We reiterate our Neutral recommendation on Edwards Lifesciences Corporation (EW) with a target price of $102.
Revenues and earnings during the company’s first quarter surpassed the Zacks Consensus Estimates. However, the company had to lower its 2012 outlook due to economic uncertainties in Southern Europe, unfavorable currency movement and delay in approval of Sapien for high-risk patients.
While fiscal 2012 sales are now expected to be on the lower end of the original range of $1.95-$2.05 billion, the outlook for adjusted EPS was slashed by $0.12 on both sides to $2.58-$2.68.
We are nonetheless encouraged by the strong ramp-up in US Sapien sales, which clocked $41 million in the first full quarter after its launch. Since the launch of Sapien in US, in November 2011, Edwards has imparted training at approximately 60 centers and is on track to render training at 150-250 new commercial sites in the first 12 months.
Although uncertainty related to reimbursement has caused some centers to postpone their training, we expect the situation to improve with the issue resolved at present. In May 2012, the Centers for Medicare & Medicaid Services announced its decision to reimburse transcatheter aortic valve replacement (“TAVR”)procedures for US patients with symptomatic aortic stenosis under specified criteria.
Given the favorable recommendation from the US Food and Drug Administration (“FDA”) advisory panel for Sapien in high-risk patients, the probability of final approval has brightened. The favorable recommendation is significant for Edwards as approval for high-risk patients will expand the targeted patient population.
We are encouraged by the company’s focus on developing its pipeline that should further strengthen its foothold in the TAVR segment. The company recently received Investigational Device Exemption (“IDE”) approval from the FDA for the next-generation tissue treatment platform, GLX. The GLX platform received CE Mark approval in May 2012.
Clinical trials for two new transcatheter valve platforms – Sapien 3 and Centera valve – are scheduled to begin in Europe in 2012. These two platforms are designed to facilitate multiple interventional and surgical delivery approaches.
Edwards is also on track to initiate enrollment in the PROTAVItrial shortly that will study the causes of strokes during TAVR procedures as well as evaluate the Embrella device. We expect that successful commercialization of these products should drive the company’s top line in the long term.
Meanwhile, operating margin continues to remain under pressure as Edwards works on developing its pipeline and expanding the use of Sapien in the US. The competitive landscape in Europe remains tough with the presence of Medtronic‘s (MDT) CoreValve.
Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.
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