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, as well as critical care and surgical 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 in 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 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: ew-20210630_g1.jpg]][[Image Removed: ew-20210630_g2.jpg]] The COVID-19 pandemic has adversely impacted, and may 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. In the second quarter of 2020, procedure volumes began to improve as we progressed through the quarter and we also started to progressively resume patient enrollment in clinical trials that were voluntarily paused or slowed at the end of the first quarter of 2020. In Critical Care, there was greater demand inEurope andthe United States 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. During the first quarter of 2021, COVID-19 stressed the global healthcare system during the winter months. However, we saw strong recovery during the second quarter of 2021, as widespread vaccine adoption contributed to an increased number of patients. Our net sales for the first six months of 2021 were$2.6 billion , representing an increase of$538.9 million over the first six months of 2020, driven by sales growth of our TAVR products. United States TAVR procedures began to grow as 24 -------------------------------------------------------------------------------- Table of Contents COVID-19 hospitalizations decreased and vaccinations increased. Surgical sales grew due to increased adoption of our premium high-value technologies around the world and rebounding surgical aortic treatment rates inthe United States . We also saw an increased demand for our Critical Care capital products as hospital capital spending continued to show signs of recovery. However, slow vaccination progress outsidethe United States and new variants of COVID-19 provides uncertainty for the remainder of the year for our sales outsidethe United States . Our gross profit increase in 2021 was driven by our sales growth and lower incremental costs associated with COVID-19. The increase in our diluted earnings per share in 2021 was driven by our sales growth and 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. 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 and measures taken in response thereto impact 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 (including new and more contagious variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, public acceptance and efficacy of vaccines and other treatments,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. While some
evidence collection was slowed during the COVID-19 pandemic, we and the clinical
community are committed to continuing our trials and generating robust evidence.
In the first six months of 2021, we invested 16.7% of our net sales in research
and development.
Results of Operations
Net Sales Trends
(dollars in millions)
Three Months Ended Six Months Ended
June 30, Percent June 30, Percent
2021 2020 Change Change 2021 2020 Change Change
United States $ 795.7 $ 516.2 $ 279.5 54.1 % $ 1,470.4 $ 1,183.6 $ 286.8 24.2 %
Europe 309.8 204.7 105.1 51.1 % 589.8 454.0 135.8 29.9 %
Japan 131.8 106.8 25.0 23.4 % 264.1 216.8 47.3 21.8 %
Rest of World 138.7 97.3 41.4 42.8 % 268.3 199.3 69.0 34.7 %
International 580.3 408.8 171.5 41.9 % 1,122.2 870.1 252.1 29.0 %
Total net sales $ 1,376.0 $ 925.0 $ 451.0 48.7 % $ 2,592.6 $ 2,053.7 $ 538.9 26.2 %
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.
