Edwards Gets Everything But The Valve

| About: Edwards Lifesciences (EW)

Edwards Lifesciences (NYSE:EW) has bought a mitral valve company but not the mitral valve. The Irvine, California-based group has acquired Valtech Cardio for $340m up front, but Valtech’s Cardiovalve transcatheter mitral valve replacement device is not included in the deal.

Instead Edwards has an option to this technology, which will for now be spun out into a new concern before the Edwards-Valtech deal closes. What it gets from the main acquisition is a mitral valve repair device, Cardioband, which could in time compete with Abbott’s MitraClip, and hence a wider product offering that could increase its appeal as a supplier.

Perhaps Edwards feels that it does not need Cardiovalve given that it already has two transcatheter mitral valve replacement devices. Fortis was developed in house and another obtained via last year’s acquisition of Cardiaq (Edwards’ $350m CardiAQ buy ups mitral valve stakes, July 13, 2015). Moreover Cardiovalve is not expected to reach the clinic until next year.

Still, it is wise to keep its foot in the door with the option to acquire Cardiovalve: a pilot trial of Fortis was halted briefly last year after instances of thrombosis, and while it has restarted Edwards now has a third device in reserve. It will cost Edwards $200m in cash and stock and up to $50m in milestones to acquire Cardiovalve, and the option specifies that the trigger must be pulled within two years of the close of the main Valtech deal.

Mitral, then tricuspid

For now Edwards has Cardioband, a catheter-mounted implant that strengthens the mitral valve’s annulus to improve its function, rather than replacing it. It is approved in Europe and close to starting a US pivotal trial. It is slightly behind Abbott’s MitraClip, which is also CE marked and has a US approval trial well under way; this study, called Coapt, ought to read out in 2018.

Like Cardioband, MitraClip is designed to treat mitral regurgitation, but does so via a different mechanism, clipping the valve’s leaflets together. Both devices are being investigated as treatments for tricuspid disease too; analysts at Wells Fargo say that early feedback from Cardioband’s CE mark trial for tricuspid repair has been positive.

A glimmer of how these technologies might sell can be seen thanks to the heart pump company Heartware (NASDAQ:HTWR). Heartware attempted to buy Valtech last year, but the deal was called off after its investors made it plain that they would rather the company sell itself than acquire (Heartware loses heart for Valtech buy, January 29, 2016). They got their way: Medtronic bought Heartware this summer.

But while the Heartware-Valtech deal was still on the table Heartware made SEC filings featuring various estimates of Valtech’s commercial potential. Its most bearish forecast put Valtech’s revenues at $14m in 2017, rising to $180m in 2022; its most bullish outlook was $30m in 2017 and $568m in 2022.

The endless buyback

Edwards is on the hook for a further $350m in milestone payments as part of the Valtech deal, meaning that the maximum it might pay out – if it exercises its option on Cardiovalve – is approaching $1bn.

The group says it intends to offset the resulting dilution with an extension of its share buyback program; $277m of its $750m share repurchase scheme remains outstanding, and Edwards now says it will add up to $1bn to this. Of course, it could avoid dilution simply by paying Valtech's owners in cash rather than new equity.

As such the buyback will likely also be an attempt to get shareholders back on side after a marked share price drop following Edwards’ disappointing third quarter, when sales of its flagship Sapien valves did not meet analysts’ expectations.