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THE HEART OF THE MATTER
Global Equity Analyst, Sanlam UK
Nov 09, 2023
What is the leading cause of death in the world today? This may not be the cheeriest question with which to start an investment article, but if you said cancer, you’d be wrong. It is in fact heart disease. Most people aren’t aware of this – which forms a large part of the opportunity for growth for medical technology company Edwards Lifesciences.
Edwards Lifesciences focuses specifically on structural heart disease. Its main priority is a disease called aortic stenosis (AS) – the gradual degradation of the aortic valve, which, if left untreated, has poor outcomes. If you have severe AS, your chance of survival after two years is around 50%.
AS is mainly a disease of the elderly. The older you are, the higher your risk of having a severe form of it. Historically, the standard treatment has been open-heart surgery, which is highly invasive – the patient needs to have their sternum ‘cracked open’ to access the chest and be placed on a heart-lung machine in order to circulate blood around the body while the heart has been stopped.
The operation can take as long as five hours, and the patient has to be kept in an intensive care unit for up to a week after the surgery. Needless to say, this is not ideal for elderly patients. The risks of carrying out open-heart surgery often outweigh those posed by AS, resulting in the disease going untreated.
Around 15 years ago, Edwards developed a transcatheter aortic valve replacement (TAVR) product that revolutionised AS treatment. The key to TAVR is that it is minimally invasive, with the new prosthetic aortic valve reaching the heart via the bloodstream, having entered the body through a small opening in the femoral artery.
This obviates the need for a heart-lung machine and reduces the time needed in an operating theatre. Patients typically leave the hospital within four days, with time spent in intensive care reduced to two days. Edwards has over the years provided these life-saving valves for more than 850 000 patients.
Why does a lack of awareness about AS help Edwards? Simply put, it means that the opportunity for growth for the company remains significant. In the US alone, only 12 out of every 100 patients with severe AS have had any kind of valve replacement therapy (TAVR or open-heart). There are currently around four million patients in the US with moderate or severe AS who could eventually need treatment, and this country is the best treated market in the world.
The opportunity outside the US is even larger. The TAVR market globally is now worth around US$5 billion (Edwards has around 65% market share). This figure is expected to double to around US$10 billion by 2028. Even then, this only assumes a high-teens percentage of intervention. The runway for growth for Edwards is decades rather than years.
It’s impossible to talk about an investment in medical technology without discussing GLP-1s, a class of medications commonly prescribed for weight management. The theory is that GLP-1s will result in improved eating habits, with diseases associated with unhealthy lifestyles (including heart disease) lessening over time as GLP-1 usage increases.
Most medtech share prices have sold off indiscriminately in response to this view. We used this sell-off to build our position in the Sanlam Global High Quality Fund in Edwards, with the name trading at valuation levels around 35% lower than has been the case on average over the past decade. We’re not particularly concerned about how GLP-1s will affect the total market for the company, since AS is a disease of the elderly. If GLP-1s help patients live longer, then this will require more people to have heart valve replacement therapy, not fewer.
What about competition in this market? If this is such a fantastic growth area, surely other companies are trying to eat Edwards’ lunch? They are, but it’s easier said than done. Medtronic has around 30% market share, while Abbott Laboratories and Boston Scientific have much smaller slices of the pie.
We remain confident that Edwards can maintain its dominance. The company commits about 17% of its revenues to research and development, which is around double the level of its competitors. All things being equal, this should lead to better products with enhanced safety profiles.
Edwards is also advantaged by its status as a first mover. Most cardiologists and surgeons have been trained to do the TAVR operation using the Edwards device. To learn how to do the procedure using Medtronic’s device, for example, is somewhat of a hassle, especially given that most operations will still be done using Edwards technology.
We believe that this provides solid protection for Edwards Lifesciences’ market share. This, combined with the attractive growth profiles of the markets it operates in, means we are highly positive about the long-term prospects of this innovative company.
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