The court issued an injunction and told Medtronic the company could no longer sell its artificial heart valve in the United States. The ruling surprised investors (and heart surgeons) who consider the Medtronic device superior. The ruling would give Edwards a near-monopoly on the sale of aortic replacement valves. Will this ruling turn out to be a huge windfall for Edwards or is this the time to take profits?
Medtronic and Edwards have battled in court for a few years. In 2010, a jury found that Medtronic's CoreValve infringed an Edwards-held patent. Edwards asked the court to bar the Medtronic device from the market. The injunction issued Friday goes into effect seven days after the ruling and will remain in effect until the expiration of the patent. Medtronic asked the judge to the delay the court order so Medtronic would have time to appeal the decision to the Federal Circuit Court of Appeals.
While the ruling seems like a terrible set back for Medtronic and patients, the judge did provide a little wiggle room. Judge Sleet allowed Medtronic to sell the device to some patients who are not eligible for the Edwards device.
According to the Centers For Disease Control, heart disease is the leading cause of death in the United States. About 600,000 people die of heart disease in the U.S. every year -- that's one in every four deaths. Every year, about 720,000 people have a heart attack. CDC estimates heart disease costs the U.S. $108.9 billion every year.
Because of incidence of heart disease in America, transcatheter aortic valve replacement (TAVR) is a growth business. The Food and Drug Administration has approved TAVR for patients who suffer from aortic stenosis (AS). AS is a narrowing of the aortic valve opening, which restricts blood flow from the left atrium to the aorta and lowers the pressure in the left ventricle. This is a dangerous situation, which leaves many patients unable to carry on with their daily activities. If left untreated, AS leads to death.
Using a catheter, the surgeon either threads the replacement valve through a vein in the leg or through an opening in the ribs. The replacement valve takes over for the beleaguered aortic value. Because the procedure is minimally invasive, patients stay just three to five days in the hospital. The older procedure requires major open-heart surgery, significant cost and a considerable amount of recovery time.
According to Edwards, the TAVR market is expected to grow between 15% and 20% through 2019. If the company's forecast is right, the global TAVR market will reach between $2.5 billion and $3 billion annually. Of course, America will be the largest market for TAVR.
Japan is also a large, untapped market. Because a large percentage of the population is over 80 years old, Japan is expected to produce $350 million in revenue by 2019.
At the beginning of 2014, most analysts thought Edwards would sell between $700 million and $820 million worth of devices. The company is also expected to attack the mitral valve disease market. Like AS, mitral valve stenosis is a narrowing of the mitral valve and is a very dangerous condition.
But I think the judge left the door open for Medtronic. Four major publications have come out in support of Medtronic's CoreValve. The New England Journal of Medicine said CoreValve demonstrated significantly higher rates of survival at one year than surgery patients. Implanted in 55,000 patients worldwide (5,000 in the U.S.), CoreValve has demonstrated its durability in an 11,000 patient, four-year clinical study.
Because of Medtronic's superior results, surgeons like using CoreValve on "extreme risk" patients. I think surgeons could simply reclassify their patients as extreme risk and use CoreValve instead of Edwards' Sapien device.
I don't think this is over. Medtronic will appeal the judge's decision and surgeons will find clever ways use the Medtronic device. In the meantime, it's uncertain if Medtronic will ever pay royalties. Patent cases typically go back and forth for years and if Edwards collects any payments, they are likely years away. I would sell into the pop as the good news in baked in.