surge impacts in your challenge areas in Germany and Japan, better visibility there versus hospital staffing. It feels like you're saying you expect all of them to move more or less together?

Yes. I would say we have similar visibility on all of them. We're very close to our customers, very close to our centers. and we feel like we know what's happening on a center-by-center basis. And we just feel that the environment has and will continue to improve.

Okay. And just following up to BJ's question. are half of your centers still doing double-digit growth in the U.S. I know it's variant, but do you still see that level of growth from at least a cohort or half of your centers?

Yes. I don't know if I could pin it down exactly to a percentage. But certainly, we see a large portion or a large section of our centers that are still doing double-digit growth. And again, I think it's not so much COVID, but it's the COVID restrictions that happen. And I think the parts of the country where those restrictions have been release sooner. I think we see those centers doing better. But we expect the rest to come along. I mean if you look broadly, those restrictions are easing really across the globe, and I think that's what is one of the things that helps us in 2023.

Yes. And Larry, you might add that you saw some weeks during Q4 where there was some significant volume, though and made us feel good about the fact that there must be some capacity out there, right?

Yes. We had some of the biggest weeks that we've had in our history in Q4. So a week doesn't make a year, but the fact that they were able to do it for several weeks indicates that staffing is getting better and capacity is coming back into the system, and it's one of the things that gives us confidence in our guidance for 2023.

And that concludes our question-and-answer session for today. I'll turn the floor back to management for closing remarks. Thank you.

Okay. Well, thanks all for your continued interest in Edwards. Scott, Mark and I welcome any additional questions by telephone. And with that, thanks for participating.

Thank you. That concludes today's conference. All parties may disconnect. Have a great day.