In January the FDA approved Medtronic's (MDT) CoreValve, a minimally invasive system for replacing diseased heart valves for U.S. marketing. The decision was expected by April. CoreValve has been available in Europe since 2007, and in the meantime Edwards Lifesciences (EW) enjoyed a monopoly position in the U.S.
Medtronic now has a few months to launch CoreValve in the U.S. before Edwards gains approval for its next-generation Sapien XT valve, which has a lower profile and so it is more similar to CoreValve. In Europe Medtronic has been maintaining a stronghold against Edwards and other approved devices including St. Jude Medical's (STJ) Portico.
Statistics show that there is a huge market for the devices. According to a 2011 report, approximately 300,000 people worldwide have been diagnosed with severe aortic stenosis, a narrowing of the heart valve between the left ventricle and the aorta. Blood can back up in the heart, leading to chest pain, breathlessness and weakness.
One in three patients can't tolerate the open-heart surgery that has been proven to improve quality and lengthen life. Half die within a year if untreated. Medtronic and Edwards are the only two companies in the U.S. approved for the minimally invasive procedure.
The Extreme Risk Study
The U.S. approval authorizes CoreValve for patients who are too sick or frail to undergo open-heart surgery for severe aortic stenosis. The U.S. pivotal trial for CoreValve has yielded overwhelmingly positive results. It showed low rates of stroke and valve leakage, two of the most concerning complications of valve replacement.
The so-called Extreme Risk Study was done in very sick patients. It met its primary endpoint of death or major stroke at one year with a rate of 25.5 percent, which was 40.7 percent lower in patients treated with CoreValve than the rate expected on a historical basis. 75.6 percent of the patients were alive after one year.
The CoreValve System also achieved great blood flow results similar to the gold standard represented by surgical valves. In addition, valve leakage rates were low and decreased over time as the self-expanding valve conformed to the shape of a patient's annulus. Annulus is the base of a heart valve that supports the valve's leaflets. This is an improvement that has not been reported in other major TAVR studies.
CoreValve's major competitor is Edwards' Sapien.
Sapien was approved in 2011 by the FDA for patients with severe aortic stenosis who were too sick to undergo open-heart surgery. In 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, called transapical procedure.
During Edwards' monopoly in the U.S., Medtronic's CoreValve System has been implanted around the world, outside the U.S., in about 50,000 patients in more than 60 countries. In Europe CoreValve is the market leading device. TAVR or aortic valve replacement is a procedure during which a diseased heart valve is replaced. The artificial valve is advanced in a compressed form through the artery by a catheter and once in position, it is expanded.
It is a revolutionary approach compared to the traditional open surgery in which the surgeon opens up the breastbone to reach the heart and aorta. During open surgery most patients are connected to a heart-lung bypass machine or bypass pump since the heart is stopped. The procedure is efficient but traumatic for the patient and requires a long period of recovery.
The FDA approved two different devices for Medtronic: CoreValve with sizes of 26 mm, 29 mm, and 31 mm and a smaller version called CoreValve Evolut, with 23 mm in diameter. Edwards' Sapien valve is available only in 23 mm and 26 mm sizes.
Edwards' next-generation product, Sapien XT, is expected to be approved in the U.S. in mid-year. With that approval, Edwards again will have gained a small edge.
The XT is expected to be approved for both extreme risk and high-risk patients, giving it an advantage over CoreValve, which is not expected to be approved for high-risk patients until mid-2015. High-risk patients are ones who are able to undergo heart surgery but are at high risk of complications. They represent a larger market for the device.
So the race goes on.
Medtronic now has about six months to get cardiologists to become familiar with CoreValve before the window of advantage, so to speak, closes again. CoreValve's appeal right now is to the patient group that cannot be treated with Sapien. It was learned from the trials that many U.S. patients require larger valve sizes in diameter than available in Sapien or Sapien XT.
Also, Medtronic's delivery system is uniformly smaller than Edwards' to accommodate all of its sizes.
The platform is available on a 6 mm diameter delivery system across all sizes, meaning that patients with smaller vasculature can also have the device implanted. This flexibility is particularly important for patients with tortuous or complex anatomy and for patients with severely calcified leaflets.
Distribution of the valves began immediately upon approval. First customers are the about 60 U.S. sites that participated in the clinical trials and already familiar with the device. Beyond that about 300-350 centers are counted as places that may meet government criteria for implanting the device. Part of the distribution is a very careful and thorough training provided for doctors and nurses.
Medtronic is already working on the next-generation of valves. European trials are underway for the Evolut R type valve, a self-expanding Nitinol-framed superannular valve which represents a substantial advance. The trial is conducted at four sites and meanwhile negotiations are continuing with the FDA about the path for a U.S. approval.
