Edwards Lifesciences (EW)

TOP CONTRIBUTORS

John Bartel

Andrew Lewis

Edwards Lifesciences (NYSE: EW) makes heart valves and post-surgical cardiac monitoring systems used to treat and monitor patients with advanced cardiovascular disease. Unlike other medical device companies, Edwards only sells medical devices for treating heart disease. Most of the company's revenue comes from devices used to replace diseased or damaged heart valves. Most of the company's other products, such as surgical tools and monitoring systems, are all used during or after valve surgery. By investing in this area ahead of its competitors and concentrating its resources on a single therapeutic area, the company has remained the market leader in this area while it competes with larger, more diversified device companies such as Medtronic (NYSE:MDT) and St. Jude Medical (NYSE: STJ).

A significant portion of Edwards' heart valves require open heart surgery to install, an extensive procedure in which the heart is stopped and bypassed. There is growing demand in the medical community for a cheaper, less invasive technique for replacing defective heart valves. Several companies are already developing transcatheter valves, which can be inserted via a narrow catheter directly over the defective valve without stopping the heart. These valves require only a small incision instead of an elaborate open heart surgery, making the procedure practical even for high risk patients who could not survive surgery.

Business Overview

Edwards sells its products in over 100 countries, with most of its revenue coming from the United States, Europe, and Japan. Products are categorized into one of five main segments: Heart Valve Therapy, Critical Care, Cardiac Surgery Systems, Vascular, and Other Distributed Products^[1].

Business & Financial Metrics^[2]

In 2009, EW earned a net income of $229.1 million on $1.32 billion in revenue; this represents a 77.7% increase in net income on a 6.8% increase in total revenue from 2008.

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Business Segments^[3]

• Heart Valve Therapy (54.1% of revenue): Heart Valve Therapy is EW's largest segment. This segment's products include tissue heart valves and repair products used to replace or repair damaged or defective valves.^[4] The core product of the Heart Valve Therapy segment in 2007 was the Carpentier-Edwards PERIMOUNT pericardial tissue valve.

• Critical Care (34.2% of revenue): Edwards' Critical Care segment produces hemodynamic monitoring system for monitoring cardiovascular function and blood oxygen levels before, during, and after surgeries.

• Cardiac Surgery Systems (7.0% of revenue): Products in this segment are designed to complement products in the Heart Valve Therapy segment, and include items such as soft tissue retractors used in open heart surgery, as well as drainage and filtration systems designed to minimize damage to vessel walls.^[5]

• Vascular (4.6% of revenue): The Vascular segment produces equipment used to treat vascular complications outside of the heart, such as atherosclerotic disease, which often occurs concurrently in the heart and the blood vessels. Edwards' Vascular segment provides catheter based instruments to remove blood clots and repair vessel damage.^[6]

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Key Trends and Forces

New Technologies Threaten Revenue Sources

In 2009, Edwards's Heart Valve Therapy segment generated 54.1% of net sales.^[3] These valves require open-heart surgery, and increasing demand for a transcatheter valve that can be installed without elaborate surgery is driving research and development in the market. Edwards is investing in the development of a high-quality transcatheter valve before its chief competitors in order to protect its primary source of revenue. A transcatheter valve can be inserted directly over the defective valve via a narrow catheter through a small incision. The procedure can be performed on higher risk patients than open heart surgery can and requires less effort. Thus, a successful transcatheter valve would render surgical valves obsolete. Since Edwards primary source of revenue is surgical valves, their business is vulnerable if another company develops a transcatheter valve first.

Consolidation in the Healthcare Industry and New Healthcare Initiatives Put Downward Pressure on Prices

As the healthcare industry consolidates, buyers become larger, their purchasing power increases, and they put downward pressure on the prices of medical device products.^[7] Studies show that hospitals that are part of multi-hospital systems have greater control on both the prices they charge and the prices they agree to pay for purchased goods. Edwards is at a disadvantage compared to larger, less specialized companies that have the capital resources to offer discounts for purchases over a broad range of products.^[8]

Also, rising costs of Medicare and Medicaid have spurred new legislative initiatives barring the increase of funding for government healthcare programs.^[9] If passed, these initiatives would limit the reimbursement potential of these programs, and subsequently put pressure on medical device suppliers to lower prices or risk not making sales at all. Congress overruled a presidential veto in July 2008, passing a bill that prohibits pay cuts from Medicare to doctors.^[10] Thus, any future cuts in Medicare budget must come from coverage, and not from payouts to doctors. Private sector insurance groups are making similar provisions in their policies.^[11]

Weakening Dollar Means Greater Revenue in Overseas Markets

Currency exchange rates can affect a company's revenue even if sales volume remains constant. In the medical devices industry, products are generally distributed from several international sites to a global market. U.S. based companies make money as the dollar weakens compared to the foreign currency, and lose money as the dollar strengthens.

Competition

The medical device industry demands constant technological improvement, mandating significant annual expenditures in research and development, effectively lowering net income. Edwards faces competitors with significantly greater capital resources like Medtronic (NYSE: MDT) and St. Jude Medical (NYSE: STJ). As such, Edwards focuses its selling efforts on high margin products in order to obtain the necessary resources to invest in developing new technologies.

As in any health related industry, competition in the medical device industry is specific to treatment. A company that produces kidney dialysis equipment is not in competition with a company that produces tissue heart valves, but a drug company that produces a miracle drug for cardiovascular disease treatment would be in competition with the tissue heart valve company. Edwards Lifesciences' products treat cardiovascular disease at advanced stages beyond the point where drugs are beneficial, so competition is limited to other companies that produce tissue heart valves and other complementary products.

The competition among companies to produce a cost-effective and reliable transcatheter heart valve has also driven research and development. CoreValve, a privately held company that is not part of the surgical heart valve market, is developing a transcatheter valve as part of their ReValving technology campaign. Edwards is developing their own SAPIEN transcatheter valve to compete. CoreValve's technology beat Edwards' in the race for European approval, but Edwards' technology performed better in clinical trials than CoreValve's.

References

1. ↑ EW 2007 10-K pg. 27  
2. ↑ ^{2.0 2.1} EW 2009 10-K pg. 49  
3. ↑ ^{3.0 3.1 3.2} EW 2009 10-K pg. 24  
4. ↑ EW 2007 10-k pg. 2  
5. ↑ EW 2007 10-k pg. 4  
6. ↑ EW 2007 10-k pg. 4  
7. ↑ EW 2007 10-k pg. 16  
8. ↑ EW 2007 10-k pg. 16  
9. ↑ EW 2007 10-k pg. 9  
10. ↑ Overriding Bush, Blocks Pay Cut for Doctors; New York Times July 16, 2008
11. ↑ EW 2007 10-k pg. 9