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Steven Chen
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Edwards Lifesciences: A Leader in an Economically Attractive and Rapidly Growing Niche

The company has a reputation-based moat and a strong industry tailwind

March 19, 2020 | About:

California-based Edwards Lifesciences (NYSE:EW) specializes in designing, manufacturing and marketing medical systems and devices for treating cardiovascular diseases.

The company spun off from Baxter International (NYSE:BAX) in 2000 to focus on this economically attractive, rapidly growing niche. Cardiovascular disease (referred to as “CVD”) is the number-one cause of death in the world and is the top disease in terms of health care spending in nearly every country.

According to a study by the American Heart Association, nearly half of the U.S. population will have some form of CVD by 2035, compared to 41.5% in 2015. Additionally, if we look at different age groups, 90% of individuals over 80 have some form of CVD, implying the “tailwind” effect from an aging society. In terms of costs, CVD is projected to cost America $1.1 trillion annually by 2035, up from $555 billion in 2016 and far exceeding the likes of Alzheimer’s and diabetes.

Edward Lifesciences is most known for its SAPIEN family transcatheter aortic heart valves, which is the first such FDA-approved device to replace a defective aortic valve without the need for open-heart surgery and is the most widely prescribed among its peers in the world. As of fiscal 2019, 63% of the sales came from Transcatheter Aortic Valve Replacement (referred to as “TAVR”), followed by 19% from Surgical Heart Valve Therapy (i.e., the surgical tissue heart valve product line) and 17% from Critical Care (i.e., the hemodynamic monitoring system). Geography-wise, the domestic market, Europe and Japan represented 58%, 22% and 10% of total revenue, respectively. Overall, Edward Lifesciences generates more than 95% of sales from products with a market-leading position globally and serves patients in approximately 100 countries.

We believe that Edward Lifesciences earns its sustainable competitive advantages through its high credibility and trust with clinicians, regulators, payors and patients. This is significant, as, for instance, doctors do not want to risk being held liable for the selection risk of a mission-critical device in the case that a lesser-known product fails. In the meantime, the company makes efforts to provide extensive customer training and service, which increases the switching cost of its products. As displayed in the chart below, the business consistently delivered super-normal returns on invested capital, which outperformed the likes of the major competitors Boston Scientific (NYSE:BSX) and Abbott Laboratories (NYSE:ABT) for the last 15 years.

As an innovation-driven business, Edward Lifesciences has a crucial need to keep pace with fast-moving technology changes. The management appears to fully acknowledge the risk in this regard by stating the following in its annual report:

“Our present or future products could be rendered obsolete or uneconomical as a result of technological advances by one or more of our present or future competitors or by other therapies, including drug therapies. We must continue to develop and commercialize new products and technologies to remain competitive in the cardiovascular medical technology industry.”

The good news here is that the research and development seem well-funded at Edward Lifesciences. Per the chart below, the company steadily increased its R&D expenditure over the years and now outspends its peers in terms of the percentage of annual sales.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

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