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Table of ContentsNet Sales byProduct Group (dollars in millions) Three Months Ended Six Months Ended June 30, Percent June 30, Percent 2021 2020 Change Change 2021 2020 Change Change Transcatheter Aortic Valve Replacement$ 901.5 $ 594.3 $ 307.2 51.7 %$ 1,693.2 $ 1,336.5 $ 356.7 26.7 % Transcatheter Mitral and Tricuspid Therapies 22.1 6.1 16.0 259.3 % 38.4 16.6 21.8 131.8 % Surgical Structural Heart 237.4 160.9 76.5 47.5 % 450.4 354.3 96.1 27.1 % Critical Care 215.0 163.7 51.3 31.3 % 410.6 346.3 64.3 18.6 % Total net sales$ 1,376.0 $ 925.0 $ 451.0 48.7 %$ 2,592.6 $ 2,053.7 $ 538.9 26.2 % Transcatheter Aortic Valve Replacement [[Image Removed: ew-20210630_g3.jpg]] Net sales of TAVR products increased for the three and six months endedJune 30, 2021 driven by:
•higher procedure volumes in the first six months of 2021 due to improved COVID-19 conditions;
•higher sales of the Edwards SAPIEN platform in 2021 driven by continued strong
adoption in
•foreign currency exchange rate fluctuations, which increased international net sales by$16.7 million and$34.7 million for the three and six months endedJune 30, 2021 , respectively, due primarily to the strengthening of the Euro againstthe United States dollar. InApril 2021 , we (1) received approval for aU.S. pivotal trial for TAVR in moderate aortic stenosis patients, (2) received approval inJapan to begin treating low-risk patients with SAPIEN 3, and (3) received SAPIEN 3 CE Mark approval to begin treating patients with a previously repaired or replaced valve in the pulmonic position. 26 -------------------------------------------------------------------------------- Table of Contents Transcatheter Mitral and Tricuspid Therapies [[Image Removed: ew-20210630_g4.jpg]] Net sales of TMTT products increased for the three and six months endedJune 30, 2021 due primarily to (1) continued adoption of our PASCAL system and activation of more centers acrossEurope and (2) higher procedure volumes for PASCAL in the first six months of 2021 due improved COVID-19 conditions. We are progressing in the enrollment of five pivotal trials across our differentiated portfolio to support therapies for patients suffering from mitral and tricuspid regurgitation. We have initiated use of the PASCAL Precision system in our currently enrolling CLASP trials. We have also begun treating patients with EVOQUE in the TRISCEND II randomized study. This study will evaluate the safety and effectiveness of the EVOQUE tricuspid valve replacement system for patients with severe tricuspid regurgitation. In addition, we continued to treat patients with our next generation transcatheter mitral replacement system, called EVOQUE Eos, through the MISCEND study. This study will evaluate the safety and performance of EVOQUE Eos, which is designed to advance the treatment of patients with mitral regurgitation with a low-profile valve delivered through a sub 30 french transfemoral delivery system. We also continued to treat patients through the ENCIRCLE trial for SAPIEN M3. 27
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Surgical Structural Heart [[Image Removed: ew-20210630_g5.jpg]] Net sales of Surgical products increased for the three and six months endedJune 30, 2021 due primarily to:
•increased sales of the INSPIRIS RESILIA aortic valve and the KONECT aortic
valved conduit, primarily in
•higher procedure volumes for aortic tissue valves in the first six months of 2021 due to improved COVID-19 conditions; and
•foreign currency exchange rate fluctuations, which increased international net sales by$6.3 million and$12.7 million for the three and six months endedJune 30, 2021 , respectively, due primarily to the strengthening of the Euro againstthe United States dollar. InJanuary 2021 , we received regulatory approval inJapan for our MITRIS valve, a new mitral valve incorporating RESILIA technology, which was launched inJapan during the second quarter of 2021. 28 -------------------------------------------------------------------------------- Table of Contents Critical Care [[Image Removed: ew-20210630_g6.jpg]] Net sales of Critical Care products increased for the three and six months endedJune 30, 2021 due primarily to: •increased demand for our capital products, primarily Hemosphere monitors inJapan (and for the three months endedJune 30, 2021 inthe United States ), as hospital capital spending continued to show signs of recovery;
•increased demand for our pressure monitoring products, primarily in
•foreign currency exchange rate fluctuations, which increased international net sales by$5.1 million and$10.1 million for the three and six months endedJune 30, 2021 , respectively, due primarily to the strengthening of the Euro and multiple other currencies againstthe United States dollar. InJune 2021 , we receivedU.S. Food and Drug Administration clearance for the Acumen Hypotension Prediction Index software with the Acumen IQ finger cuff. This is the first noninvasive solution that uses machine learning to alert clinicians of the likelihood a patient is trending toward hypotension, or low blood pressure. 29
