‘Double-Digit’ Growth Could Boost Edwards Lifesciences Stock
Edwards Lifesciences EW — maker of medical devices including artificial heart valves — has lagged the stock market in 2020. As of October 23, its shares had increased a modest 3.8% for the year — while the S&P 500 rose 6.4%.
Its latest quarterly report exceeded investor expectations and Edwards expects double-digit growth to resume in 2021. My recent interview with Chairman and CEO Mike Mussallem suggests that Edwards will deliver products to market that could accelerate top-line growth.
(I have no financial interest in the securities mentioned in this post).
Edwards’s Expectations-Beating Financial Report
Edwards Lifesciences — which was spun off from Baxter International BAX 20 years ago — designs, manufactures, and markets medical devices and equipment for advanced stages of structural heart disease.
With 55% of its sales coming from the U.S., Edwards’s products include surgical tissue heart valves, transcatheter valve technologies, surgical clips, catheters and retractors, and monitoring systems used to measure a patient’s heart function during surgery.
Edwards — a pioneer in transcatheter aortic valve replacement (TAVR) — reported third quarter 2020 results that impressed analysts. Total sales increased 4.3% to about $1.1 billion and TAVR global sales rose 6% to $745 million in the third quarter.
Edwards growth has suffered as patients deferred TAVR operations due to the pandemic. A year ago — in the third quarter of 2019, TAVR sales popped 30%. However, in the second quarter of 2020, patients deferred TAVR procedures.
The good news, as Mussallem told investors in an October 21 earnings call for the period ending September 30, 2020, is that in the third quarter, 100% of Edwards’s active U.S. TAVR sites had returned to performing TAVR procedures.
Faster growth is expected. More specifically, double digit revenue growth — spurred by a more than $7 billion TAVR opportunity by 2024 — is on tap for Edwards in 2021, according to Medical Devices and Diagnostic Industry (MD+DI).
For the full year 2020, Edwards expects a slight improvement over the previous quarter’s guidance. For example, CFO Scott Ullem told investors on October 21 that Edwards was assuming that the worst of 2020’s Covid-19 financial impact was “behind us although we anticipate regional hotspots and risks for the foreseeable future.”
(With U.S. infections rising above 75,000 on October 22 — to the second highest level since the pandemic began — according to the New York Times NYT , I wonder whether that is a realistic assumption.)
Ullem said that Edwards expects fourth quarter TAVR growth at the high end of the “minus 5% to plus 5%” range. And for the full year Edwards is raising the bottom end of its adjusted earnings per share guidance to a range between $1.85 and $1.95 — that is a slight improvement since “2020 consensus is non-GAAP EPS of $1.84 on sales of $4.4 billion,” according to SeekingAlpha.
Analysts Neither Disappointed, Nor Thrilled
Analysts were not disappointed with the results. For example, Marie Thibault, a medtech analyst at BTIG, wrote in an October 22 report, “Overall, Q3 results wowed us, though some may nitpick Q4 guidance or look for a more specific range on double-digit TAVR growth in 2021,” according to MD+DI.
Debbie S. Wang, Morningstar MORN Senior Equity Analyst, dubbed the results “respectable” and “tracking closely with our estimates for 2020.” As Wang wrote in an October 21 report, Edwards’s results underscored “how the firm’s transcatheter aortic valve business had suffered a relatively shallow dip during the shelter-in-place orders last spring and a quick resumption of procedure volume over the summer into fall.”
How Edwards Aims To Accelerate Growth
Wang sees opportunities for growth from Edwards’s product development portfolio. As she wrote, Edwards “has assembled a robust pipeline of transcatheter mitral and tricuspid valve (TMTT) technologies. [The clinical data reported from] five pivotal trials for TMTT devices” could raise her assessment of the depth of Edwards’s “moat.”
Edwards is excited about the potential of four of its products. As Mussallem told me in an October 6 interview, “we continue to make progress toward helping more patients with some specific therapies.”
