One of our favorite medical device markets here on the Vascular team at DRG is undoubtedly transcatheter heart valves. Highly differentiated, these gadgets are marvels of engineering with the potential to vastly improve patient outcomes while avoiding the open heart surgery which has long been the only option for patients with defective heart valves.
Transcatheter valves are relatively new, and the market in most countries is dynamic and expanding rapidly. Plus, since there are two different valves currently being targeted by this sort of technology (the aortic and mitral valves, to be exact), this market is actually two markets rolled into one. Since these markets will behave quite differently from each other, understanding the bigger picture can be quite complex. All of which makes transcatheter heart valves very fun to cover as analysts!
A few days ago, the biggest name in the industry, Edwards Lifesciences, announced it was acquiring the start-up CardiAQ, for a cool $400M. Edwards is the acknowledged leader in the transcatheter aortic valve implantation (TAVI) market for a few years now, but it and its competitors are now attempting to position themselves for the transcatheter mitral valve implantation (TMVI) market, which does not yet exist. CardiAQ has developed a TMVI device, and it is this technology that Edwards is paying for.
However, Edwards already has TMVI technology in its pipeline (namely, the FORTIS valve), so why does this acquisition make sense? Did they pay the right price? A few of the analysts that cover this market got a little roundtable discussion going to try and figure out how we feel about all this . . .
Sean Messenger (Principal Analyst, Cardiovascular Medical Devices at DRG): Wow, guess Edwards really had concerns about its homegrown mitral valve technology, seeing as it just shelled out $350 million in cash (up to $400 million with milestones) for a TMVI device. Edwards' FORTIS device had been in early clinical studies, but they recently halted studies due to safety concerns.
Alexander Marsolais (Market Research Analyst, Cardiovascular Medical Devices at DRG): It's funny, they sort of alluded to this in an investor event a few weeks back. The CEO was asked a question about the FORTIS program, and while he maintained they are still working on it, he also mentioned that the company has a history of acquisitions and isn't afraid to buy better technology if it is advantageous, and may do so in this segment as well. It just goes to show, you should read between the lines as much as possible with these investor day/conference call type secondary sources, there is often some juicy foreshadowing in there for the attentive analyst.
Erik Bracciodieta (Market Research Analyst, Cardiovascular Medical Devices at DRG): History repeats itself! Edwards acquired a small company to get TAVI years ago. Also, this should make the lawsuit CardiAQ has against NeoVasc wrap up much sooner. CardiAQ claims NeoVasc’s TMVI device infringes on their design and has temporarily blocked NeoVasc’s European patent application. With Edwards’ resources NeoVasc may be pushed out of a market that doesn’t even exist yet.
Sean Messenger: I wonder if they're going to completely scrap FORTIS or if they're going to try to incorporate some lessons from CardiAQ into their technology. [editor’s note: Edwards has now stated that they believe the two technologies are complementary] Also an interesting comparison Erik brought up: Edwards acquired PVT for $125 million in cash over 10 years ago (2004). The current acquisition is almost triple what PVT was. Is that just inflation, or is CardiAQ's technology closer to the market than PVT's was? With the recent concerns around FORTIS and the caution displayed in MitraClip adoption, it's hard to believe Edwards thinks TMVI will take off as rapidly as TAVI did.
Alexander Marsolais: On the other hand, before TAVI the idea of transcatheter valve replacement was basically untested, and it was probably hard to say at the time whether there was ever going to be a significant market for this kind of device— it could have been a huge flameout. The mitral position is obviously much more technically challenging, but no one would now argue that the mitral market won't be huge if it does take off - this might explain some of the difference in the valuation. Also, CardiAQ may be much further ahead in development than PVT was?
Sean Messenger: That's a really good point that's important to keep in mind. Now that TAVI is practically ubiquitous, it's hard to imagine a pre-TAVI world. In fact, it looks like Edwards was thinking that way at the time of the PVT acquisition—they had a $15 million opt-out clause, protecting them somewhat if the technology was a complete flop from the get-go . . . though it's hard to say that a similar clause definitely *doesn't* exist in the new deal.
Erik Bracciodieta: Well $125 million dollars in 2004 is about $160 million today. So the difference between the acquisitions must be based on technological maturity. TMVI will definitely not take off like TAVI, it's a totally different anatomy, disease profile and the treatment matrix is more varied.
It took Edwards three years after buying PVT to get TAVI introduced in Europe. We currently predict TMVI to receive a CE mark in 2017, so that's a year of difference in tech development post-acquisition between TAVI and TMVI. So, is paying more than twice the upfront price with TMVI worth the extra year of sales? I'm afraid I have to disagree somewhat with Alex, a year of early sales of TMVI won't be as lucrative as with TAVI.
Sean Messenger: I think both are probably going on here. Sapien showed that transcatheter heart valves can actually work, which should have increased the value of any company developing these technologies. But at the same time, it was very far away from the market. Another interesting comparison is Medtronic's >$1 billion spend on CoreValve and Ventor in 2009 (CoreValve was $700 million out of that $1 billion). That was for a market-ready product, and is more than twice the spend of Edwards' investment in CardiAQ, despite it being more than 5 years ago.
For this acquisition, there are probably some concerns about TMVI technology generally, which depresses the value of the acquisition, and also great optimism that it will be the next TAVR, which increases it. I don't know if we'll see TMVI any sooner than we expected to, but hopefully this means the technology will be more robust and can save more lives.
Alexander Marsolais: I did a quick calculation - assuming an ASP around that of TAVR ($30,000) the extra $240M they paid for CardiAQ would require something like 20,000 extra units sold to justify the extra expense, once you factor in EW's profit margin of around 35%. Erik's right, this probably won't happen in the first year; however, with the CardiAQ acquisition, they will continue to always be one year ahead of where they would have been during an equivalent period after the PVT acquisition. So they will continue to rack up extra sales over several years; they must be betting that this will justify the investment.
Also, by buying CardiAQ, they prevent anyone else from swooping down and buying it up to their own advantage (ahem, Medtronic?) - this alone might be worth an extra $200M.