-------------------------------------------------------------------------------- Table of Contents Gross Profit [[Image Removed: ew-20210630_g7.jpg]] The increase in gross profit as a percentage of net sales for the three and six months endedJune 30, 2021 was driven primarily by: •a 1.4 percentage point and 0.7 percentage point increase for the three and six months endedJune 30, 2021 , respectively, inthe United States due to an improved product mix, driven by TAVR products; •lower incremental costs associated with COVID-19; and •manufacturing efficiencies; partially offset by: •a 1.8 percentage point and 1.7 percentage point decrease for the three and six months endedJune 30, 2021 , respectively, due to the impact of foreign currency exchange rate fluctuations, including the settlement of foreign currency hedging contracts. Selling, General, and Administrative ("SG&A") Expenses [[Image Removed: ew-20210630_g8.jpg]] SG&A expenses increased for the three and six months endedJune 30, 2021 due primarily to (1) higher personnel-related costs, (2) increased commercial activities compared to the heavily COVID-19 impacted prior year, and (3) the impact of foreign currency exchange rate fluctuations, which increased expenses by$11.3 million and$20.2 million for the three and six months endedJune 30, 2021 , respectively, due to the weakening ofthe United States dollar against multiple currencies, primarily the 30 -------------------------------------------------------------------------------- Table of Contents Euro. Research and Development ("R&D") Expenses [[Image Removed: ew-20210630_g9.jpg]] R&D expenses increased for the three and six months endedJune 30, 2021 primarily due to continued investments in our transcatheter innovations. In addition, beginning in the second quarter of 2020, spending on clinical trials was reduced as we temporarily paused certain mitral and tricuspid active pivotal clinical trials at the end of the first quarter of 2020 due to COVID-19.
Change in Fair Value of Contingent Consideration Liabilities
The change in fair value of contingent consideration liabilities resulted in income of$102.6 million and$107.1 million for the three and six months endedJune 30, 2021 , respectively, and expense of$19.6 million and$17.4 million for the three and six months endedJune 30, 2020 , respectively. The income in 2021 was primarily driven by changes in the projected probability and timing of milestone achievements and the projected timing of cash inflows. The expense in 2020 was primarily driven by credit spreads (which increased during the first quarter of 2020 and decreased in the second quarter of 2020), decreased discount rates and the accretion of interest due to the passage of time. The changes to the credit spread and discount rate assumptions in 2020 were primarily due to uncertainties related to COVID-19. For further information, see Note 4 to the "Consolidated Condensed Financial Statements." Other (Income) Expense, net (in millions) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Foreign exchange gains, net$ (2.7) $ -$ (4.4) $ (3.7) (Gain) loss on investments (1.4) (1.2) (4.1) 0.6 Other (0.3) 1.5 (1.4) 1.5 Other (income) expense, net$ (4.4) $ 0.3 $ (9.9) $ (1.6) The net foreign exchange gains relate to the foreign currency fluctuations in our global trade and intercompany receivable and payable balances, partially offset by the gains and losses on derivative instruments intended as an economic hedge of those exposures. The (gain) loss on investments primarily represents our net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on investments in equity securities. 31 -------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes The provision for income taxes consists of provisions for federal, state, and foreign income taxes. We operate in an international environment with significant operations in various locations outsidethe United States which have statutory tax rates typically lower thanthe United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. Our effective income tax rate was 10.3% and 27.5% for the three months endedJune 30, 2021 and 2020, respectively, and 11.5% and 3.9% for the six months endedJune 30, 2021 and 2020, respectively. The fluctuation in the effective rates between the three and six months endedJune 30, 2021 and the three and six months endedJune 30, 2020 is primarily due to the impact of the litigation settlement agreement reached in 2020 with Abbott Laboratories and its direct and indirect subsidiaries to settle all outstanding patent disputes. In addition, the effective rates for the six months endedJune 30, 2021 and 2020 were lower than the federal statutory rate of 21% primarily due to (1) the tax benefit from employee share-based compensation, (2) foreign earnings taxed at lower rates, and (3) Federal andCalifornia research and development credits. In the normal course of business, the Internal Revenue Service ("IRS") and other taxing authorities are in different stages of examining