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Bull of the Day: Edwards Lifesciences (EW)

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Edwards Lifesciences (EW - Free Report) , the $24 billion global leader in structural heart disease innovations, is once again a Zacks #1 Rank Strong Buy after reporting strong Q2 results and improved guidance for Q3 that prompted analysts to raise EPS estimates.  

Edwards Lifesciences’ second-quarter sales grew 10.9% to $841.8 million, beating the consensus. Underlying sales increased 15.3%, including the impact of German customers stocking shelves for additional inventory of the SAPIEN 3 valve in anticipation of a potential supply interruption resulting from recent intellectual property litigation.

Revenues were driven by considerable growth in the company's primary solution, the transcatheter aortic valve replacement (TAVR) device, which, as the name implies, is a specialized collapsible valve that can be inserted into a patient's heart via a catheter, thus eliminating the need for major invasive surgery.

This innovation is especially welcome for older or at-risk heart patients whose doctors are concerned about the dangers of open heart surgery.

In 2011, the FDA approved the Sapien valve invented by Edwards as the first approved transcatheter aortic valve prosthesis.

By the end of 2015, nearly 55,000 procedures had been performed.

Q2 Highlights: The Beats Go On

  • Global Transcatheter Heart Valve Therapy (THVT) sales grew 16 percent to $488 million
  • U.S. THVT sales grew 28 percent to $316 million
  • 2017 adjusted EPS guidance increased to $3.65 to $3.85, from $3.43 to $3.55
  • Recent FDA approvals of SAPIEN 3 valve-in-valve, INSPIRIS RESILIA and HemoSphere

Growth was driven by excellent clinical performance results being delivered by SAPIEN 3 as well continued strong therapy implementation across all regions.

Surgical Heart Valve Therapy (SHVT) sales in the quarter were $207.1 million, up 4.2% from the prior-year quarter. This was led by strong demand for the EDWARDS INTUITY Elite valve system and the supply recovery in mitral valve sales, partially offset by the continuing shift from surgical aortic valves to the SAPIEN 3 valve.

Edwards' smallest segment also saw growth. Critical Care sales were $147.2 million in the reported quarter, representing an increase of 3.7% from second-quarter 2016.  Solid growth across all product categories was driven by double-digit growth in the company's Enhanced Surgical Recovery Program, mainly in the U.S and Asia Pacific.

Edwards chairman and CEO Michael A. Mussallem was quoted in the company press release, "Strong demand for TAVR therapy resulted in total sales growth of 15 percent on an underlying basis, which also reflected strength in all three of our product lines across all regions.  And our transcatheter mitral and tricuspid valve technologies continue to represent exciting opportunities for breakthrough therapies for patients in need."

Analysts Raise Estimates and Price Targets

Since the company report, analysts have boosted the full-year 2017 EPS estimate to $3.78 from $3.52.

And the 2018 profit projection moved up to $4.17 from $3.97, representing 10% growth and matching the annual revenue growth rate as sales are expected to climb to $3.74 billion from this year's $3.4 billion.

Goldman Sachs was a standout bull on EW this spring, placing the company on their coveted Conviction Buy List and raising their price target to $138 after strong Q1 results. Luckily for my Healthcare Innovators service, I bought the stock below $100 the morning before they reported for Q1 on April 25.

After the Q2 report, Goldman no longer owns the Street high target. SunTrust analysts bumped their PT to $146 and BofA/ML analysts jumped to $150 while Canaccord Genuity analyst Jason Mills raised his price target on Edwards to $155 from $150.

One investment bank that sounded more neutral was Leerink Swann. They only raised their PT to $120 from $110 citing a slower ramp in sales to the "intermediate risk" population, the market for heart valve replacement patients who are not high risk.

This is a new and expanded market opportunity that has been approved by the FDA and EW is moving into. But Leerink analysts think the sales ramp will be slow.

The analysts apply a 30X P/E multiple to their $3.95 2018 EPS estimate to arrive at the $120 target. They believe that upside to shares will be limited, as "beat and raise" quarters "will be more difficult to come by in light of a potentially slower-than-initially expected intermediate risk ramp and increasing competition."

So they believe the stock is fairly valued now given near-term growth, but at the same time say "We continue to believe the ultimate market opportunity is massive and EW will retain its market-leading position."

Bottom line: Edwards Lifesciences is a solid long-term "buy and hold" -- especially if you get to buy it near $110.

Disclosure: I own EW shares for the Zacks Healthcare Innovators portfolio.

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