Edwards Lifesciences Corp.’s core heart valve business has skipped a slight beat, prompting the Irvine-based device maker to look for a sales shock.
Sales of heart valves, which make up half of the company’s $1 billion in yearly revenue, grew 4% in the third quarter, only slightly better than the second quarter’s 2% growth clip. A year ago, valve sales were growing in the low teens.
The slower valve growth led to a disappointing overall 3% gain to $247 million in third-quarter sales. Wall Street was looking for $255 million in sales.
Competition is taking a toll, according to Chief Executive Michael Mussallem.
“We are still feeling the effect of a competing product introduced late last year,” Mussallem said after the third-quarter results came out earlier this month.
That product is Biocor, a valve from Minneapolis-based St. Jude Medical Inc., Edwards’ key heart valve rival.
Biocor came out a year ago and has been gaining market share since then. The good news for Edwards: Biocor’s surge appears to have stalled.
When St. Jude reported third-quarter results earlier this month, it said Biocor sales were down 0.5% from a year earlier, though overall heart valve sales grew 10% to $65 million.
Still, Edwards estimated Biocor affected its valve sales by $3 million in the recently ended quarter.
Mussallem, on a conference call with analysts and investors, didn’t seem particularly ruffled.
“This is a very steady market,” he said.
Edwards believes “the clinical superiority of our heart valve products, which is backed by the strongest published data, combined with our robust product pipeline, gives us confidence that we will accelerate our growth,” company spokesman Jared Adams said.
Part of Edwards’ slowing growth could stem from a subtle doctor backlash, according to one analyst.
The company is working on a new type of valve that doesn’t require major surgery to implant. Some doctors may have felt left out of the development process, according to Jan Wald, an analyst with A.G. Edwards in St. Louis.
“We have heard that cardiac surgeons have been upset by the Edwards approach for developing its percutaneous valves,” Wald said in a report. “They felt as if they had been ignored.”
The valves still are undergoing testing and don’t provide sales yet to Edwards. But some doctors who feel jilted could be turning away from the company’s mainstay tissue valves implanted during open-heart surgery, according to Wald.
“We believe that the loss of goodwill may be one of the reasons why tissue valve unit growth has slowed,” the analyst said.
Edwards spokesman Adams didn’t specifically address the issue. He said the company is “uniquely positioned to provide an exceptional opportunity for the collaboration of cardiologists and cardiac surgeons.”
Other analysts don’t address any doctor irritation in recent reports on Edwards and its less-invasive valves.
“We view the transcatheter repair program as promising and prefer its approach over competitor approaches,” wrote Glenn Reicin of Morgan Stanley & Co.
If there is a rift, Edwards is “making good progress toward healing” it, Wald said.
Still, competitors, including Minneapolis-based Medtronic Inc., may be trying to seize on any opening, Wald said.
“We have also heard that Medtronic has introduced a program that trains surgeons in endovascular procedures, we believe in part as a response to the opening Edwards seems to have provided,” he said.
Analysts agree Edwards has to jump-start valve sales.
In the past, the company has said valves could yield better profits as long as they were growing faster than the corporate average.
“However, (valve) sales grew below the corporate average in the second and third quarters due to competition from St. Jude’s Biocor,” said Larry Biegelsen, an analyst with Prudential Equity Group LLC in New York.
“Therefore, the improvement in gross margins in 2007 will partly depend upon (Edwards’) ability to reaccelerate the growth rate of its (valve) business,” Biegelsen said.
Edwards could grow its valve business by 7% next year, Biegelsen said. That could be a conservative estimate since Biocor’s sales growth might have reached a plateau, he said.
Biegelsen said he’s optimistic Edwards can handle the Biocor threat. Edwards successfully addressed a competitive challenge from Medtronic three years ago after Medtronic came out with Mosaic, a tissue valve that’s produced at its Santa Ana plant.
Edwards also is going to look for new ways to grow. It plans to roll out an aortic version of its Theon heart valve at the end of January. An aortic replacement valve controls blood flow from the left ventricle to the aorta.
Theon is expected to be less expensive than Edwards’ premium Perimount Magna valve and will be targeted at doctors who do not want to pay more for Perimount Magna, Biegelsen said in his report.
“We believe that (Edwards) may be introducing this valve to better compete with St. Jude’s Biocor, which is priced lower than the Perimount Magna,” Bie-gelsen said.
