Artificial heart valves can sustain life for cardiovascular patients. They play a similar role for Edwards Lifesciences Corp.
Growing heart valve profits coupled with the shedding of slow-growth businesses have made Irvine-based Edwards a standout on Wall Street since its 2000 spin-off from Baxter International Inc. Last week, Edwards shares were up nearly 40% for the year, and the company counted a market value of $1.4 billion.
Heart valves are the key driver of Edwards: Sales of cardiac surgery products,heart valves and related products used during bypass surgery,made up nearly half of the company’s $384 million in first-half sales.
But while profitability is up, Edwards’ sales are slowing. In the second quarter, revenue dropped 6% to $192.4 million from the year-ago period. Among analysts, the prevailing take is that Edwards needs to branch out from heart valves to bolster its growth.
“Sustainable longer-term growth could hinge on the commercialization of other device-based treatments for end-stage cardiac disease besides heart valves,” wrote Juan Noble, an analyst at Fahnestock & Co., in a recent research report.
“To get to the next level (and) increase their growth, they will have to invest heavily in R & D; and include acquisitions as well,” said Ben Andrew, a medical device analyst with William Blair & Co.
Edwards officials say they aren’t offended by such suggestions.
“This really comes back to the core reason why we spun off the company,” said Chief Executive Michael Mussallem.
Mussallem, who’s overseen Edwards since the days when it was Baxter’s cardiovascular group, said the company is focused on the “real value creation thing,” or to “apply new technology to unmet clinical needs.”
Edwards is spending about half of its research and development budget on devices other than heart valves, according to Stu Foster, the company’s vice president of technology and discovery.
Edwards spent 6.3% of its $775 million in revenue last year on R & D;, up from 5.5% of sales in 1999 and 5.3% in 1998. Next year, the company projects R & D; spending should hit 8.9% of sales.
But Edwards still is playing catch-up to its bigger and more diversified rival Medtronic Inc. The Minneapolis-based device maker, which employs 430 people in Orange County, spent 10.4% of its fiscal 2001 sales on R & D.; St. Paul, Minn.-based St. Jude Medical Inc., another key competitor, spends about 11% of its sales on R & D.;
According to Foster, Edwards expects its heart valve business to grow in the 3% to 5% range, “but we have all these other initiatives that we think will raise the growth rate of the company into the 6% to 9% range over the next few years.”
“We’re absolutely engaged in trying to discover new opportunities,” Foster said. “You know, we work in a very rich space,cardiovascular disease is the No. 1 disease in the world in terms of money spent.”
Specifically, Foster said that Edwards’ biggest R & D; program is its endovascular graft program designed to treat aneurysms. The company’s Lifepath AAA Graft System is resuming second-phase clinical trials in the U.S. The tests were voluntarily stopped last year after Edwards discovered wire form fractures in some of the devices.
Last month, Edwards officials said they received CE-mark approval to market a next-generation version of Lifepath in the European Union.
Lifepath “really addresses peripheral vascular disease, which is an area we’ve targeted for investment, in addition to heart valve therapy,” Foster said.
Analyst Andrew said he believes Edwards won’t stray far from where it came: “They will still remain a valve company. That’s the heart of their franchise, but they can branch out into related areas.”
To be sure, Edwards’ shift is subtle. The company is seeking to diversify by building on its stronghold in heart valves. Other areas of cardiac surgery, including devices used in minimally invasive surgery, are in the company’s sights, according to Foster.
“We also believe in the future that many of the techniques that are done surgically today will eventually be done in minimally invasive ways,” he said. “We are seeing much of our R & D; dollars” shifting to less invasive procedures, he said.
In a research report, Andrew Jay of First Union Securities wrote that new products, such as Lifepath and a transmyocardial revascularization heart laser system for treating angina, “give us greater confidence in our 2001 and 2002 EPS estimates.”
Andrew of William Blair points to Lifepath as something that could broaden Edwards’ base. He estimated the market for treating abdominal aortic aneurysms could be $600 million to $800 million within the next three to five years.
But, he said, “Edwards is late to the party” as Medtronic and Guidant Corp. of Indianapolis already are in the aneurysms device market.
Still, “the market is $200 to $300 million today,” Andrew said. “There will be room for Edwards.”
“While they will not be one of the first players to market, we believe that physicians will welcome a new option when it becomes available as the approved devices still have performance shortcomings,” said Jay of First Union Securities.
Lifepath’s thicker material and balloon-expandable delivery system, according to Jay, could provide better results for aneurysm patients in the long term.
“At $8,500 (to) $9,000 per device, the (Lifepath) opportunity exceeds $1.5 billion,” Jay said in his report, noting that the market is barely penetrated.
Fahnestock’s Noble also noted Lifepath’s potential in his report. He wrote that Lifepath, “could, after a U.S. release projected for mid-2004, develop into a $100-plus-million-a-year product, as endografts have developed for Medtronic and Guidant.”
Edwards has a number of other devices in development besides heart valves and aneurysm treatments.
Among other things, the company is adding a new measurement to hemodynamic parameters monitored by its critical care catheters, Foster said.
“It gives the clinician another means to gauge the well-being of their patients in the intensive care units that they didn’t have before.”
The new measurement required Edwards to develop a change in the catheter system and a new software program for the catheter’s monitors, Foster said.
Additionally, the company is planning to roll out new critical-care catheters, including Vantex, which is made of material designed to prevent infections in intensive-care unit patients, and AVA, a catheter which can deliver both drugs and introduce another catheter in a patient.
While analysts say Edwards’ push into new areas and products is key, the move could bring some volatility to the company’s stock, which has steadily appreciated since its debut.
“Much of the longer-term risk in the stock relates to the company’s execution of product development on a broad front,” Noble said.
Edwards actually was more diverse when it spun off from Baxter International of Deerfield, Ill., a year and a half ago.
Back then, Edwards included Bentley Laboratories, a maker of disposable oxygenators, blood reservoirs and filters used during heart surgery, and Novacor, maker of a heart assistant system.
Edwards eventually jettisoned both units. Jostra AG, a German device maker, acquired Bentley for $30 million. Novacor was acquired by World Heart Corp. of Ottawa, for a fourth of that company’s shares, or around $45 million at the time.
If Edwards wanted to keep Bentley, the company would have had to find a unit that was growing 20% to 35% in order to maintain an overall 15% revenue growth, according to analyst Andrew.
“Bentley was contracting. For Edwards to keep Bentley and Novacor, it would have made (sustaining growth) that much harder,” he said.
“Because those operations showed narrower margins and weaker growth prospects than Edwards’ core valve and critical care businesses, their divestment significantly improved the company’s profitability and internal growth rate,” analyst Noble wrote. n