various years of our tax filings. During these audits we may receive proposed audit adjustments that could be material. Therefore, there is a possibility that an adverse outcome in these audits could have a material effect on our results of operations and financial condition. We strive to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While we have accrued for matters we believe are more likely than not to require settlement, the eventual outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, we may later decide to challenge any assessments, if made, and may exercise our right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations, or case law. We previously executed an Advance Pricing Agreement ("APA") in 2018 betweenthe United States andSwitzerland governments for tax years 2009 through 2020 covering various, but not all, transfer pricing matters. The unagreed transfer pricing matters, namely Surgical Structural Heart and Transcatheter Aortic Valve Replacement (collectively "Surgical/TAVR") intercompany royalty transactions, then reverted toIRS Examination for further consideration as part of the respective years' regular tax audits. In addition, we executed other bilateral APAs as follows: during 2017, an APA betweenthe United States andJapan covering tax years 2015 through 2019; and during 2018, APAs betweenJapan andSingapore and betweenSwitzerland andJapan covering tax years 2015 through 2019. We have filed to renew these APAs related toJapan for the years 2020 and forward. The execution of some or all these APA renewals depends on many variables outside of our control. AtJune 30, 2021 , all material state, local, and foreign income tax matters have been concluded for years through 2015. During the quarter, we completed aWisconsin state income tax audit for tax years 2010 through 2016 which resulted in a tax benefit of approximately$2.0 million . While not material, we continue to address matters inIndia for years from 2010. OurU.S. federal income tax returns through 2014 have been audited. TheIRS began its examination of the 2015 and 2016 tax years during the fourth quarter of 2018 and later added the 2017 tax year to this audit cycle during the first quarter of 2019. TheIRS audit field work for the 2015 through 2017 tax years was substantially completed during the fourth quarter of 2020, except for transfer pricing and related matters. During the second quarter of 2021, we received a Notice of Proposed Adjustment ("NOPA") from theIRS for the 2015-2017 tax years relating to transfer pricing involving certain Surgical/TAVR intercompany royalty transactions between ourU.S. andSwitzerland subsidiaries. The NOPA proposes an increase to ourU.S. taxable income which could result in additional tax expense for this period of approximately$200 million . We have formally disagreed with the NOPA. Our analysis of the NOPA is ongoing as it represents a significant change to previously agreed upon transfer pricing methodologies for these types of transactions. We anticipate receiving the Revenue Agent's Report prior to the end of the third quarter of 2021 and plan to submit a formal protest on the matter to theIRS Independent Office of Appeals . We continue to evaluate all possible remedies available to us, which could take several years to resolve. No payment of any amount related to the NOPA is required to be made, if at all, until all applicable proceedings have been completed. We believe the amounts previously accrued related to this uncertain tax position are sufficient and, accordingly, have not accrued any additional amount based on the NOPA received. 32 -------------------------------------------------------------------------------- Table of Contents Certain Surgical/TAVR intercompany royalty transactions covering tax years 2015 through 2021 that were not resolved under the APA program remain subject toIRS examination, and those transactions and related tax positions remain uncertain as ofJune 30, 2021 . We have considered this information, as well as information regarding the NOPA described above, in our evaluation of our uncertain tax positions. These unresolved transfer pricing matters, net of any correlative repatriation tax adjustment, may be significant to our consolidated financial statements. Based on the information currently available and numerous possible outcomes, we cannot reasonably estimate what, if any, changes in our existing uncertain tax positions may occur in the next 12 months and, therefore, have continued to record the gross uncertain tax positions as a long-term liability.
Liquidity and Capital Resources
Our sources of cash liquidity include cash and cash equivalents, short-term investments, cash from operations, and amounts available under credit facilities, . We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures, and other financial commitments for the next twelve months. However, we periodically consider various financing alternatives and may, from time to time, seek to take advantage of favorable interest rate environments or other market conditions.
