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Edwards Lifesciences: High Revenue Growth, But Fairly Valued (NYSE:EW)

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Edwards Lifesciences

In this analysis of Edwards Lifesciences Corp. (NYSE:EW), we looked into the growth potential of the Transcatheter Aortic Valve Replacement (TAVR) segment as it is the company’s main product accounting for 65.41% of revenues in 2021. Furthermore, we also analyzed SG&A as a percentage of revenue as the average growth rate in the past decade has been -3.01% indicating the company might be benefitting from economies of scale. Additionally, Edwards EV/EBITDA multiple is 40.21x which is almost double the industry average EV/EBITDA of 23.29x and our model shows the company’s shares are fairly valued.

Studies Show TAVR Procedures to Have Benefits for Patient in the Short Term

65.40% of Edwards revenue in 2021 is from the Transcatheter Aortic Valve Replacement (TAVR) segment. TAVR is used to treat a thickened aortic valve (cardiovascular disease) that is unable to open by replacing it through a minimally invasive procedure. According to GlobalData currently, the TAVR procedure is only performed on people over the age of 75 as there is currently insufficient data on the durability of the impacted device. There are also concerns with side effects hence, the device is currently used only on the ageing population. The US National Institutes of Health also mentions cardiovascular diseases to be more prominent among those over the age of 65 as ageing causes changes to the blood vessels and the heart. According to the United Nations, there were 703 mln people over the age of 65 in 2019 and is forecasted to reach 1.5 bln by 2050 which is more than double.

Chart, bar chart Description automatically generated

United Nations

Source: United Nations

Based on a study conducted by Mack et al., which randomized 1,000 patients in 71 centres, the results show patients who underwent a TAVR procedure had a lower rate of stroke or death after 30 days in comparison to undergoing surgery. Another study conducted by Wood et al. examined the effectiveness of Edwards TAVR product with the median age of patients being 84. Based on 411 patients in the study, 80.1% of the patients were discharged the next day while 89.5% was discharged within 48 hours. In comparison, The Society of Thoracic Surgeons claims patients who undergo open-heart surgery are discharged only 3 days after the surgery. Furthermore, during Q4 202 earnings briefing management mentioned:

“Recent cost-effectiveness study demonstrated that TAVR with SAPIEN 3 was economically dominant when compared to surgical aortic valve replacement in treating French patients with severe symptomatic aortic stenosis who are at low risk of surgical mortality. We’re also encouraged by the recently published guidelines from the European Association of Cardiothoracic Surgery, which now definitively recommend TAVR for patients over 75. We believe both of these developments represent an important long-term opportunity to bring TAVR therapy to even more patients in need.”- Mike Mussallem, Chairman and CEO of Edwards Lifesciences

During the 2021 Investor Conference, Edwards claimed the TAM within the TAVR procedure to grow to $10 bln by 2028. We based 2022 revenue growth based on management guidance of 13.5%. From 2023 onwards, we based our forecast on GlobalData’s projection of TAVR procedures growing at a CAGR of 15% which is supported by the ageing population along with expectations of improvement in the current technology of TAVR procedures.

Segment ($ mln)

2021

2022F

2023F

2024F

2025F

2026F

Transcatheter Aortic Valve Replacement

3,423

3,885

4,467

5,137

5,908

6,794

Growth (%)

19.78%

13.50%

15.00%

15.00%

15.00%

15.00%

Source: Edwards Lifesciences, GlobalData, Khaveen Investments

SG&A Cost Benefitting from Economies of Scale

The income analysis chart of Edwards clearly shows SG&A as a percentage of revenue constantly decreasing in the past decade.

EW Income Analysis

Edwards Lifesciences

Source: Edwards Lifesciences

Furthermore, the correlation coefficient between revenue growth and SG&A as a percentage of revenue growth is -0.28. This means there is a negative relationship between revenue growth and SG&A growth. Essentially, as the company’s revenues grow, the SG&A as a percentage of revenue decreases. We believe this negative relationship suggests Edwards has been benefitting from economies of scale.

In the past decade, the average growth of SG&A as a percentage of revenue is -3.01%. We used the same average growth rate to forecast the SG&A as a percentage of revenue to grow until 2026. Based on our forecast, the revenue growth is 11.03% in 2022 while SG&A only grows by 8.3%. This 8.3% is maintained while revenue growth continues to increase.

