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 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_chartx39428a19.jpg]][[Image Removed: ew10-qq220_chartx40915a19.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 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 middle 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. During the second and third quarters of 2020, procedure volumes improved. In the second quarter of 2020, we also started to 25
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progressively resume patient enrollment in all clinical trials that were voluntarily paused or slowed at the end of the first quarter of 2020, and we are now enrolling patients at pre-COVID rates. 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 third quarter of 2020. Despite the challenges associated with COVID-19, our net sales for the first nine months of 2020 were$3.2 billion , representing an increase of$20.7 million over the first nine months of 2019, driven by sales growth of our TAVR products.
Our gross profit increase was driven by a charge recorded during the three and
nine months ended
The increase from the prior quarter-to-date period in our diluted earnings per share was driven by our increased sales growth as well as reduced spending due to COVID-19. The decrease from the prior year-to-date 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 nine months of 2020, we invested 17.7% 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 Nine Months Ended
September 30, Percent September 30,
2020 2019 Change Change 2020 2019 Change Percent Change
United States $ 662.0 $ 647.8 $ 14.2 2.2 % $ 1,845.6 $ 1,835.5 $ 10.1 0.6 %
Europe 253.8 222.6 31.2 13.9 % 707.8 699.0 8.8 1.2 %
Japan 113.9 112.9 1.0 0.8 % 330.7 324.4 6.3 1.9 %
Rest of World 111.2 110.7 0.5 0.7 % 310.5 315.0 (4.5 ) (1.4 )%
International 478.9 446.2 32.7 7.3 % 1,349.0 1,338.4 10.6 0.8 %
Total net sales
0.7 %
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 Nine Months Ended September 30, September 30, 2020 2019 Change Percent Change 2020 2019 Change Percent Change Transcatheter Aortic Valve Replacement$ 744.6 $ 700.0 $ 44.6 6.4 %$ 2,081.1 $ 1,975.4 $ 105.7 5.3 % Transcatheter Mitral and Tricuspid Therapies 12.1 9.7 2.4 23.7 % 28.7 21.0 7.7 36.5 % Surgical Structural Heart 203.3 204.1 (0.8 ) (0.3 )% 557.6 636.6 (79.0 ) (12.4 )% Critical Care 180.9 180.2 0.7 0.4 % 527.2 540.9 (13.7 ) (2.5 )% Total net sales$ 1,140.9 $ 1,094.0 $ 46.9 4.3 %$ 3,194.6 $ 3,173.9 $ 20.7 0.7 % Transcatheter Aortic Valve Replacement [[Image Removed: ew10-qq120_chartx55097a20.jpg]] Net sales of TAVR products increased for the three and nine months endedSeptember 30, 2020 driven by higher sales of the Edwards SAPIEN 3 Ultra System following its regulatory approval inthe United States (December 2018 ) and inEurope (November 2018 ). Our sales for the nine months endedSeptember 30, 2020 were also negatively impacted by the COVID-19 pandemic. Our procedure volumes dropped significantly beginning inMarch 2020 due to COVID-19, and began to steadily improve beginning inMay 2020 . The launch of the Edwards SAPIEN 3 Ultra System continued to be very positive in the first nine 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-24a48e476b4c9df1964a08.jpg]] Net sales of TMTT products increased for the three and nine months endedSeptember 30, 2020 due primarily to sales inEurope of PASCAL, which received CE Mark inFebruary 2019 . Our sales in nine months endedSeptember 30, 2020 were also negatively impacted by the COVID-19 pandemic. Our procedure volumes for PASCAL dropped significantly inApril 2020 due to COVID-19, and began to improve beginning inMay 2020 . 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. In the second quarter of 2020, we began resuming enrollments and are now enrolling patients at pre-COVID rates. InMay 2020 , we received CE Mark for the PASCAL Ace implant system for mitral and tricuspid repair. 28
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Surgical Structural Heart [[Image Removed: ew10-qq120_chartx56718a20.jpg]] Net sales of Surgical products decreased for the three and nine months endedSeptember 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 . 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_chartx58317a20.jpg]] The decrease in net sales of Critical Care products for the nine months endedSeptember 30, 2020 was driven by a decline in sales of our enhanced surgical recovery products, primarily inthe United States , as many surgical procedures were delayed due to COVID-19 beginning inMarch 2020 . 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 nine months endedSeptember 30, 2020 by$4.4 million due to the weakening of multiple currencies, primarily the Euro, againstthe United States dollar. These decreases in net sales during the nine months endedSeptember 30, 2020 were partially offset by increased demand for our pressure monitoring products, primarily inEurope . In addition, our sales for the three and nine months endedSeptember 30, 2020 included$5.6 million and$15.7 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_chartx43964a19.jpg]] The increase in gross profit as a percentage of net sales for the three and nine months endedSeptember 30, 2020 was driven primarily by: • a charge in the three and nine months endedSeptember 30, 2019 of$26.9
million and
regarding our TAVR portfolio, including the decision to discontinue our
CENTERA program; and
• manufacturing efficiencies in the three months ended
partially offset by:
• a 1.4 percentage point and 0.8 percentage point decrease in the three
and nine months ended September 30, 2020 , 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_chartx45302a19.jpg]]
SG&A expenses increased for the three months ended September 30, 2020 due
primarily to increased sales and marketing expenses related to transcatheter
structural heart field personnel, primarily in the United States , partially
offset by decreased costs associated with COVID-19. SG&A expenses decreased for
the nine months ended September 30, 2020 due to decreased
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sales, marketing and travel-related expense associated with COVID-19, and the impact of foreign currency, which decreased expenses by$5.5 million due to the strengthening ofthe United States dollar against multiple currencies, primarily the Euro. These decreases for the nine months endedSeptember 30, 2020 were partially offset by increased sales and marketing expenses related to transcatheter structural heart field personnel, primarily inthe United States . Research and Development ("R&D") Expenses [[Image Removed: ew10-qq220_chartx46645a19.jpg]] R&D expenses were flat for the three months endedSeptember 30, 2020 primarily due to increased spending on transcatheter mitral valve replacement clinical trials, offset by decreased spending on transcatheter aortic valve clinical trials and decreased travel and other expenses associated with COVID-19. The increase in R&D expenses for the nine months endedSeptember 30, 2020 was primarily due to investments in our transcatheter mitral and tricuspid therapies, partially offset by decreased spending on transcatheter aortic valve clinical trials.
Change in Fair Value of Contingent Consideration Liabilities, net
The change in fair value of contingent consideration liabilities resulted in income of$9.0 million and$2.3 million for the three months endedSeptember 30, 2020 and 2019, respectively, and expense of$8.4 million and$12.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The changes in fair value were primarily driven by changes in the projected probability and timing of milestone achievements, and the projected timing of cash inflows, partially offset by the accretion of interest due to the passage of time, and for the nine months endedSeptember 30, 2020 , discount rates (which decreased significantly in the first quarter of 2020). For further information, see Note 6 to the "Consolidated Condensed Financial Statements."
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