EUR 850.00 For Business Accounts Only

Morningstar | Edwards Lifesciences Posts Strong 2Q With Solid TAVR Demand; Raising Our FVE. See Updated Analyst Note from 24 Jul 2019

Edwards Lifesciences delivered impressive second-quarter performance and is tracking along with our full-year projections. While we haven’t made any changes to our estimates through 2023, we have boosted our fair value estimate to $170 after baking in more optimistic estimates of longer-term growth and cash flow realized since our last update. We see little to change our view of Edwards’ narrow economic moat. However, we think it is worth monitoring the firm’s stable moat trend over the next 12 to 18 months, as more pivotal trials for transcatheter mitral and tricuspid get closer to fruition. If preliminary clinical data is favorable and European adoption of PASCAL and Cardioband is robust, we’d consider turning Edwards’ moat trend positive.

We were pleased to hear that transcatheter aortic Sapien valve sales seemed to grow in line with procedure growth during second quarter, which is a shift from what we saw last year when Medtronic appeared to be aggressively pricing its CoreValve and Edwards indicated it had lost some market share as it remained disciplined on its premium pricing. With quarterly Sapien revenue and U.S. sales up 14% and 15%, respectively, on an underlying basis, we see little evidence that rival Boston Scientific’s controlled U.S. launch of its Lotus Edge TAVR has slowed Sapien growth. Nonetheless, we wouldn’t be surprised to see practitioners trying out Lotus over the next few quarters as Boston ramps up physician training and establishes more centers.

Nonetheless, even if Boston’s rollout is met with enthusiasm, it will still take time to put a dent in Sapien growth, in our view. Lotus Edge is currently indicated for inoperable and high surgical risk patients, while Sapien has already expanded its indication to include the intermediate risk pool, and we expect further expansion to encompass low surgical risk patients in the second half of 2019. Boston, meanwhile, is still enrolling its trial for intermediate risk patients.

Two other items caught our attention in the quarter. First, the launch of PASCAL in Europe has been running smoothly, and Cardioband supply has improved. These two TMTT products are the first out of Edwards’ gate and European adoption should give us a sense of how the devices might perform in the U.S. While sales remain small at $7 million in second quarter, we expect acceleration as Edwards penetrates the market with more interventional cardiologists trained and new centers established over the next 18 months. We’re particularly interested in PASCAL, considering rival Abbott’s recent success with MitraClip, which saw 30% growth in the second quarter. Edwards expects to begin enrolling its pivotal PASCAL trial for functional mitral regurgitation by end of this year.

Though Cardioband has struggled with manufacturing challenges that have constrained supply, Edwards has shifted manufacturing to other sites, which has improved the situation. Unlike PASCAL, Cardioband is the first of the new direct annuloplasty devices to enter the market (we anticipate Boston Scientific’s Millipede device could receive approval in 2022, at the earliest). If Cardioband demonstrates strong ease of use, we think it could hold more potential than PASCAL, as it could provide a more durable repair of the annulus, especially for functional mitral regurgitation patients whose underlying heart failure condition puts particular stress on the anatomy of the mitral valve.

Second, management made several decisions to discontinue the self-expanding Centera TAVR product (which is marketed in Europe) and to stop development of the Forma device for tricuspid disease, in order to focus resources on PASCAL, Sapien for mitral use, and Cardioband. Although the medical technology business is often one of having enough shots on goal, it seems that Edwards’ shots on goal have perhaps exceeded the firm’s bandwidth to successfully develop and commercialize them. In some ways, this is an enviable problem to have. Nevertheless, we look favorably on management’s decision to allocate resources deliberately in support of the strongest candidates with the most potential, which underscores our exemplary stewardship rating. Edwards' management makes no apologies for making concentrated bets on differentiated, superior technologies and will back that up with appropriate resources.