EDWARDS LIFESCIENCES CORPORATION The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. See "Note Regarding Forward-Looking Statements" preceding Part I, Item 1 in this Quarterly Report on Form 10-Q. We are the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring. Driven by a passion to help patients, we partner with the world's leading clinicians and researchers and invest in research and development to transform care for those impacted by structural heart disease or who require hemodynamic monitoring during surgery or intensive care. We conduct operations worldwide and are managed in the following geographical regions:United States ,Europe ,Japan , and Rest of World. Our products are categorized into the following main areas: Transcatheter Aortic Valve Replacement ("TAVR"), Transcatheter Mitral and Tricuspid Therapies ("TMTT"), Surgical Structural Heart ("Surgical"), and Critical Care. Financial Highlights and COVID-19 [[Image Removed: ew10-qq220_chartx39428a17.jpg]][[Image Removed: ew10-qq220_chartx40915a17.jpg]] InMarch 2020 , theWorld Health Organization categorized the Coronavirus disease 2019 ("COVID-19") as a pandemic. COVID-19 continues to spread throughoutthe United States and other countries across the world, and the duration and severity of its effects are currently unknown. The global pandemic has adversely impacted and is likely to further adversely impact nearly all aspects of our business and markets, including our workforce and operations and the operations of our customers, suppliers, and business partners. Our priority has been to support our clinician partners, protect the well-being of our employees, and maintain continuous access to our life-saving technologies while offering front-line in-hospital support. Our manufacturing operations have responded to impacts related to COVID-19, and we have been able to supply our technologies around the world. Across the organization, we are proactively managing inventory, assessing alternative logistics options, and closely monitoring the supply of components. TAVR and Surgical procedure volumes inMarch 2020 varied greatly by geography, and even by hospital, as patients and their physicians analyzed the trade-off between aortic stenosis and their concern for COVID-19. In the last few weeks of the first quarter of 2020, procedure volumes related to our TAVR and Surgical products dropped significantly. In Critical Care, there was greater demand inEurope for our pressure monitoring products, while demand for other Critical Care products began to decrease at the end of the first quarter of 2020 due to COVID-19. Despite the challenges associated with COVID-19, our net sales for the first quarter of 2020 were$1.1 billion , representing an increase of$135.7 million over the first quarter of 2019. Our sales growth was driven by our TAVR products, primarily increased sales of the Edwards SAPIEN 3 Ultra valve. 23
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The increase from the prior year period in our diluted earnings per share was
primarily driven by the aforementioned sales growth. In addition, the first
quarter of 2019 includes the
We are closely monitoring the impact of COVID-19 on all aspects of our business and geographies, including its impact on our customers, employees, suppliers, vendors, business partners and distribution channels. The extent to which the COVID-19 global pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact,U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations. For more information on the risks associated with COVID-19, refer to Part II, Item 1A, "Risk Factors" herein.
Healthcare Environment, Opportunities, and Challenges
The medical technology industry is highly competitive and continues to evolve. Our success is measured both by the development of innovative products and the value we bring to our stakeholders. We are committed to developing new technologies and providing innovative patient care, and we are committed to defending our intellectual property in support of those developments. In the first three months of 2020, we invested 16.6% of our net sales in research and development. New Accounting Standards
For information on new accounting standards, see Note 1 to the "Consolidated Condensed Financial Statements."
Results of Operations
Net Sales Trends
(dollars in millions)
Three Months Ended
March 31,
2020 2019 Change Percent Change
United States $ 667.4 $ 562.8 $ 104.6 18.6 %
Europe 249.3 234.7 14.6 6.1 %
Japan 110.0 98.4 11.6 11.8 %
Rest of World 102.0 97.1 4.9 5.3 %
International 461.3 430.2 31.1 7.2 %
Total net sales $ 1,128.7 $ 993.0 $ 135.7 13.7 %
International net sales include the impact of foreign currency exchange rate
fluctuations. The impact of foreign currency exchange rate fluctuations on net
sales is not necessarily indicative of the impact on net income due to the
corresponding effect of foreign currency exchange rate fluctuations on
international manufacturing and operating costs, and our hedging activities.