As ofJune 30, 2021 , cash and cash equivalents and short-term investments held inthe United States and outsidethe United States were$1.2 billion and$408.5 million , respectively. We have a Five-Year Credit Agreement ("the Credit Agreement") which matures onApril 28, 2023 . The Credit Agreement provides up to an aggregate of$750.0 million in borrowings in multiple currencies. Subject to certain terms and conditions, we may increase the amount available under the Credit Agreement by up to an additional$250.0 million in the aggregate. As ofJune 30, 2021 , there were no borrowings outstanding under the Credit Agreement. InJune 2018 , we issued$600.0 million of 4.3% fixed-rate unsecured senior notes (the "2018 Notes") dueJune 15, 2028 . As ofJune 30, 2021 , the total carrying value of the 2018 Notes was$595.4 million . From time to time, we repurchase shares of our common stock under share repurchase programs authorized by the Board of Directors. OnMay 4, 2021 , the Board of Directors approved a new stock repurchase program providing for an additional$1.0 billion of repurchases of our common stock. We consider several factors in determining when to execute share repurchases, including, among other things, expected dilution from stock plans, cash capacity, and the market price of our common stock. During the six months endedJune 30, 2021 , under the Board authorized program, we repurchased a total of 4.7 million shares at an aggregate cost of$402.3 million , including pursuant to an accelerated share repurchase agreement we entered into during 2021 (see Note 7 to the "Consolidated Condensed Financial Statements") and as ofJune 30, 2021 , we had remaining authority to purchase$1.2 billion of our common stock, which includes the additional stock repurchase program authorized by the Board inMay 2021 . Certain of our business acquisitions involve contingent consideration arrangements. Payment of additional consideration in the future may be required, contingent upon the acquired company reaching certain performance milestones, such as attaining specified revenue levels, achieving product development targets, or obtaining regulatory approvals. For further information, see Note 4 to the "Consolidated Condensed Financial Statements." InApril 2021 , we purchased an exclusive option to acquire a medical device company (the "investee") for up to approximately$390 million , depending on the paid-in capital at closing. Depending on the investee's achievement of certain milestones, we may be required to invest up to an additional$9.9 million in the investee's equity securities and up to an additional$21.8 million for the option to acquire the investee. Edwards also agreed to loan the investee up to$45 million under a secured promissory note. For further information, see Note 3 to the "Consolidated Condensed Financial Statements." OnJuly 12, 2020 , we reached a settlement agreement with Abbott Laboratories to settle all outstanding patent disputes between the companies in cases related to transcatheter mitral and tricuspid repair products. The settlement agreement resulted in us recording an estimated$367.9 million pretax charge inJune 2020 related to past damages. In addition, we will incur royalty expenses throughMay 2024 totaling an estimated$100 million . We made a one-time$100.0 million payment toAbbott inJuly 2020 , and will make quarterly payments in future years.
At
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Consolidated Cash Flows - For the six months ended June 30, 2021 and 2020:
[[Image Removed: ew-20210630_g10.jpg]] [[Image Removed: ew-20210630_g11.jpg]]
[[Image Removed: ew-20210630_g12.jpg]]
Net cash flows provided by operating activities of $826.6 million for the six
months ended June 30, 2021 increased $388.2 million over the same period last
year primarily due to improved operating performance in 2021 and a higher bonus
payout in 2020 associated with 2019 performance.
Net cash used in investing activities of $379.2 million for the six months ended
June 30, 2021 consisted primarily of capital expenditures of $175.3 million and
net purchases of investments of $204.8 million .
Net cash used in investing activities of $144.9 million for the six months ended
June 30, 2020 consisted primarily of capital expenditures of $190.5 million ,
partially offset by net proceeds from investments of $77.3 million .
Net cash used in financing activities of
Net cash used in financing activities of
Critical Accounting Policies and Estimates
The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted inthe United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated condensed financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 33-35 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no significant changes from the information discussed therein.
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