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Edwards’ Legacy Buy Cushions ‘Worst Day’

Mussallem: expects “strong rebound in the fourth quarter”

Medical device maker Edwards Lifesciences Corp. last week saw what some analysts called “the worst day” in its 12 years as an independent public company.

Its shares fell by 20%, wiping away about $2.5 billion in market value.

The big dip came on the Irvine-based company’s lowered outlook for third-quarter sales. The revision tracked in part to slower-than-expected sales of its Edwards Sapien, a non-invasive device that has been the star of the company’s fast-growing transcatheter heart-valve unit, which brought in about 20% of nearly $1.7 billion in revenue last year.

Questions about insurance reimbursements for the heart valve in the U.S. and Europe played into the slower sales of the device—and the rugged reaction on Wall Street.

The “worst day” ended within a day, though, thanks in part to an acquisition Edwards made for its less-flashy and generally steady critical-care unit, a legacy business line that gets less attention than heart valves but accounts for nearly 32% of overall revenue.

Shares Rise

Edwards’ shares rose 4% on word of its $42 million buy of Netherlands-based BMEYE B.V., and the company finished the week with a market value of about $10 billion.

BMEYE develops non-invasive advanced hemodynamic monitors for use in surgery, intensive care, emergency room and cardiology settings. Edwards is planning to further develop BMEYE’s technology and integrate it into its Edwards EV1000 monitoring platform for hospital use.

That’s part of Edwards’ slower-growing legacy business, which includes critical-care products such as FloTrac, a minimally invasive heart monitor; PediaSat, an oximetry catheter used on children; sensor-catheter VolumeView; and surgical heart valves.

The legacy business doesn’t get as much attention from analysts and investors compared with Edwards Sapien.

The company, which employs about 2,500 people in Orange County, remains focused on both units.

“Adoption of our advanced monitoring products is continuing, and we gained share both domestically and internationally in our legacy products that have a great history,” said Chief Executive Michael Mussallem.

Sales of Edwards Sapien have nonetheless driven much of the increase in shares, which were up 49% since the beginning of the year, prior to last week. The device has been on the market in Europe since 2007, and the company saw a big run-up in its shares after it got Food and Drug Administration approval for U.S. sales late last year.

Global sales of the Sapien have been growing steadily and will reach $124 million, including $55 million in U.S. sales, according to the revised revenue forecast that sent Edwards’ shares downward last week.

Edwards’ acquisition of the Dutch business for its legacy line helped hold the line last week, and Mussallem said he expects a new look from investors once U.S. regulators issue new guidelines for Medicare reimbursement on the Edwards Sapien.

The new guidelines are expected in the “next several weeks,” according to Mussallem, who said he “anticipates a strong rebound in the fourth quarter.”

Expectations

Also expected soon: an FDA approval to expand the use of Edwards Sapien on high-risk patients.

Analyst Larry Biegelsen of Wells Fargo & Co. said in a client note that he expected broader approval that would double the potential U.S. market for the device “any day.” He also said that insurance reimbursements for the valve should be helped through the approval of a method to implant it without going through the femoral artery.

Getting more U.S. sales would help balance out the slowdown in European sales, where reimbursements for Edwards Sapien have been affected by austerity measures by several national governments. Biegelsen also noted that an approval for Edwards Sapien by health regulators in Japan appears to be on track for late 2013.

Some on Wall Street are taking a more cautious view, based in part on competitors that are expected to bring minimally invasive heart valves to market in coming years.

“At this point, it’s hard to see what turns this trend around … The competitive landscape will only get tougher over the next six to 12 months,” Morgan Chase & Co. analyst Michael Weinstein said in a client note.

Competitors

Among the companies aiming to bring competing products to the market: St. Jude Medical Inc., a Minnesota-based device maker with some 425 Orange County workers; and Natick, Mass.-based Boston Scientific Corp., which bought San Clemente-based Cameron Health Inc. Both expect to release minimally invasive heart valves during that time, according to Weinstein.

The new competitors are likely to get to market in Europe first, with U.S. approval several years away.

Minneapolis-based Medtronic Inc., which makes its Medtronic CoreValve in OC, isn’t expected to be on the U.S. market until at least 2015.

Edwards is scheduled to release its third-quarter results on Oct. 19.

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