Edwards Lifesciences Corp (EW): Is This Fallen Angel Still a Good Growth Play?

Healthcare stocks resemble tech stocks, in that both are eye candy to growth investors, show volatility over business cycles and thus have less appeal to value investors. Conclusively, it is important for growth investors to understand that if they pick high-growth companies with a strong market presence, they are likely to reap greater rewards during down markets than up markets. The reason is obvious. During down markets, the stronger companies will continue to grow (albeit slowly) while the weaker will be elbowed out. During up markets, even the smaller companies would show growth and rapidly catch up to the bigger ones, thus taking away a chunk of their revenues.

This discussion is premised on Edwards Lifesciences Corp (NYSE:EW)‘ present market position. As the US economy gradually expanded after the Great Recession, we saw a strong rally in Edwards. However, the momentum is now starting to break as competition is getting fiercer. Edwards Lifesciences is a medical device manufacturer and is known for its signature SAPIEN valves used to replace diseased aortic heart valves.

In spite of having a stronghold in the US, the company is starting to receive major setbacks in the European region. The company missed both earnings and revenue forecasts in the latest quarter and a selling frenzy, similar to the one seen back in October of last year, followed. The third quarter 2012 price slump, due to a revenue forecast miss, was the biggest Edwards had seen in a decade. Something similar was witnessed this past quarter, ended in April.

The bearish case

Medtronic, Inc. (NYSE:MDT) is cited as Edwards’ biggest competitor. Edwards managed to forestall Medtronic’s entry into its primary market, the US. In the latest quarter alone, Edwards Lifesciences Corp (NYSE:EW) received over $84 million from the competitor in a patent litigation. While it may have contributed toward Edwards reporting a better EPS this quarter than what it could have been otherwise, Medtronic’s Europe presence remains a huge threat to Edwards’ future performance. Adding to Edwards’ problems is the recent CE Mark approval of a valve-in-valve replacement technique using Medtronic’s CoreValve–a direct substitute to Edwards’ SAPIEN Valve. The approval is the first-of-its-kind in Europe.

Apart from Medtronic, St. Jude Medical, Inc. (NYSE:STJ) is yet another device maker causing troubles for Edwards in Europe. St. Jude’s Portico Valve received approval last year and gives EW holders another reason to worry about. And just when you think it can’t get any worse, we hear of Boston Scientific Corporation (NYSE:BSX)‘s Lotus Valve System, which is currently awaiting approval in Europe, and once approved, may send shock waves across to all competitors. Edwards management was optimistic about its move to Japan last year but competition has also crept in there.