- “Our newest transcatheter aortic valve, SAPIEN 3 Ultra, which is being introduced to more geographies;
- the PASCAL tricuspid repair system, which this year received CE Mark for the treatment of patients with tricuspid regurgitation;
- the continued adoption of the INSPIRIS RESILIA aortic valve for enhanced tissue anti-calciﬁcation technology that will potentially allow the valve to last longer; and
- the advancement of the HemoSphere platform for machine learning, data-driven hemodynamic monitoring and incorporation of artificial intelligence.”
Edwards is investing in R&D and clinical trials to move new ideas into the market. Mussallem sees opportunities to improve the TAVR procedure and technology and to treat more patients who need it. Patients with mitral and tricuspid valve disease are “tremendously under‐served,” he said.
Mussallem said that unlike its rivals, Edwards is investing in “new developments and therapies” within the surgical structural heart market. Edwards is also partnering with surgeons — aiming to apply artificial intelligence to improve patient monitoring — thus enabling clinicians to generate sharper insights and make better decisions.
Inside Edwards’s Culture of Innovation
Edwards rejects the notion that only startups can innovate. Mussallem has deeply researched corporate innovation and has incorporated three practices that enable it to come up with compelling new products:
- A culture of innovation. Edwards encourages innovation in many ways — structuring physical spaces to encourage collaboration, organizing people into focused teams, and encouraging teams to be bold and learn quickly from “valiant failure,” adapt, and move ahead.
- Innovation-focused business processes. Edwards has a powerful mission and invests considerable time to set specific milestones and coordinate business processes to realize this mission. Its mission includes “aspirations” such as “transforming patient lives with breakthrough medical technologies.” As I wrote last November, that aspiration helps Edwards to attract and motivate highly talented people. Mussallem’s executives works with teams across different functions and business lines to agree on and take responsibility for meeting near-term team key operating drivers (KODs) that align with corporate KODs. To meet these goals, Edwards manages multi-functional teams — consisting of project integrators who orchestrate the efforts of regulatory, supply chain and other functional experts that work with product-focused R&D specialists across its business lines as needed during the appropriate stages of the development process.
- Generous, continuous funding. Edwards uses what it sees as a startup-like approach to funding research and development programs. Specifically, Edwards ties funding to achievement of milestones and bases team rewards on innovation success and patient impact.
Edwards’s product development approach does not focus solely on near- and medium-term results. As Mussallem explained, Edwards’s Advanced Technology (AT) unit, led by its Chief Scientific Officer, “helps us identify and define our future technologies at the outer horizons of our strategic planning time period.” As they have approached commercialization, some AT projects have been transitioned to the business units.
How SAPIEN-3 Was Born
Over a few decades, Edwards was able to introduce a treatment for patients with structural heart disease that generated better results for low-risk patients than open-heart surgery.
Its SAPIEN-3 transcatheter aortic heart valve “is a testament to the outstanding work of our dedicated R&D team [contributing to a treatment that] provides better patient outcomes, less time in the hospital and the ability for patients to resume their everyday lives more quickly,” said Mussallem.
Introduced into Europe over ten years ago, and later around the world, Edwards’s SAPIEN 3 was developed by global teams consisting of more than 350 employees.
Two distinct teams in Irvine, Calif. worked on the device’s catheter delivery system and valve. The team in Israel focused on the valve and the frame; a China-based team worked on a crimper that enables the valve to be delivered through the catheter, and a team in Utah provided input on components manufacturing.
Edwards used data from several clinical trials to set design goals for the SAPIEN 3 valve leading to advancements such as “a new frame geometry, new leaflet design, the addition of a ‘skirt’ on the frame to address paravalvular leak, and a delivery sheath to accommodate the design of the newer generation valve,” explained Mussallem.
To realize the vision for the SAPIEN-3, Edwards fielded a team with diverse strengths. The team included a leader with R&D expertise, a dedicated project manager, and a marketing executive to provide upstream “guidance and feedback.” Experts in metals, tissue, and other areas worked together to overcome challenges and capture opportunities.
Edwards is not resting on its laurels. “While all of this is underway, we also have separate, dedicated teams working on next-generation versions of TAVR therapies,” Mussallem concluded.
As future generations of products find their way into the marketplace, Edwards’s revenue growth is likely to revive. And if Edwards can sustain expectations-beating growth, its shares are likely to rise.