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Table of ContentsNet Sales byProduct Group (dollars in millions) Three Months Ended March 31, 2020 2019 Change Percent Change Transcatheter Aortic Valve Replacement$ 742.2 $ 597.7 $ 144.5 24.2 % Transcatheter Mitral and Tricuspid Therapies 10.5 4.3 6.2 NM Surgical Structural Heart 193.4 214.7 (21.3 ) (9.9 )% Critical Care 182.6 176.3 6.3 3.6 % Total net sales$ 1,128.7 $ 993.0 $ 135.7 13.7 % NM - Not meaningful Transcatheter Aortic Valve Replacement [[Image Removed: ew10-qq120_chartx55097a18.jpg]] Net sales of TAVR products increased for the three months endedMarch 31, 2020 due primarily to: • higher sales of the Edwards SAPIEN 3 Ultra System following its regulatory approval inthe United States (December 2018 ) and inEurope (November 2018 ); and • higher sales of the Edwards SAPIEN 3 valve, particularly inthe United States , driven by strong therapy adoption; Our global TAVR sales growth through earlyMarch 2020 was consistent with our fourth quarter 2019 global growth rate. During the last few weeks of the first quarter of 2020, procedures dropped significantly as the result of COVID-19 disruptions. TAVR procedure volumes inMarch 2020 varied greatly by geography and by hospital, as patients and their physicians analyzed the trade-off between aortic stenosis and their concern for COVID-19. The launch of the Edwards SAPIEN 3 Ultra System continued to be very positive in the first quarter of 2020. However, to ensure the safety of our employees and clinician partners from the threat of COVID-19, we have decided to pause proctoring at centers that are not already trained on the device. 25
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Transcatheter Mitral and Tricuspid Therapies [[Image Removed: chart-24a48e476b4c9df1964a06.jpg]] Net sales of TMTT products increased for the three months endedMarch 31, 2020 due primarily to sales of the Edwards PASCAL transcatheter valve repair system inEurope , which received CE Mark inFebruary 2019 . At the end ofMarch 2020 , we temporarily paused new enrollments in our active pivotal clinical trials of transcatheter mitral and tricuspid therapies in response to the COVID-19 response around the globe. We are coordinating closely with the trials' clinical investigators, and the decision to resume enrollments in the trials will be made in consultation with each investigator and hospital at the time when their clinicians' and patients' needs can be better served. 26
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Surgical Structural Heart [[Image Removed: ew10-qq120_chartx56718a18.jpg]] Net sales of Surgical products decreased for the three months endedMarch 31, 2020 due primarily to decreased sales of aortic tissue valves, primarily inthe United States andEurope , as customers have converted to TAVR. In addition, there was a deceleration in sales of all of our surgical products in the last few weeks ofMarch 2020 related to COVID-19. These decreases were partially offset by increased sales of the INSPIRIS RESILIA aortic valve, primarily inthe United States . InEurope , our HARPOON Beating Heart Mitral Valve Repair System became available commercially at the end of 2019, and we plan to expand the launch as the COVID-19 environment stabilizes. In addition, we receivedUnited States Food and Drug Administration approval inApril 2020 to begin ourU.S. pivotal IDE study. HARPOON offers the potential for earlier treatment of degenerative mitral valve disease, with faster recovery and more consistent outcomes for surgical patients. 27
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Critical Care [[Image Removed: ew10-qq120_chartx58317a18.jpg]] The increase in net sales of Critical Care products was driven by our core hemodynamic products, primarily pressure monitoring devices inEurope . OnApril 18, 2019 , we completed the acquisition ofCAS Medical Systems, Inc. ("CASMED"). CASMED is a medical technology company dedicated to non-invasive monitoring of tissue oxygenation in the brain. Our sales for the three months endedMarch 31, 2020 included$5.7 million related to CASMED. Demand for our enhanced surgical recovery products began to fall significantly in the last few weeks of the first quarter of 2020 as many surgical procedures were delayed due to COVID-19. We have also seen some delay in orders of our HemoSphere advanced monitoring platform inthe United States as hospitals limit their capital spending as they focus on COVID-19. 28
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Gross Profit [[Image Removed: ew10-qq220_chartx43964a17.jpg]] The decrease in gross profit as a percentage of net sales for the three months endedMarch 31, 2020 was driven primarily by (1) a 0.3 percentage point decrease due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts, (2) increased inventory reserves, and (3) European Medical Device Regulations costs. These decreases were partially offset by a 0.7 percentage point increase due to an improved product mix inthe United States , driven by TAVR products. Selling, General, and Administrative ("SG&A") Expenses [[Image Removed: ew10-qq220_chartx45302a17.jpg]] The increase in SG&A expenses for the three months endedMarch 31, 2020 was due primarily to higher transcatheter structural heart field personnel-related costs, primarily inthe United States andEurope . These increases were partially offset by the impact of foreign currency, which decreased expenses by$2.9 million primarily due to the strengthening ofthe United States dollar against multiple currencies, primarily the Euro. The decrease in SG&A expenses as a percentage of sales was primarily due to leverage from our higher sales performance, primarily TAVR sales inthe United States . 29
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Research and Development ("R&D") Expenses
[[Image Removed: ew10-qq220_chartx46645a17.jpg]]
The increase in R&D expenses and ratio as a percentage of net sales for the
three months ended March 31, 2020 was due primarily to continued investments in
our transcatheter mitral and tricuspid therapies.
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in income of$2.2 million for the three months endedMarch 31, 2020 and expense of$6.7 million for the three months endedMarch 31, 2019 . The changes in fair value were primarily driven by credit spread assumptions (which increased during the first quarter of 2020), partially offset by discount rates (which decreased significantly in the first quarter of 2020) and the accretion of interest due to the passage of time. The changes to the credit spread and discount rate assumptions were primarily due to COVID-19. For further information, see Note 5 to the "Consolidated Condensed Financial Statements."
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