Edwards Lifesciences Won't Skip a Beat

 | Jan 24, 2017 | 10:00 AM EST
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In the last year, shares of Edwards Lifesciences EW are up 20.5%. Back in September, I was bullish on the company's shares. I thought the transcatheter aortic value replacement (TCAV) business was growing at a double-digit pace and could exceed $5 billion by 2021.

Two weeks ago, Jim Cramer interviewed CEO Mike Mussallem on CNBC's Mad Money and last month Edwards held an analyst meeting in New York City to explain the opportunity in front of the company.

Edwards is the leading maker of transcatheter arterial heart valve replacements, or TAVR, one of the fastest-growing markets in the medical device sector. About 50% of the company's business is heart value replacement, while 35% is critical care.

Like the more widely accepted coronary artery stent, the arterial heart value replacement is placed into the left ventricle of the heart through an artery. A balloon is expanded and the new value is deployed directly on top of the damaged value.

The market for TAVR is taking off, as heart surgeons begin to recognize the benefits of replacement heart values delivered by catheter. From virtually zero sales in 2008, the market climbed to over $1 billion worldwide by 2015.

Last year, the PARTNER 2 trial was able to demonstrate 98% of patients experienced "freedom from death and stroke at 30 days". That was 75% better than open-heart surgery. In fact, 30 days after deploying the Sapien 3 aortic value, patients experienced four times lower mortality and disabling stroke compared to surgery. Over 12 months, patients had half the rate of mortality and stroke of surgery patients. Two years after TAVR, patients experienced an improved quality of life as well.

Edwards is working hard to educate patients and doctors about this life-saving technology. Severe inoperable aortic stenosis has a worse prognosis than many metastatic cancers. After five years, 23% of breast cancer, 30% of prostate cancer and just 12% of colorectal cancer patients are alive. While only 3% of aortic stenosis patients are alive after five years.

Fishing a stent through the body is very cost effective and greatly reduces hospital stays. Open-heart surgery often requires a 10-day hospital stay at an average cost of $76,000, while the TAVR approach costs just $45,500 and requires a three-day stay.

According to Edwards's research, there are approximately 1.6 million patients in the United States with moderate to severe aortic stenosis, or AS. Approximately 650,000 of those could have severe disease, and of those, as many as 290,000 are asymptomatic and could benefit from therapy. Patients with severe symptomatic aortic stenosis (ssAS) carry a poor prognosis. By 2021, the company estimates 70% of severe symptomatic, AS patients will still be left untreated.

Edwards guided sales between $3 billion and $3.4 billion, which represents 10-14% growth. Margins are expected to range from 74-76%. Consensus earnings for 2017 are in the middle of the range of guidance or $3.40.

I think this stock can keep climbing. The company has several trials underway to expand the indication of the Sapien 3 aortic value. Earnings are growing in the high teens (17-19%) and are expected to continue until at least 2018. Operating margins are modeled to increase 100 basis points from 28% to 29% this year.

In the last five years, the stock has traded from 18x to 35x forward estimates. Because of the company's superior growth prospects, I think the stock can trade to $120, or 35x the $3.40 estimate. Edwards Lifesciences won't skip a beat.

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