Edwards Lifesciences (EW, Financial) reported +6% growth in revenue (foreign exchange adjusted) compared to a year ago. While this quarter represented a deceleration in revenue growth from earlier this year, much of that was due to hospital staffing shortages and the vagaries of global health-care systems emerging from a myriad of Pandemic disruptions. Earlier this year, the Company received FDA approval for its minimally invasive mitral valve repair system PASCAL. The Company has presented compelling clinical data, which could help support accelerating growth in the next few years. As for Edwards' core TAVR system, there continues to be a (unfortunately) pent-up, untreated population suffering from severe aortic stenosis that will ultimately be able to find their way back into healthcare systems as labor market pressures ease, thus driving long-term, double-digit revenue growth. (See more on Edwards Lifesciences below.)
Edwards Lifesciences
Edwards Lifesciences has been in portfolios since 2017. The Company is a leader in treating structural heart diseases and providing critical care technologies to surgical and intensive care centers. Edwards' flagship franchise is its Transcatheter Aortic Valve Replacement (TAVR) SAPIEN family of aortic heart valves. The Company's TAVR products began revolutionizing aortic valve replacement clinics around 15 years ago. Prior to TAVR, patients who were too sick to undergo open-heart surgery often went untreated. After a long history of surgical valve development, Edwards came to develop a prosthetic aortic valve that could be inserted into place with a minimally invasive procedure, often via a small opening in the femoral artery (or less frequently through a small incision in the ribs). Since then, Edwards has provided these life-saving valves for over 800,000 patients.
Edwards' revenue rose over +40% from 2016 through 2021 driven by TAVR revenues that more than doubled. More recently, the Company's TAVR performance has been volatile, especially when compared to the pre-Pandemic trend line. The large swings in growth have been due to random regional shutdowns from the Pandemic in addition to hospital staffing shortages. The Pandemic societal shutdowns are almost impossible to predict, but we assume those will eventually subside, as they have in the U.S.
On the latter point of hospital staffing shortages, it is most acute in the U.S. Even though TAVR is minimally invasive to the body of the patient, it seems TAVR is "moderately invasive" to the administrative efforts of hospitals in the U.S., at least in the early part of this post-Pandemic world. We will admit, surprisingly, that cracking open a patient’s ribs in to expose their beating heart for an aortic valve replacement is more streamlined from an administrative perspective than minimally invasive TAVR. After all, there's no need to guess the condition of a patient’s heart or circulatory system if they're exposed in an open surgery. TAVR, on the other hand, requires several non-invasive, pre-operational steps in order to make a clinically safe decision about if and how the body can handle the procedure. These steps require close coordination between administrators, physicians and patients. Again, this is nothing new to the industry. However, what is new is that administrators are in short supply, so the coordination required to get the patient treated has become a bottleneck.
But Edwards, and the rest of the structural heart technology industry, have an excellent incentive to help hospitals alleviate the administrative bottleneck that emerged during the pandemic. We estimate Edwards' addressable market for TAVR grows by about $1 billion per year in the U.S. alone, based on demographics and compared to the Company's 2021 TAVR revenues that approached $3.5 billion. Severe aortic stenosis (SAS), which is the disease that TAVR is most often used to treat, is most prevalent in those approaching their mid-70's and beyond. Only 12 out of 100 patients with SAS have had valve replacement therapy, with over 1 million patients estimated to be in need of the therapy in the U.S. alone. We estimate U.S. valves to cost anywhere from $20k to $30k per device. Further, Edwards is enrolling a study to treat patients with moderate aortic stenosis (MAS). MAS has been shown to be nearly as lethal as "severe" cases, but with a population that is twice the size.
The good news about Edwards' treatable population is they are living longer, not only once they reach 70 years of age but also once they reach 80 years, and beyond. As people are living longer, they are more susceptible to moderate and severe forms of aortic stenosis. So there's no shortage of patients in need of TAVR treatment. However, as we mentioned earlier, often the bottleneck to treatment is administrative rather than clinical. For example, less than a quarter of 80-year-old patients who have been diagnosed with SAS actually get referred to treatment - that's over 200,000 elderly patients in the U.S. who are not getting treatment. Ageism, in particular, becomes a concrete problem, with younger patients on average, receiving treatment sooner compared to 80+ year-olds. Over 10% of the SAS population dies within six months without treatment, so it is a bias with a truly tragic consequence that can be remedied with regular education from industry stakeholders. Many of these people have SAS recognized in their primary care or general cardiology but aren't getting referred because - to many physicians - TAVR is still considered a "big procedure" given it's replacing open-heart surgery. But TAVR has lowered that risk and Edwards is sensibly investing in its educational efforts to help populations see it more as an opportunity to improve the long-term quality of life for elderly patients. As we have noted in the past, the demise of TAVR growth has been written about every few years. Given the recent bottlenecks in the U.S. healthcare system, those calls for gloom and doom are coming again. But as we can see, the untreated population for both severe and moderate aortic stenosis is clearly huge and underserved, so TAVR’s demise continues to be greatly exaggerated.
We expect Edwards to be able to compond revenues at a double-digit rate over the next several years by driving higher adoption of TAVR as well as through the launch of new platforms targeting other forms of structural heart disease (especially related to mitral valve). The Company probably "under -earns" as they commit between 15-20% of revenues to R&D, a multiple of larger med-tech conglomerates (e.g. Medtronic, Abbott Laboratories, and Stryker). Edwards' returns are still tremendous, even with this high level of reinvestment in future growth. We continue to hold a healthy weight in portfolios, after trimming positions in late 2021 (when the stock was trading near peak multiples). Since then, we've seen the multiple come in during 2022 and it is beginning to look more attractive. We would likely look to add to positions if the stock traded down on short-term worries, given Edwards' commanding long-term competitive positioning and attractive growth profile.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners fourth-quarter 2022 letter.