The Evolut R Recapturable System has been designed to resolve some of the difficulties encountered by physicians: it allows recapturing and repositioning of the valve during deployment, it better conforms to an irregular annulus, and provides a delivery system with a smaller sheath to reduce the profile needed to access the patient vessel.
Medtronic also working on its upcoming U.S. application for the high risk group of patients. This coming spring one-year data will become available from the high risk patient group of the CoreValve's pivotal trial. The high risk study compares CoreValve against traditional open heart surgery, a data which will be subject to a separate FDA review, possibly involving the use of an advisory panel.
Medtronic estimates that roughly 100,000 people in the U.S. have severe, symptomatic aortic stenosis, and about a third of those are at an extreme risk from surgery. The company projects that the world-wide market could grow to between $2 billion and $2.5 billion annually by 2020 if further clinical studies expand regulatory approvals to less-sick patients.
TAVR devices, which have been available in Europe for several years, are considered by industry analysts as a major source of new sales for heart-device makers. The analysts are projecting shining numbers for future sales. But the projections may be overly optimistic at this point in light of recent developments.
Heart devices in general, including bread-and-butter products like pacemakers and implantable defibrillators, have come under pricing pressure from insurers. Regarding transcatheter valves, the U.S. market hasn't grown as quickly as Edwards and others had hoped because of strict payment-reimbursement guidelines implemented by Medicare.
Medicare requires hospitals to document that patients are not good candidates for surgery. The valve, which costs about $30,000 per procedure, is also a money loser for many hospitals since Medicare typically doesn't provide extra reimbursement beyond what it pays for surgery.
The world-wide market for transcatheter aortic valves was $1.1 billion last year, of which Edwards controlled about 65 percent and Medtronic about 31 percent, according to estimates by Jefferies LLC. Regarding the U.S. Market, Glenn Novarro, an analyst with RBC Capital Markets estimates that the TAVR market will be approximately $450 million in 2014.
Due to the early approval of CoreValve, the reduction in Edwards' market share will happen sooner than expected, with Medtronic ending up with 20 percent of the U.S. TAVR market in 2014 and about 30 percent by 2016. According to David Lewis, an analyst at Morgan Stanley, CoreValve's U.S. sales should reach $5 million in the first quarter of 2014. Medtronic said that CoreValve will be priced at around the same level as Sapien.
In January Edwards was awarded $392 million in a patent-infringement lawsuit against Medtronic. The lawsuit over the Cribier patent was filed in federal court in Santa Ana, California in 2011 and transferred the following year to Wilmington, Delaware. Edwards said it will seek triple damages because the jury ruled Medtronic's infringement was intentional and it will also seek injunction of the product in the U.S.
However, the appeals process takes time, at least 14-18 months and the injunction barring Medtronic from launching in the U.S. is not likely. It has been difficult to get an injunction in the U.S. since a 2006 Supreme Court ruling conditioned that before injunction is ordered, other measures should be tried, like a royalty agreement worked out between the parties. In any case, the public interest should not be harmed.
Since Medtronic's CoreValve is now approved for U.S. marketing and certain sizes will treat patients that Edward's Sapien currently cannot, the infringement issue is likely will be resolved with a royalty agreement. Medtronic said it plans to appeal the jury's decision on Edwards's Cribier patent. Medtronic had appealed an earlier decision on the Anderson patent through the U.S. Supreme Court, which declined to hear it. Medtronic paid Edwards $84 million in initial damages last year in a case that's still pending.
Regarding the Cribier patent, Medtronic won a similar case in Europe and an injunction in Germany based on the Spenser patent. A patent verdict and injunction were initially obtained in Germany by Edwards, but subsequently the case was overturned on appeal after the European Patent Office said the claims may not be valid.
Medtronic last reported financial results for the second quarter of its fiscal year of 2014, which ended on October 25, 2013. For the quarter the company reported worldwide revenue of $4.19 billion, compared to the $4.09 billion for the same period the year before, an increase of 3.3 percent. Second quarter net earnings were $902 million, or $0.89 per diluted share, an increase of 40 percent and 41 percent, respectively, over the previous year.
The international revenue of $1.87 billion increased by 5 percent on a constant currency basis and accounted for 45 percent of the total revenue. Emerging market revenue of $513 million increased 13 percent and represented 12 percent of the total revenue. Structural Heart revenue, which is the segment that includes CoreValve sales, grew 4 percent to $281 million. Obviously all the CoreValve income came from outside the U.S.
It is hard to underestimate the significance of CoreValve's U.S. launch for Medtronic. CoreValve along with Simplicity, the renal denervation system were supposed to be the two driving engines of growth for the company. The recent trial failure of Simplicity left CoreValve alone to carry the burden.
Investors should be assured that the company will do its very best to make CoreValve a success.