Edward Lifesciences (NYSE:EW): Expect sell-the-news reaction

So far, so good with the s-t bear thesis. Altera (ALTR) worked out nicely yesterday. With the market looking down this morning, I'm on the hunt for additional short-selling candidates.

Today I'm looking at Edward Lifesciences (NYSE:EW). I gave a lengthy review on the co back in June.

Wednesday after the close the long-awaited results of Edward’s PARTNER Cohort B trial were published in the New England Journal of Medicine. The SAPIEN was a success, at least on the surface.

- JP Morgan's Michael Weinstein, who rates EW at Underweight is out with some interesting comments:

First, we believe that the Cohort B results should support US approval of Sapien for use in inoperable patients. While there were certainly some issues raised by the data , the trial met both of its endpoints by a wide margin. Patients treated with Sapien experienced 30.7% mortality at 12 months compared to 49.7% for those treated medically (p<0.001), style="font-weight: bold;">In the meantime, Edwards’s valuation already assumes significant success for Sapien once it does launch domestically. If we apply the current NTM P/E multiple for the large-cap group (11.5x) to the company’s base business, it implies a valuation of $23.71 per share. Assuming that the stock opens today around $65, that leaves more than $41 per share, or nearly $4.9B, in value attributed to Edwards’s transcatheter valve program. Using an 11% discount rate, we estimate that peak sales would have to exceed $2.2B to justify that valuation, with EBIT approaching $1.0B. Our own model calls for peak sales of roughly $1.7B with EBIT of $750M. It’s also worth noting that for Sapien to get to $2.2B and, more importantly, to sustain that level, the TAVI market would most likely need to reach $4.5B in size, as rarely in cardiovascular devices does one company end up controlling more than 50% of a market. To put that in perspective, the worldwide drug-eluting stent market is expected to be roughly $4.3B in 2010, and the entire surgical valve market (including repair) will likely approach $1.5B.

That said, there were plenty of issues with the trial, some of which are likely to dictate FDA labeling and training requirements:

- More concerning is the strikingly poor randomization of patients within the trial.

- Finally, treatment with Sapien was associated with some serious adverse
events.

What does it mean for the stock? As we noted in our preview, the chances of a negative trial outcome were remote given the significant structural changes to the study design over the past two years and inclusion of the co-primary endpoint, which we viewed as an easy target. However, there was legitimate uncertainty about whether Sapien could demonstrate a mortality advantage in this very sick patient population, without which the issue of approvability could have been thrown into question. With this risk now removed, we would expect EW shares to trade up ~10% on Thursday to the mid-60s, though whether it holds that level is another question, as we fully expect to see some profit-taking.

An FDA panel for the Cohort B indication is in all likelihood a minimum of eight months away, with final approval following a few months after. Meanwhile, follow-up in Cohort A should be completed soon, but presentation of the data will likely wait until the ACC conference in March.


- This is what BMO has to say about EW this morning:

We expect the stock to be up meaningfully given the results,and we would not be averse to investors trimming positions and taking some profit off the table. Our MARKET PERFORM stock rating is predicated on EW’s valuation as we think the stock is ahead of itself. From a longer-term perspective,the only thing that keeps us on the sidelines is valuation.

- Lazard has the following comments:

We note that the control arm was statistically (p=.04) sicker, with a logistic EuroSCORE of 30.4% vs. 26.4% in the Sapien arm. While mortality may have hit the significant threshold in equal groups, from the data it is impossible to tell since the control group was statistically sicker.

We expect this will cause investor debate and maybe a pullback from the $7 increase after hours. It is also likely to cause FDA discussion although we strongly believe that the device will be approved and the statistical mortality benefit will carry physician view and lead to standard of care as the group differences are forgotten.

Notablecalls: I think EW could see a sell-the news reaction today. Note that the NEJM article was originally sent to select docs and journalists already on Tuesday morning (or even Monday evening).

Morgan Stanley was out with a positive Research Tactical Idea on EW on Tuesday morning - the stock shot up 5 pts in reaction to that. It's pretty clear the MSCO guys knew the NEJM data would be positive, although there is no mention of that in the RTI. Anyway, the stock was up 5 pts on 4M shares. Most of this 4M is probably fast money types that will be looking to cash in their chips as soon as today.

JPM, BMO and Lazard are calling for profit taking.

Also note that the data was somewhat hairy (randomization) & that EW is trading at a sky-high valuation.

I think EW is a short here around $67. I would give this one some wiggle room, so start lightly. Average up if you need but keep it small.