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 orwho 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. OnMay 7, 2020 , our Board of Directors declared a three-for-one stock split of our outstanding shares of common stock effected in the form of a stock dividend, distributed onMay 29, 2020 to stockholders of record onMay 18, 2020 . We distributed two newly issued shares of common stock to holders of record of each share of common stock to effect the stock split. All applicable share and per-share amounts in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" have been retroactively adjusted to give effect to this stock split. Financial Highlights and COVID-19 [[Image Removed: ew10-qq220_chartx39428a18.jpg]][[Image Removed: ew10-qq220_chartx40915a18.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 continued to respond 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 varied greatly since the end ofMarch 2020 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 the second quarter of 2020, procedure volumes began to improve as we progressed through the quarter. We also started to 25
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progressively resume patient enrollment in clinical trials that were voluntarily paused or slowed at the end of the first quarter of 2020, and we are working with additional centers as many are now ready to re-engage. In Critical Care, there was greater demand inEurope for our pressure monitoring products, but demand for other Critical Care products began to decrease at the end of the first quarter of 2020 due to COVID-19, and that trend continued through the second quarter of 2020. Despite the challenges associated with COVID-19, our net sales for the first six months of 2020 were$2.1 billion , representing a decrease of$26.2 million over the first six months of 2019. Sales growth of our TAVR products, primarily the Edwards SAPIEN 3 Ultra valve, for the six months endedJune 30, 2020 was not enough to offset lower demand for our Surgical Structural Heart and Critical Care products. The decrease from the prior year period in our diluted earnings per share was driven by an after-tax charge of$306.9 million in the second quarter of 2020 to settle certain patent litigation related to transcatheter mitral and tricuspid repair products. For further information, see Notes 3 and 9 to the "Consolidated Condensed Financial Statements." 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.
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 six months of 2020, we invested 18.0% 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 Six Months Ended June 30, June 30, 2020 2019 Change Percent Change 2020 2019 Change Percent Change United States$ 516.2 $ 624.9 $ (108.7 ) (17.4 )%$ 1,183.6 $ 1,187.7 $ (4.1 ) (0.3 )% Europe 204.7 241.7 (37.0 ) (15.2 )% 454.0 476.4 (22.4 ) (4.7 )% Japan 106.8 113.1 (6.3 ) (5.5 )% 216.8 211.5 5.3 2.5 % Rest of World 97.3 107.2 (9.9 ) (9.5 )% 199.3 204.3 (5.0 ) (2.5 )% International 408.8 462.0 (53.2 ) (11.5 )% 870.1 892.2 (22.1 ) (2.5 )% Total net sales$ 925.0 $ 1,086.9 $ (161.9 ) (14.9 )%$ 2,053.7 $ 2,079.9 $ (26.2 ) (1.3 )% 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 (loss) due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs, and our hedging activities. 26
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Table of ContentsNet Sales byProduct Group (dollars in millions) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change Percent Change 2020 2019 Change Percent Change Transcatheter Aortic Valve Replacement$ 594.3 $ 677.7 $ (83.4 ) (12.3 )%$ 1,336.5 $ 1,275.4 $ 61.1 4.8 % Transcatheter Mitral and Tricuspid Therapies 6.1 7.0 (0.9 ) (11.2 )% 16.6 11.3 5.3 47.6 % Surgical Structural Heart 160.9 217.8 (56.9 ) (26.1 )% 354.3 432.5 (78.2 ) (18.1 )% Critical Care 163.7 184.4 (20.7 ) (11.3 )% 346.3 360.7 (14.4 ) (4.0 )% Total net sales$ 925.0 $ 1,086.9 $ (161.9 ) (14.9 )%$ 2,053.7 $ 2,079.9 $ (26.2 ) (1.3 )% Transcatheter Aortic Valve Replacement [[Image Removed: ew10-qq120_chartx55097a19.jpg]] Net sales of TAVR products decreased for the three months endedJune 30, 2020 as patients and providers turned their focus to the COVID-19 pandemic. The decrease in sales was driven by the Edwards SAPIEN 3 valve, particularly inthe United States andEurope , partially offset by higher sales of the Edwards SAPIEN 3 Ultra System following its regulatory approval inthe United States (December 2018 ) and inEurope (November 2018 ). Our procedure volumes dropped significantly beginning inMarch 2020 due to COVID-19, and began to steadily improve in May andJune 2020 . For the six months endedJune 30, 2020 , increased sales of the Edwards SAPIEN 3 Ultra System more than offset the decrease in SAPIEN 3 sales. The launch of the Edwards SAPIEN 3 Ultra System continued to be very positive in the first six months of 2020. In the first quarter of 2020, to ensure the safety of our employees and clinician partners from the threat of COVID-19, we decided to pause proctoring at centers that were not already trained on the Edwards SAPIEN 3 Ultra System. In the second quarter of 2020, we resumed training. 27
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Transcatheter Mitral and Tricuspid Therapies [[Image Removed: chart-24a48e476b4c9df1964a07.jpg]] Net sales of TMTT products decreased for the three months endedJune 30, 2020 as patients and providers turned their focus to the COVID-19 pandemic. The decrease in sales was driven by the Edwards PASCAL transcatheter valve repair system ("PASCAL") inEurope , partially offset by increased sales of the Cardioband system for tricuspid valve repair. Our procedure volumes for PASCAL dropped significantly inApril 2020 due to COVID-19, and began to improve in May andJune 2020 . For the six months endedJune 30, 2020 , net sales of TMTT products increased due primarily to sales inEurope of PASCAL, which received CE Mark inFebruary 2019 , and the Cardioband system for tricuspid valve repair.
