Edwards heart valve sales skip a beat

Edwards Lifesciences CEO Michael Mussallem at the Irvine headquarters. The walls are decorated with artwork by employees and heart patients who have recieved the company's heart valve.

An Edwards Lifesciences assembly worker hand sews a transcatheter heart valve with more than 700 stitches. The focused and detailed process takes 12 to 15 hours to complete inside a sterile room.

Edwards Lifesciences assemblers work in the cleanroom, a santitized area where they work on heart valves. The Irvine company employes 2,500 workers and 8,200 worldwide.

In the 18 months since Edwards Lifesciences launched U.S. sales of a heart valve that doesn't require cutting open a patient's chest, the device has become by far the company's biggest driver of sales growth. In the first quarter, it was the only driver.

Unfortunately for Edwards, however, Wall Street came to rely on the company's lofty projections for the valve, which are forecast to reach a third of total sales this year. When first-quarter results came up short of expectations last week, Edwards’ stock price got hammered, falling 22 percent in one day.

It was the second time in seven months that Edwards had been punished for weaker-than-expected sales of the new valves, which are known by the brand name Sapien.

Edwards CEO Michael Mussallem has had to reset expectations. But he's not backing off from the long-term promise of so-called transcatheter valves. Mussallem still expects sales of Sapien to surpass surgical valves by the middle of this year.

Sapien is so far the only transcatheter heart valve approved for sale in the U.S. Like other transcatheter valves sold elsewhere by rival companies, it is used in patients who are too frail to withstand open heart surgery. It is collapsed and delivered in a catheter via the femoral artery, or through a slit in the rib cage, to replace the diseased valves of patients suffering from severe aortic stenosis – a deadly illness in which the aortic valve narrows, restricting blood flow from the heart to the rest of the body.

In a more traditional heart-valve replacement, the patient's chest is opened up completely, the heart is stopped, and a heart-lung machine is used to maintain blood circulation and oxygen levels. Sapien allows surgeons to avoid all that, which means fewer complications and faster recovery times.

A Sapien valve, along with its delivery system and other accessories, costs roughly $30,000. But because of the shorter hospital stays and less intensive physician involvement, it is believed to be more cost effective than open-heart surgery. And because it targets patients who would not be good candidates for surgery, it has opened a whole new potential market for Edwards – and its competitors.

"The development of the transcatheter heart valve technology has been the most exciting thing I’ve been involved in in my 30-plus years in the industry," Edwards’ Mussallem said in a recent interview. "Very rarely do you have a chance to participate in an innovation that is this successful, that has the opportunity not only to improve outcomes in mortality and all those other clinical measures but also improve quality of life and demonstrate cost effectiveness. It's a triple win."

The company has been selling the valve in Europe since late 2007 and began marketing it in the United States in November 2011, after the Food and Drug Administration approved it for implantation in otherwise inoperable patients, via the femoral artery. Eleven months later, the FDA expanded the approval to cover "high risk" patients and gave the green light to delivery through the rib cage.

That broadened the U.S. market for Sapien considerably and seemed to at least partially redeem the company in the eyes of investors after a missed sales estimate for the valve only 10 days earlier – on October 9 – had sent Edwards’ stock plummeting 21 percent. The good news was reinforced by a strong fourth quarter, when revenue from Sapien jumped 73 percent from a year earlier, to $161 million, and total company sales rose 13 percent, to $1.9 billion.

Then, last week, Edwards disappointed investors again. Its earnings report for the first quarter painted a cloudier picture of Sapien's growth potential in the U.S., while sales in its other two main divisions – surgical valves and critical care equipment – slumped.

Globally, sales of Edwards’ transcatheter valves actually rose nearly 40 percent, to $170 million. But sales in the U.S., at $83 million, fell well short of what the market had expected. And that is the number that touched a nerve.

By the close of trading last Wednesday, the company's share price had sunk to $64.60 from $82.81 the previous day, just before the news hit. Tuesday the stock closed at $63.79, down 42 percent from its 52-week high of $109.75 last October.

Mussallem, in a teleconference with analysts and investors, attributed the sales shortfall largely to staffing and facility constraints at hospitals that had been planning to train their staff on the Sapien procedure. Twenty hospitals that had been slated for the training had postponed it, taking a $5 million bite out of Edwards’ revenue, Mussallem said.

He downgraded the company's estimate for global 2013 Sapien revenue by $40 million, reflecting lower expected sales growth of 25 to 30 percent compared with the previous projection of 30 to 45 percent. He cut the forecast for total company sales by $100 million.

"They could have done a lot of other things wrong, and if the Sapien number had been good, the stock price would have held up," said Ben Andrew, an equities analyst who covers Edwards for William Blair & Co. in Chicago. For the time being, he added, the market's high hopes for Sapien have been replaced by "lots of questions about how quickly (Edwards) can penetrate that market."

It is a particularly salient question now that "competition is coming," Andrew noted.

In Europe, Edwards is locked in a fierce battle for the transcatheter heart valve market with its arch-rival Medtronic Inc., whose CoreValve product is widely expected to win FDA approval for sale in the U.S. sometime next year. Edwards won a patent infringement case against Medtronic in 2010 and, after a federal appeals court upheld the decision last year, it received an initial payment of $83.6 million from the Minneapolis-based company in the first quarter. Edwards is seeking a court injunction that would prohibit Medtronic from manufacturing and selling CoreValve in the U.S.

Other companies are jumping in, too: St. Jude Medical Inc.; JenaValve Technology; Sadra Medical, which is a subsidiary of Boston Scientific; and Direct Flow Medical Inc., a Santa Rosa company that has a technology and manufacturing center in Lake Forest.

Mussallem told analysts that despite the setback, his assessment of the opportunity in transcatheter valves "remains unchanged." He estimated there are about 260,000 people in the United States with severe aortic stenosis and that only about a quarter of them are being treated. The numbers are roughly similar outside the U.S., he told the Register. "You can get into very big numbers; you can get into billions very quickly."

Mussallem said that eventually he would like to make Sapien available to all aortic heart valve patients, because its minimal invasiveness and lower overall cost would benefit everyone. But Edwards must first demonstrate the valve's durability, which is not easy.

While the standard surgical valves have been proven to last nearly 20 years, no such data are available for transcatheter valves. They have not been around that long and only a limited number of the frail and elderly patients who tend to get the valves survive more than five years.

Edwards has other products in the pipeline that it hopes will expand its portfolio in the coming years. Its Intuity heart valve, which is sold in Europe but not yet in the U.S., is implanted surgically but mimics some of the characteristics of Sapien. And the company is working on a real-time glucose monitoring machine that can help reduce the risk of infections in surgery and in the ICU.

"We’re spending an awful lot on R&D – 16 percent of our sales," said Mussallem. "So if we’re fortunate enough, we’ll crack the code on some other tough health care problems and be able to make a contribution."

Contact the writer: (714) 796-2440 or [email protected]

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