Growing Cash Could Drive Edwards Acquisitions

Edwards Lifesciences Corp. is loading up with cash and could be in the market for acquisitions.

The Irvine-based heart valve maker generated some $140 million in free cash flow last year, up from about $60 million in 2001, the company’s first year as a public company after spinning off from Baxter International Inc. in 2000.

As of December, Edwards counted $179 million in cash and investments on its balance sheet.

This year, Edwards said it could generate up to $150 million more, said David Erickson, the company’s vice president of investor relations, at Roth Capital Partners LLC’s annual stock conference last month in Dana Point.

When asked what Edwards plans to do with all that cash, Erickson said, “We want to make technology acquisitions that are close to our core business.”

Edwards is the top maker of replacement valves implanted during open-heart surgery.

The company could look at acquiring makers of heart valves, critical care and peripheral vascular disease-treating devices, Erickson said.

Edwards has other options for its cash. The company could buy back shares or repay some debt, Erickson said.

At the end of December, Edwards had $316 million worth of long-term debt.

Without acquisitions, Edwards could grow valve sales 9% yearly through 2007, wrote Thomas Gunderson of Minneapolis-based US Bancorp Piper Jaffray.

“Reimbursement is healthy and price resistance is minimal in the U.S. market,” Gunderson wrote.

But like other device makers, Edwards could need acquisitions to keep its growth going.

In the fourth quarter, Edwards disappointed Wall Street with sales of $250 million, up 5% from a year earlier but below expectations of $253 million.

Edwards’ profits came in ahead of estimates excluding charges at $38.6 million, up about 50% from a year earlier.

Cautious Analysts

Two other analysts are cautious about Edwards’ growth prospects.

“We are not sure the company’s long-term strategies are likely to pay off in a way the company believes they might,” Jan Wald and Thomas Kouchokos of AG Edwards & Sons Inc. in St. Louis wrote in a recent report.

Edwards already has done some buying.

Early on, Edwards looked to acquisitions to diversify beyond heart valves. But the company switched gears in 2003 and set out to refocus on valves.

The effort has included a handful of buys, including a big one two years ago.

In early 2004, Edwards spent about $125 million to buy Percutaneous Valve Technologies Inc., a developer of a replacement heart valve that doesn’t require major surgery.

Smaller buys included separate deals worth $35 million for mitral heart valve repair products from ev3 Inc. of Plymouth, Minn., and Jomed NV, a defunct European device maker.

The mitral heart valve takes in blood from the lungs.

“We’re more than willing to consider acquisitions of any size if they meet our criteria,if they provide a new growth platform for the company and/or if they provide a great strategic fit,” Stuart Foster, Edwards’ corporate vice president, technology and discovery, said in an earlier interview.

Of course, there still is buzz about Edwards being in the crosshairs of some big device makers. Earlier this year, an Edwards spokesman said management was “positioning the company for long-term, sustainable growth as an independent entity,” though, like any public company, “Ed-wards would act in the best interests of its shareholders and evaluate any offer for purchase.”

Edwards still is waiting for a payoff from its Percutaneous buy.

Most analysts agreed the move was needed: Less-invasive valves are expected to grab more of the heart surgery market in coming years.

In December, Edwards got the regulatory approval to restart a clinical trial for its less-invasive Cribier-Edwards heart valve.

Edwards suspended the trial in June after it found that the procedure carried too many complications, with some patients dying.

Meanwhile, Edwards continues to tend to its core market of valves implanted during major surgery.

40% Market Share

With 2005 heart valve sales of $469 million, Edwards has more than 40% of the estimated $1.1 billion global valve market.

Rivals include St. Jude Medical Inc. and Medtronic Inc.

Edwards is looking to convert older mechanical parts of valves to tissue, said Larry Wood, vice president of percutaneous interventions.

Using tissue would cut down on the need for patients to take blood thinners, he said.

There is growth to be had abroad, according to Wood.

Outside the U.S., less than half of people who need a tissue valve replacement get one, according to Edwards.

“There are still great opportunities for growth,” Wood said.

Edwards is bulking up overseas. Last week, the heart valve maker said it was starting work on a valve plant in Singapore.

The plant, set to employ up to 500 workers, will be the third that produces the Carpentier-Edwards Perimount tissue valves. The company also makes the valves at its headquarters and in Switzerland.

The plant, set to open late next year, is set to serve patients in Asia.

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SHOPPING LIST

Prior buys by Edwards Lifesciences

2004: Paid $125 million for Percu taneous Valve Technologies Inc.

2004: Paid $15 million to acquire technology, patents for less-invasive mitral valve repair from ev3 Inc.

2004: Spent $20 million for catheter-based mitral repair from Jomed NV