At the end of
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Surgical Structural Heart [[Image Removed: ew10-qq120_chartx56718a19.jpg]] Net sales of Surgical products decreased for the three and six months endedJune 30, 2020 due primarily to decreased sales of aortic tissue valves, primarily inthe United States andEurope , due to the impact of COVID-19. The ongoing adoption of TAVR also contributed to the decrease inUnited States surgical aortic valve sales. These decreases were partially offset by increased sales of the INSPIRIS RESILIA aortic valve, primarily inthe United States andJapan . Increased and improved management of intensive care unit capacity, as well as prioritization of heart surgery in many hospitals, contributed to rebounding procedure volumes late in the second quarter of 2020. InEurope , our HARPOON Beating Heart Mitral Valve Repair System became available commercially at the end of 2019, and the first commercial case was successfully completed inEurope in the second quarter of 2020. In addition, we receivedUnited States Food and Drug Administration approval inApril 2020 to begin ourU.S. pivotal investigational device exemption study. HARPOON offers the potential for earlier treatment of degenerative mitral valve disease, with faster recovery and more consistent outcomes for surgical patients. 29
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Critical Care [[Image Removed: ew10-qq120_chartx58317a19.jpg]] The decrease in net sales of Critical Care products was driven by our enhanced surgical recovery products, primarily inthe United States , as many surgical procedures were delayed due to COVID-19. We also experienced a decline in orders of our HemoSphere advanced monitoring platform inthe United States as hospitals limited their capital spending due to COVID-19. Foreign exchange rate fluctuations decreased net sales for the three and six months endedJune 30, 2020 by$3.3 million and$4.6 million , respectively, due to the weakening of multiple currencies, primarily the Euro, againstthe United States dollar. These decreases in net sales were partially offset by increased demand for our pressure monitoring products, primarily inEurope . In addition, our sales for the three and six months endedJune 30, 2020 included$4.4 million and$10.1 million , respectively, related toCAS Medical Systems, Inc. ("CASMED"), which we acquired onApril 18, 2019 . CASMED is a medical technology company dedicated to non-invasive monitoring of tissue oxygenation in the brain. 30
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Gross Profit [[Image Removed: ew10-qq220_chartx43964a18.jpg]] The increase in gross profit as a percentage of net sales for the three and six months endedJune 30, 2020 was driven primarily by: • the prior year charge of$46.2 million related to strategic decisions
regarding our transcatheter aortic valve portfolio, including the
decision to discontinue our CENTERA program;
partially offset by: • a 0.5 percentage point and 0.4 percentage point decrease, respectively,
due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts; and
• incremental costs associated with COVID-19.
Selling, General, and Administrative ("SG&A") Expenses [[Image Removed: ew10-qq220_chartx45302a18.jpg]] The decrease in SG&A expenses for the three and six months endedJune 30, 2020 was due to (1) decreased sales, marketing and travel-related expenses, primarily inthe United States ,Europe andJapan , due to COVID-19, (2) decreased personnel-related costs due to lower sales performance, and (3) the impact of foreign currency, which decreased expenses by$4.3 million and$7.2 million , respectively, due to the strengthening ofthe United States dollar against multiple currencies, primarily the Euro. The decrease in SG&A for the six months endedJune 30, 2020 was due to the aforementioned decreases, 31
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partially offset by higher transcatheter structural heart field
personnel-related costs, primarily in
Research and Development ("R&D") Expenses [[Image Removed: ew10-qq220_chartx46645a18.jpg]] The decrease in R&D expenses for the three months endedJune 30, 2020 was primarily due to decreased spending on clinical trials as we paused certain mitral and tricuspid active pivotal clinical trials due to COVID-19. The increase in R&D expenses for the six months endedJune 30, 2020 was primarily due to investments in our transcatheter mitral and tricuspid therapies during the first quarter of 2020, partially offset by the decreased spending on clinical trials in the second quarter of 2020.
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in expense of$19.6 million and$17.4 million for the three and six months endedJune 30, 2020 , respectively, and$8.0 million and$14.7 million for the three and six months endedJune 30, 2019 , respectively. The changes in fair value were primarily driven by credit spreads (which increased during the first quarter of 2020 and decreased in the second 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 6 to the "Consolidated Condensed Financial Statements."
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