Edwards Lifesciences Corp.'s New Share Buyback Program

Sep.19.11 | About: Edwards Lifesciences (EW)

Edwards Lifesciences Corporation (NYSE:EW) recently announced a new share repurchase program worth $500 million. At the end of the second quarter of fiscal 2011, the company was left with $240 million of authorization. Edwards expects to repurchase approximately $100 million worth of additional shares during the third quarter of the current fiscal.

Edwards exited the second quarter of fiscal 2011 with $468.2 million in cash and cash equivalents (up from $396.1 million at the end of December 2010) and total debt of $174.8 million. Free cash flow generated during the quarter was $42.1 million and the company anticipates it to be within the $190−$200 million level for the year. Moreover, 970,000 shares for $83.2 million were repurchased during the most recent quarter.

A strong cash balance enables the company to target suitable acquisitions. In March 2011, Edwards acquired Embrella Cardiovascular for $43 million in cash. Embrella develops the Embrella Embolic Deflector System which is used during transcatheter heart valve (THV) procedures and received CE Mark approval in May 2010. This acquisition is a strategic fit for Edwards given its current focus on the THV portfolio.

While the latest share buyback program is an attempt to reward shareholders, current investor focus is on the potential US approval of Sapien THV for Cohort B patients (considered unfit for surgery). Edwards is confident of receiving approval by October 2011 and expects to record approximately $20–$25 million during the first quarter of Sapien’s launch in the US.

In Europe, Edwards operates in a highly competitive environment with the strong presence of Medtronic (NYSE:MDT). Moreover, Boston Scientific (NYSE:BSX) is also working to enter the THV market.

In July 2011, Sapien received favorable recommendation from the advisory panel of the US Food and Drug Administration (FDA). However, the panel expressed concerns about vulnerability to neurological problems, particularly stroke, in patients treated with Sapien. On a cautionary note, any hiccup in the final approval of the device will be a major blow for the company.

The risk related to stroke also poses a challenge for potential approval in Cohort A patients. Although survival rate for patients treated with Sapien (under Cohort A) was similar to those treated surgically, the former group experienced a significantly higher risk of stroke.

We currently have a Neutral recommendation on Edwards, which corresponds to a Zacks #3 Rank (Hold) in the short term.