Edwards Lifesciences' Very Good Year

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 |  About: Edwards Lifesciences Corp (EW)
by: Peter Geschek

2012 was a good year for Irvine, California,-based Edwards Lifesciences (NYSE:EW), as total sales, earnings per share, gross margin and R&D expenditures all grew.

On a list of the S&P 500 component companies ranked by market capitalization Edwards has moved up to the #274 spot replacing DTE Energy Co. (NYSE:DTE). Edwards' market cap is now around $10.56 billion.

In the second quarter Edwards was included in the top 10 performers of the S&P 500.

Competition in heart valves

The driver of Edwards' success is the Sapien THV (Transcatheter Heart Valve). Edwards' main competitor in this product is Medtronic (NYSE:MDT), a company four times larger by market cap.

The FDA has approved Sapien in November 2011 for patients with severe aortic stenosis who were too sick to undergo open-heart surgery.

In October of 2012 Edwards received an additional approval to treat high-risk aortic stenosis patients and also to use a new approach to access the heart through the breastbone, which considerably broadens the market for the procedure.

In May Medicare agreed to cover Sapien's cost.

In the US Edwards now has monopoly on the TAVR (Transcatheter aortic valve replacement) procedure since Medtronic's CoreValve is still undergoing clinical trials.

But in Europe CoreValve has been approved since 2007 and continues to maintain a stronghold. In addition, St. Jude Medical (NYSE:STJ) recently received approval there for its Portico heart valve replacement device.

Edwards has shown positive sales growth in recent quarters in all international regions except Europe.

In November Edwards achieved a US court victory against Medtronic.

The U.S. Court of Appeals affirmed an April 2010 federal jury decision that Medtronic's CoreValve is willfully infringing Edwards' transcatheter heart valve patent. The Appeals Court ordered the trial court to reconsider Edwards' request for a permanent injunction that would prohibit the manufacture and sale of the CoreValve System in the US.

The Court also upheld the verdict awarding a payment of $74 million in damages to Edwards, which covers infringement through early 2010.

Sapien vs CorValve

There are four valves within the heart: the mitral, tricuspid, aortic and pulmonic valve.

TAVR is only applicable for the aortic valves of the four. Similar approaches may one day be used to fix the problems of the other valves too.

As the heart pumps blood through the body, the heart valves make sure that blood flows in one direction only.

The standard treatment currently for diseased aortic valves is open-heart surgery.

In open-heart surgery the patient's breastbone is cut open and the heart temporarily stopped.

Not everybody is a candidate for open-heart surgery. Thirty percent of patients with aortic stenosis are unable to have the traditional surgery because of advanced age, frailty or multiple medical problems.

Prognosis for such patients was poor until recently.

But in the last few years, interventional cardiologists and heart surgeons have developed nonsurgical methods of replacing diseased valves. The procedure involves inserting an artificial valve by snaking a catheter through an artery. The artery may be accessed through small incision in either the patient's groin or chest.

Edwards' Sapien Valve requires either a large 22 French or 24 French sheath for delivery. In contrast, Medtronic's CoreValve can be delivered through a smaller 18 French sheath.

Since the anatomy of many patients cannot accept a 22 or 24F sheath, Medtronic has a competitive edge.

However, Edwards has found a way to counter that by using the transapical approach and getting it FDA approved.

The transapical procedure

During this procedure, a small incision is made between the ribs of the left lower chest. The replacement valve is then inserted directly into the heart and across the diseased aortic valve.

This approach allows for most direct route to the diseased aortic valve for a faster procedure and a shorter recovery time.

The transapical procedure is a solution for patients with small blood vessels because the direct access into the aortic valve allows the use of a larger size sheath.

Investor summary

Edwards' total sales in the third quarter grew 9% to $448 million, driven by the US launch of Sapien.

Total US sales of heart valves grew 29% and represent a growing proportion of the company's total sales.

Earnings per share were $0.58, a 35% increase over the prior year. The company increased its R&D investments by 20%.

For the quarter, gross profit margin was 75.1%, a 550-basis-point increase over the prior year.

At the end of the third quarter Edwards had total cash and cash equivalents of $622 million and total debt of $175 million.

The free cash flow for 2012 is expected to be between $240 million and $260 million.

To expand its product line, Edwards acquired BMEYE, a Dutch company, for EUR32.5 million (approximately $42 million). BMEYE specializes in non-invasive finger cuffs to measure cardiac output, blood pressure, fluid responsiveness and other hemodynamic parameters.

Another product, the Perimount Mitral Heart Valve, was approved in China.

Outside the US, sales declined 8%.

While in the rest of the world sales grew nicely, in Europe, sales were comparable to the prior year mainly due to austerity measures. The bottom fell out in the south of Europe, while procedures in Germany grew 13% over prthe ior year.

For 2013 the company is optimistic. It projects 13% to 16 percent global sales growth fueled by growing sales of transcatheter valves forecasted between $710 million and $790 million.

Total sales are projected around $2.1 billion to $2.2 billion and earnings per share of $3.21 to $3.31, an increase of more than 25 percent over expected 2012 earnings.

Edwards Lifesciences had a good year and management anticipates an even better one in 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.