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Edwards Lifesciences (EW)Stock (Medical Appliances & Equipment Industry, Pharma & Healthcare Industry)
 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. Selling the valves themselves generated 47.2% of the company's revenue in 2007.[1], and 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). Despite Edwards' smaller size, the company's share of the global surgical heart valve market in 2007 was 44%, nearly twice the market share of the company's nearest competitor. Edwards' gross margins were greater than 60% of net sales in 2005, 2006, and 2007[2] by focusing on high-margin products.[3] 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. The privately held company CoreValve received approval to sell their new transcatheter valve in Europe in 2007 Q3, and Edwards received European approval for their own SAPIEN transcatheter valve in 2007 Q4. The SAPIEN valve is in the process of gaining FDA approval to be sold in the United States as of 2008 Q3.
[edit] Company OverviewEdwards sells its products in over 100 countries, with 89% of 2007 net sales coming from the United States, Europe, and Japan (45%, 28%, and 16%, respectively)[4]. Products are categorized into one of five main segments: Heart-Valve Therapy, Critical Care, Cardiac Surgery Systems, Vascular, and Other Distributed Products[5]. Although their Heart-Valve Therapy segment still generated 47.2% of net sales in 2007[6], new technologies in the Critical Care segment, especially the FloTrac minimally invasive monitoring system, accounted for most of net sales growth from 2006 to 2007.[7] Critical Care technologies increased net sales in the United States by $15.5 million, and by $19.6 million internationally.[8] [edit] Business and Financial Metrics EW Net Sales, Gross Margin, and Net Income[9] Edwards has increasingly invested in new technologies over the past three years, spending 9.9%, 11.0%, and 11.2% of annual net sales in 2005, 2006, and 2007 respectively on research and development.[10]
Edwards does business in over 100 countries, with 55.4% of 2007 net sales from outside of the United States.[12] 44.6% of net sales were generated in the United States, 28.3% in Europe, 15.7% in Japan, and 11.4% in other international countries.[13]  EW 2007 Net Sales By Region[14]
[edit] Business Segments EW 2007 Net Sales By Segment[16]
[edit] Key Trends and Forces[edit] New Technologies Threaten Revenue SourcesIn 2007, Edwards' Heart Valve Therapy segment generated 47.2% of net sales.[32] 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. As part of their effort to put a high quality transcatheter valve on the market as soon as possible, Edwards has invested $122 million in 2007 towards research and development, constituting 11.2% of net sales[33]. In 2006 and 2005, Edwards spent $114 million (11.0% of net sales) and $99 million (9.9% of net sales), respectively, on research and development[34]. Edwards initiated sales of its new SAPIEN transcatheter heart valve in 2007 Q4. As of July 2008, the device is undergoing clinical trials for sale in the U.S. Although Edwards' privately held competitor CoreValve received European approval for its ReValving transcatheter valve technology in May of 2007, before Edwards' SAPIEN technology, as of 2008 Q3, CoreValve has not initiated clinical trials of its technology in the United States[35]. [edit] Consolidation in the Healthcare Industry and New Healthcare Initiatives Put Downward Pressure on PricesAs the healthcare industry consolidates, buyers become larger, their purchasing power increases, and they put downward pressure on the prices of medical device products.[36] 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; hospitals in multi-hospital systems raised their prices by 34% on average compared to 17% for nonsystem hospitals in 2006.[37] 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.[38] Also, rising costs of Medicare and Medicaid have spurred new legislative initiatives barring the increase of funding for government healthcare programs.[39] 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.[40] 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.[41] [edit] Weakening Dollar Means Greater Revenue in Overseas MarketsCurrency 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. In 2007, 55.4% of Edwards' net sales came from sources outside of the United States, chiefly from Europe (28.3%) and Japan (15.7%).[42] Edwards' 2007 net sales increased by $30.1 million due to the strengthening of the Euro to the U.S. dollar, partially offset by the weakening of the Japanese yen against the U.S. dollar.[43] [edit] CompetitionThe 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; Medtronic (NYSE: MDT) and St. Jude Medical (NYSE: STJ) generated $12,299 million[47] and $3,799 million[48] in 2007 net sales respectively, compared to Edwards' $1,091.1 million[49]. 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. Although Edwards is much smaller than its principal competitors, Medtronic (NYSE: MDT) and St. Jude Medical (NYSE: STJ), in terms of net sales, Edwards dominates its principal market (surgical heart valves) with a 44% market share in 2007.[50]
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 and is already in the process of receiving U.S. approval as of 2008 Q3.[54] Edwards invested 11.2% of 2007 net sales in research and development, compared to 10.1% and 12.6% for Medtronic and St. Jude respectively.[55][56][57] Although Edwards invested a similar proportion of its net sales in research and development as Medtronic and St. Jude, Edwards and the privately held CoreValve were the only companies to conduct clinical trials of transcatheter valves in 2007. Since CoreValve is not a public company, it is not required to publish research and development expenses.
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