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Morningstar | Edwards Lifesciences' Fourth Quarter Held Few Surprises; No Change to Our Fair Value Estimate

Edwards Lifesciences posted solid fourth-quarter results that generally lined up with our expectations, and we don’t anticipate any material changes to our fair value estimate as we make slight adjustments to 2019 and beyond. Sales of transcatheter aortic valves for the full year were close to our expectations. However, surgical heart valves fell short of our estimates but were offset by robust performance from critical care as it enjoys robust adoption of its next-generation monitoring platform. After adjusting for the recent legal settlement with Boston Scientific and impairment charge related to the Valtech acquisition, fourth-quarter operating income and earnings slightly exceeded our projections. Unfortunately, rival Abbott is now pursuing Edwards with intellectual property litigation in certain markets. It is too early to tell what the related financial implications might be, but we could see this unfold over the next year. We remain confident in Edwards’ narrow economic moat. As more clinical data associated with Edwards’ and competitive transcatheter mitral valve technologies begins to dribble in through the 2019-21 time period, we may consider turning Edwards’ moat trend positive if data are favorable and the firm continues to maintain its lead in the development of these technologies.

Although growth in TAVR sales has moderated for Edwards, we still expect expansion of the patient pool to support low-double-digit growth through 2020. We anticipate seeing favorable data from the PARTNER 3 trial shared at the cardiology conference next month, which puts Edwards on track for the low-risk indication by year-end. We’re sticking with our expectation for low-single-digit growth in surgical valves but will likely raise our estimates for faster growth from critical care and roughly $40 million in transcatheter mitral valve sales (though this does not materially shift our valuation).

Finally, we’re not particularly worried about the TAVR share decline that Edwards absorbed in 2018, which stemmed mainly from the firm’s decision to stand by its premium pricing. Management estimates the Sapien franchise lost roughly 100 to 200 basis points of market share last year, which, from our perspective, is not alarming. Additionally, the firm has already teed up its next-gen Sapien 3 Ultra, which received European regulatory approval in late 2018. Based on what we’ve seen in the past when new Sapien platforms are rolled out, we anticipate positive reception by practitioners, which should help Edwards eke back share.