Edwards Reaffirmed at Neutral

We reiterate our Neutral recommendation on Edwards Lifesciences (EW - Analyst Report) following its fourth-quarter 2011 results.  The company’s adjusted EPS of 62 cents in the quarter was ahead of the Zacks Consensus Estimate though revenues fell short.

Edwards was adversely affected by economic pressure in southern Europe and inconsistent interpretations among the regional Medicare contractors regarding the National Coverage Analysis (“NCA”) of transcatheter aortic valve replacement (“TAVR”). As a reminder, in September 2011, the Centers for Medicare & Medicaid Services (CMS) decided to initiate an NCA of TAVR to formulate a national coverage determination (NCD). Earlier this month CMS posted on its website a proposed decision memo for TAVR. This has set off a 30-day public comment period after which a formal NCD will be issued in the next 90 days. As per the memo, CMS will provide coverage only if five conditions are met. We believe some uncertainty will prevail in the near term until the matter is finalized.

However, Edwards is one of the leading players in the field of heart valve therapy which accounts for approximately 61% of total revenues. The company has a strong product portfolio with many launched in the recent past, including the Intuity valve in February 2012. Increased acceptance of these products and greater market penetration would lead to higher sales in the forthcoming period.

The development of Sapien products holds immense potential for Edwards as it provides surgeons the option to eliminate the possibility of open heart procedures. The company has the first mover advantage in the US with its recent launch of Sapien (approximate price of $30,000) in November 2011. The competitive landscape in Europe, however, is quite tough with the strong presence of Medtronic’s (MDT - Analyst Report) CoreValve and recent launches of JenaValve and Acurate TA. Although economic uncertainty in Europe (in particular Greece, Italy and Spain) adversely affected THV sales during the fourth quarter, the situation is expected to improve gradually. For 2012, the company expects to record THV sales of $560–$630 million, including $200–$260 million of sales in the US ($30–$40 million in the first quarter).

Meanwhile, current investor focus remains on the potential US approval of Sapien THV for Cohort A patients. A higher rate of stroke in patients undergoing TAVR evokes concern. The company expects FDA approval for Cohort A by the second quarter of 2012, which will be preceded by an FDA advisory panel.

Our recommendation is backed by a Zacks #3 Rank (“Hold”) in the short term.

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