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Morningstar | Edwards Lifesciences Delivers Decent 1Q; No Change to Our FVE

Edwards Lifesciences’ first-quarter results fell slightly short of our projections on the top line, but gross margin slightly exceeded our expectations. We’re not particularly concerned about the slower start to 2019, as we anticipate adoption of new products as the year goes on to translate into stronger growth in the coming quarters. We’re holding firm on our valuation. Overall, Edwards remains in a strong competitive position, and we’re reiterating the firm’s narrow moat rating. As it continues development on its portfolio of transcatheter mitral valve technologies and begins launching some of those products in Europe, we may rethink Edwards’ moat trend, potentially upgrading it to positive.

With competitive entrances in the U.S. from Boston Scientific and Abbott on the horizon, Edwards has focused on doing what it does best—improving and innovating its heart valve products. The firm has plenty on its plate, with the roll out of Sapien 3 Ultra, the introductions of Centera, Pascal, and Harpoon for TMV (transcatheter mitral valve) repair in Europe, and the ongoing shift of Cardioband manufacturing to Edwards’ sites. We still view the competitive picture in Europe’s transcatheter aortic valve replacement market as instructive for how the U.S. market with four competitors could reasonably play out, with respect to Edwards’ leadership position. We suspect Edwards will concede some market share in the U.S., particularly in the near term as practitioners try out Boston’s Lotus Edge and Abbott’s Portico. However, over the longer term, we don’t expect Portico will be able to garner more than a peripheral position, as the product doesn’t seem to perform better than Sapien or CoreValve. Boston’s Lotus may do better carving out a niche position, as it is well-suited for more complex patients. We think practitioner experience with Sapien and its strong clinical data support continued TAVR (transcatheter aortic valve replacement) leadership for Edwards.

The most recent Partner 3 data revealed at the American College of Cardiology conference in March was extremely impressive. We think the data pave the way for TAVR to become the standard of care for low-risk patients, and we expect the indication will be expanded to include these patients some time this year. Based on what we saw when the label expanded to include intermediate-risk patients, indication creep does not necessarily translate into a new bolus of patients right away. We’re more inclined to see the new pool of patients contribute to steady double-digit growth of TAVR, which supports our projections for low- to mid-single-digit TAVR growth at Edwards through 2023.

The biggest question is whether prices will decline over time. Thus far, Edwards has been very disciplined about price, bolstered by the growing body of seriously impressive clinical data on Sapien. However, we’ve long contended that the value equation for low-risk patients is different from that for inoperable and high-risk patients because surgical valve replacement (where the valve is roughly one fifth the cost of Sapien) is a legitimate option. Thus, we’ve baked in a 10% price decline by 2022. We’re keeping an eye on this, as the entrance of two more competitors could put more pressure on price.