Edwards Lifesciences Corporation (EW) is currently in an uncomfortable situation which can land it in hot water as it recently received a warning letter from the U.S. Food and Drug Administration (FDA) following an inspection of the company’s facility in Draper, Utah.
Edwards produces medical devices such as catheters, cannulae and cardioplegia solutions among others under its Cardiac Surgery Systems (CSS) business at the Utah facility. The company also manufactures components and accessories for its transcatheter heart valve delivery system and heart valve repair rings.
The warning from FDA is regarding the execution of Edwards’ quality systems under the CSS business. The letter from the Denver District Office of the FDA resulted from the inspection that was completed in Feb 2013.
The warning from the agency that is responsible for protecting and promoting public health in the U.S. pertains to the ‘design and process validation, corrective and preventive actions, finished device acceptance and packaging’ within the CSS franchise. The letter states, among other things, that Edwards will not gain premarket approvals (PMA) from the FDA for devices under scrutiny until the company resolves the underlying issues.
According to the company, the FDA warning is not expected to have any relevant impact on its outlook for 2013. Edwards currently envisages annual revenues in the range of $2.0−$2.1 billion. The Zacks Consensus Estimate is pegged at $2.04 billion.
The company expects earnings per share in the band of $3.00−$3.10 for 2013. The Zacks Consensus Estimate of $3.05 lies in the midpoint of the guided range.
Bearish on Edwards
The warning letter is a major setback for Edwards as it manufactures products under its surgical heart valve therapy product group and THV group at the facility. Moreover, the CSS business has consistently generated revenues for the company.
Such a strict stand of not granting premarket approval might hamper product development activities under the said business. Thus far, Edwards witnessed a challenging year. The FDA warning letter appears to be another headwind for the company.
With a dismal start to 2013 when Edwards’ revenues and earnings missed the Zacks Consensus Estimate and considerable guidance cut, the estimate revision trend also reflects a bearish tone towards the stock. Despite few upward revisions for this ongoing and the next year, the overall estimate revision trend reflects a negative bias towards Edwards.
It remains to be seen whether the transcatheter aortic valves that offer the most promising opportunity in the cardiac device space, can turn the tables for the company. Until then, we prefer to avoid this Zacks Rank #5 (Strong Sell) stock.
While Edwards is presently out of favor, other stocks in the medical device space are expected to do well. We believe that The Cooper Companies (COO), CONMED Corporation (CNMD) and Myriad Genetics Inc. (MYGN) are worth considering. These stocks carry a Zacks Rank #2 (Buy).
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