SG&A Forecast

2021

2022F

2023F

2024F

2025F

2026F

Revenue ($ mln) (a)

5,095

5,656

6,403

7,272

8,261

9,356

Growth (%)

16.15%

11.03%

13.20%

13.57%

13.61%

13.25%

SG&A as % of Revenue (b)

27.65%

26.82%

26.01%

25.23%

24.47%

23.73%

Growth (%)

-1.30%

-3.01%

-3.01%

-3.01%

-3.01%

-3.01%

SG&A ($ mln) (c)

1,409

1,517

1,665

1,834

2,021

2,220

Growth (%)

14.63%

8.30%

8.30%

8.30%

8.30%

8.30%

c = a * b

Source: Edwards Lifesciences, Khaveen Investments

EV/EBITDA Multiple Outgrowing Revenue

Edwards EV/EBITDA is significantly higher at 40.21x than the industry average EV/EBITDA of 23.29x.

EV/EBITDA

Seeking Alpha

Source: Seeking Alpha

Edwards historical 5-year average EBITDA growth is 14.31%. During the same period, the average growth rate of the enterprise value is 32.71%. Therefore, we see the EV/EBITDA multiple of Edwards more than double over the past 5 years.

EV/EBITDA

2016

2017

2018

2019

2020

2021

EW Stock Price on Dec 1st of each year ($) (a)

31.23

37.57

51.06

77.76

91.23

129.55

Growth (%)

20.30%

35.91%

52.29%

17.32%

42.00%

Shares outstanding (mln) (b)

653

648

641

637

632

632

Enterprise Value ($ mln) (c)

20,393

24,345

32,729

49,533

57,657

81,876

Growth (%)

19.38%

34.44%

51.34%

16.40%

42.00%

EBITDA ($ mln) (d)

891

1,104

1,150

1,330

1,423

1,719

Growth (%)

25.67%

24.00%

4.16%

15.61%

7.04%

20.74%

EV/EBITDA (e)

22.90x

22.05x

28.46x

37.25x

40.51x

47.64x

c = a*b

e = c/d

Source: Edwards Lifesciences, Yahoo Finance, Macrotrends, Khaveen Investments

Furthermore, looking at the EV/EBITDA trend of Edwards over the past 5 years, the multiple sees an increase towards the beginning of the year except in 2020 as the overall market was negatively impacted due to due to COVID. Additionally, in comparison to its peers, we see Edwards EV/EBITDA multiple being more volatile.

Chart, histogram Description automatically generated

Seeking Alpha

Source: Seeking Alpha

Additionally, we analyzed the revenue growth over the past 5 years of 13 companies. Based on the table below, Edwards’ 5-year revenue CAGR is 8.78% which is close to the industry average of 8.07%.

Companies

5-year CAGR

Edwards Lifesciences

8.78%

Agilent Technologies (A)

7.16%

Danaher (DHR)

13.67%

Abbott Laboratories (ABT)

9.48%

Thermo Fisher Scientific (TMO)

13.39%

Qiagen (QGEN)

9.70%

Becton Dickinson (BDX)

10.86%

Stryker (SYK)

6.51%

Siemens Healthineers (OTCPK:SEMHF)

5.22%

Boston Scientific (BSX)

5.58%

Bio-Rad Laboratories (BIO)

6.07%

Globus Medical (GMED)

8.16%

Medtronic (MDT)

0.27%

Industry Average

8.07%

Source: Edwards Lifesciences, Agilent Technologies, Danaher, Abbott, Thermo Fisher Scientific, Qiagen, Becton Dickinson, Stryker, Siemens Healthineers, Boston Scientific, Bio-Rad Laboratories, Globus Medical, Medtronic

Based on the high volatility of its EV/EBITDA, peers in the same industry having a more stable multiple, and the close to average 5-year revenue CAGR, we believe Edwards current EV/EBITDA multiple is too high. Hence, we used the industry average multiple of 23.29x to value Edwards.

Risk: Future Revenues Dependent on Regulatory Approval

Although our revenue projections expect Edwards to continue maintaining its historical revenue growth, it is highly dependent on regulatory approval for its new products. Based on the 2021 Investor Conference presentation, Edwards expects products in all its segments to either receive regulatory approval or start its trial data collection. It is important to note Edwards TAVR requires Premarket Application which is the most rigorous form of FDA approval for a medical device as their product is implanted into the patient. Historically only 2% of all approved medical devices have required a Premarket Application approval. Furthermore, the table below shows obtaining a Premarket Approval takes longer than a 510(K) and the approval percentage is lower as well.

