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Edwards Lifesciences’ first year was anything but boring

Like any spin-off, Edwards Lifesciences Corp.’s Michael Mussallem says he sometimes misses the name recognition, product diversity and deep pockets of his former parent, Baxter International Inc.

But Edwards’ chief executive says he’s taken to independence as the one-year anniversary of his company’s public debut approaches.

“Overall, I’m very proud of what we’ve accomplished so far,” Mussallem said of Edwards, the Irvine-based heart-valve maker with around 1,500 Orange County workers and 5,000 in all. “For our customers, the promise was that not only were we going to continue to be a highly trusted, high-quality company, but we were going to be more engaged in innovation. That was a turn-on for them.”

Baxter spun off its former cardiovascular unit as Edwards Lifesciences last spring. Since then, Edwards shares have marched steadily upward,with the big exception of a late October plunge that saw the company’s shares lose nearly half their value in one day.

The slide came after Edwards said weakness in the euro would stunt fourth-quarter and 2001 sales growth. Approximately 35% of Edwards’ sales, which totaled $775 million in 2000, come from outside the U.S.

Edwards’ stock since has recovered from the euro meltdown. Last week, the company counted a market capitalization of about $1.1 billion, up from $700 million in early November.

Still, the euro incident provided Edwards with its first big investor relations test.

“We did not expect the reaction to be what it was, and we really considered it an overreaction,” Mussallem said.

Mussallem and other executives immediately got on the phone with analysts and big investors and offered details about the currency situation, he said. Then, he and others met with workers to try to calm their fears about what the stock drop meant to the company’s stock ownership plan.

Edwards officials told workers that “we did consider (the price drop) an overreaction and that we were the same great company today that we were yesterday,” Mussallem said.

A week after the euro announcement, “we actually did a fly-around and we visited most of our shareholders, at least the top 10 shareholders, and also all the folks that wrote research on the company,” Mussallem said.

In all, Edwards has held up well vis- & #341;-vis its peers. The company’s shares have traded closely with those of St. Paul, Minn.-based St. Jude Medical Inc. and recently have outpaced those of Minneapolis-based Medtronic Inc., which saw its shares fall off in February after reporting softness in one of its key markets.

Edwards is “a good company, all of their fundamentals are in play,” said Keay Nakae, an analyst with Wedbush Morgan Securities in Los Angeles. “While Edwards is a relatively new independent entity, its product lines have a long history, strong brand names and well-established market positions in businesses that focus on the treatment of late-stage cardiovascular disease.”

Nakae estimates that Edwards has 65% of the U.S. tissue heart valve market, based on the performance of its Carpentier-Edwards Perimount aortic valve. Edwards launched a new pericardial valve last year, “which we expect will further strengthen its lead in the tissue valve segment of the market,” Nakae said.

Tissue heart valves are becoming more popular in the market because of two factors, according to Nakae: patients who receive them don’t have to take the anticoagulant drugs that mechanical-valve recipients do; and Edwards’ cow tissue heart valves are more durable than standard pig tissue valves.

“Since they last longer, they are now prescribable to younger patients,” Nakae said.

Greg Simpson, a medical device analyst at A.G. Edwards & Sons in St. Louis, has a more measured view of Edwards.

“All things considered, the stock has performed reasonably well. Even now, in this bad time, they’re up 50% over their low,” he said.

Additionally, he said, Edwards now is “free of the Baxter chains. That’s a big plus.”

The valve maker’s “hands were tied in a lot of ways” because of Baxter, Simpson said. And Edwards still is wrestling with part of that legacy: “As is pretty typical in a spin-off, (Baxter) loaded them with a pretty significant amount of debt,” he said.

As of Dec. 31, Edwards counted $428.4 million in total debt, after paying down $70 million in the fourth quarter.

But Simpson said Edwards’ long-term future is strong, particularly if it’s able to wrap other products around its brand name.

“Heart surgeons are the most conservative group of doctors,” Simpson said. “The Edwards brand name is solid gold for them.”

Edwards takes its name from the late Lowell Edwards, a biomedical pioneer who began working out of his Santa Ana garage in the 1950s and is credited with co-inventing the first commercially viable artificial heart valve.

While the Baxter name also is well known, Mussallem cites Edwards’ 40-year-old brand as an edge. As an independent company, Edwards also has been able to boost research and development spending by 10%. In the fourth quarter, the company spent $13.4 million, or 7% of sales, on R & D.; But that’s still below bigger rivals Medtronic at 10% and St. Jude at 11%.

Edwards’ other first-year activities included jettisoning Novacor and Bentley Labs, two of its less-profitable units, and accusing Medtronic and St. Jude Medical of infringing on its patents. The company also suffered some product testing setbacks and introduced new products.

“(As) a pure company that’s focused on cardiovascular medicine, we’re focused on being the best cardiovascular company that we can possibly be,” Mussallem said. “That really changes a lot, your mindset and what you’re going after.”

So what was the biggest surprise Mussallem encountered in the spin-off? Paperwork.

“I don’t know how high the documents would stack, if you could stack them; they’d probably go from here to the moon,” he said. “But there’s a tremendous amount that goes with SEC filings, with registering with the New York Stock Exchange. It’s also a very expensive proposition to put all the infrastructure in place.”

But Mussallem said building Edwards as a stand-alone company was made easier by what he called a “very experienced team” that had helped run Edwards when it was Baxter’s cardiovascular unit. Mussallem himself was a Baxter group vice president who oversaw the unit before the spin-off.

Mussallem said he’s also found that he spent more time than expected with stock analysts and institutional investors in Edwards’ first year.

“Especially as a new company, you want investors to understand,” he said. “And the best way to do that, actually, is to have face-to-face meetings. What we find more than not is serious investors who want to buy shares of Edwards want to be able to look management in the eye and ask them direct questions and come away with a sense of confidence. And you just can’t phone that in or say ‘look at my Web site’ for people to make those kinds of commitments.” n

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