FDA Approval Comparison

Premarket Approval

Normal 510(K) Form

Average Number of Days for Approval

243

177

Percentage of Applications Approved

92%

95% to 98%

Source: Qualio, Drugwatch

Timeline Description automatically generated

Edwards Lifesciences

Source: Edwards Lifesciences

The current SAPIEN 3 and SAPIEN 3 Ultra THV products are only allowed by the FDA to be used in patients who are at high risk of undergoing open-heart surgery. This restriction is due to the lack of sufficient data to support the long-term reliability of the product as mentioned previously. The SAPIEN X4 is expected to be an improvement from the current SAPIEN 3 products. Similarly, the other products highlighted by the company are also mainly improvements to the previous generation of products that are already sold. Hence, failing to achieve approval may lead to competitors releasing products that are more advanced than Edwards’ line of products. We believe if Edwards fails to receive approval for the product, then it can be of concern as the company is in the growth stage and currently focuses only on the cardiovascular market.

Valuation

The company’s historical 5-year gross and net margins are 74.95% and 21.65%.

EW Earnings and Margins

Edwards Lifesciences, Khaveen Investments

Source: Edwards Lifesciences, Khaveen Investments

Edward’s historical 5-year average FCF margin is 15.46%.

EW Cash Flows

Edwards Lifesciences, Khaveen Investments

Source: Edwards Lifesciences, Khaveen Investments

The revenue projection for Transcatheter Aortic Valve Replacement has been discussed above. For 2022, we followed management guidance for each of the segments. From 2023 onwards:

  • Transcatheter Mitral and Tricuspid Therapies segment growth rate has been tapered down to the market CAGR of 12.57% (Research and Markets) by 2027.
  • Surgical Structural Heart segment is forecasted to grow based on the historical 6-year average growth of 3.10%.
  • Critical Care segment is forecasted to grow at a market CAGR of 6.10% (BioSpace)

Overall, our projections reflect a forward 5-year average revenue growth of 12.93% which is higher than the historical 5-year average revenue growth of 11.62%.

Segments ($ mln)

2021

2022F

2023F

2024F

2025F

2026F

Transcatheter Aortic Valve Replacement

3,423

3,885

4,467

5,137

5,908

6,794

Growth (%)

19.78%

13.50%

15.00%

15.00%

15.00%

15.00%

Transcatheter Mitral and Tricuspid Therapies

86

155

258

396

553

697

Growth (%)

105.74%

80.23%

66.70%

53.17%

39.64%

26.10%

Surgical Structural Heart

889

910

938

967

997

1,028

Growth (%)

16.71%

2.35%

3.10%

3.10%

3.10%

3.10%

Critical Care

835

860

912

968

1,027

1,090

Growth (%)

15.10%

3.01%

6.10%

6.10%

6.10%

6.10%

Total Revenues

5,233

5,810

6,576

7,468

8,485

9,609

Growth (%)

19.29%

11.03%

13.20%

13.57%

13.61%

13.25%

Source: Edwards Lifesciences, Research and Markets, BioSpace, Khaveen Investments

Based on a discount rate of 10.0% (the company’s WACC), we find the company fairly valued.

EW Price Target

Khaveen Investments

Source: Khaveen Investments

Verdict

In conclusion, we believe the TAVR revenues could continue growing at an average rate of 14.70% until 2026 supported by an ageing population. Furthermore, we believe Edwards could continue benefitting from economies of scale as seen in the past decade hence we forecasted the SG&A as a percentage of revenue to grow at -3.01% until 2026. We believe Edwards current EV/EBITDA multiple is extremely high as the company tends to have a higher multiple towards the beginning of the year hence, we used the industry average EV/EBITDA multiple of 23.29x to value the company. A potential risk to the valuation is the company’s heavy reliance on regulatory approval in 2022 for products in all segments to maintain a competitive edge in the market. Overall, we rate Edwards Lifesciences as a Hold with a target price of $101.12.

https://seekingalpha.com/article/4495196-edwards-lifesciences-high-revenue-growth-already-priced-in