COVER STORY

Few companies endure the competitive rigors of the medical device marketplace long or successfully enough to claim the distinction of being a 50-year-old, billion-dollar company. But in 2008, Edwards Lifesciences Corp. (Irvine, CA) is just such a company, celebrating its 50th anniversary while also delighting in its ongoing financial success.

Edwards's drive to remain true to its technological roots i more than a lesson in humility; it's also a recipe for continued success. Fifty years after its founders collaborated to develop the first successful artificial heart valve for implant in humans, Edwards continues to focus its efforts on groundbreaking technologies that offer compelling opportunities to transform patient care in the cardiovascular market.

Not every technology Edwards explores lives up to its high standards for clinical superiority and profitable market opportunities. In recent years, the company has made a number of divestitures, including its perfusion products business and angiogenesis program. In late 2006, the company discontinued its Optiwave 980 cardiac laser ablation system. And most recently, in December 2007, Edwards announced plans to sell its LifeStent peripheral vascular product line to C. R. Bard Inc. (Murray Hill, NJ) for up to $140 million.

This transaction will enable the company to allocate an unprecedented level of investment into continued development of its transcatheter heart valve and critical-care product lines, as well as expansion into emerging geographical markets. In addition, the company and its leaders are exerting increased influence in the greater medtech community. Last fall, for example, Edwards announced a $5 million multiyear grant to the Henry Samueli School of Engineering at the University of California, Irvine, to establish the Edwards Lifesciences Center for Advanced Cardiovascular Technology. And in March 2008, Edwards Lifesciences chairman and CEO Michael A. Mussallem will assume the role of chairman of the board of directors for industry association AdvaMed (Washington, DC).

In this excerpted interview with MX editor-in-chief Steve Halasey, Mussallem discusses Edwards's history of innovation, as well as the company's process for continually reevaluating, refocusing, and reinvigorating its product pipeline.

MX: How do the divestitures and acquisitions that Edwards has made over the last few years fit into the overall vision and strategic focus of the company?

Michael A. Mussallem: Edwards is focused on developing clinically superior, differentiated products that provide a compelling competitive advantage. When we start down the product development path, we look for those characteristics. But once we're down that path, if we realize we won't achieve the expected superiority—possibly because clinical practices have changed—we'll move on to an area where we can make a real difference. And so our divestitures have been in areas in which we felt we couldn't fulfill that promise of clinical superiority.

Most recently, on December 7, 2007, Edwards Lifesciences announced that it plans to sell its LifeStent peripheral vascular product line to C. R. Bard Inc. for up to $140 million. How did you identify Bard as a potential buyer?

Bard approached us with an unsolicited offer in early November.

Did that offer spark a reevaluation of the product line?

No. During the course of our routine strategic planning, we realized that we were still at subcritical mass in the peripheral vascular space. To drive our leadership in that space, we would have to make substantial investments. At the same time, we recognized some emerging opportunities within heart valves and critical care that were demanding additional investment. So prior to Bard's offer, we had already decided that we either needed to do substantially more in the peripheral vascular space or consider an exit.

Over the past 18 months, the markets for both cardiac rhythm management and interventional cardiology products have been hit hard by product recalls and questions of efficacy. Although Edwards Lifesciences doesn't operate in these categories, has the company felt any effects of this cardiology market turmoil?

Not directly, but we've been affected by it tangentially, of course. When media outlets focus on the negative side effects of terrific cardiology products and fail to discuss the tremendous benefits they offer patients, such coverage ends up having an impact on all companies in the sector.

Clinical Research

The regulatory pressure you mention can influence the data demands that are placed on clinical research. This past October, at the Cardiovascular Research Foundation's Transcatheter Cardiovascular Therapeutics (TCT) scientific symposium, Edwards Lifesciences announced the 12-month results from its Randomized Study Comparing the Edwards Self-Expanding LifeStent versus Angioplasty Alone in Lesions Involving the Superficial Femoral Artery or Proximal Popliteal Artery (RESILIENT) trial of the Life-Stent self-expanding stent. What has the trial demonstrated? How did the trial factor into the decision to divest the LifeStent line to Bard?

We're very satisfied with what that trial has delivered. In fact, it was designated as the blockbuster trial of the day at TCT. The trial didn't really factor into the decision to divest the line, but it made the LifeStent technology more valuable. The LifeStent represents a landmark premarket approval (PMA) application in a field where most of the products used in the United States are being used off label.

In early 2007, Edwards Lifesciences received conditional approval from FDA to initiate a pivotal clinical trial of its Sapien transcatheter aortic heart valve technology. The Placement of Aortic Transcatheter Valves (PARTNER) trial is designed to evaluate the valve in patients who are considered high risk for conventional open-heart valve surgery. What is the status of that trial and the implications of the findings to date?

The Edwards Sapien valve is a transcatheter heart valve. It encompasses a lot of proprietary technology and enables patients to have heart valves replaced without open-heart surgery while the heart is still beating.

The PARTNER trial is a partnership between surgeons and cardiologists. The trial is going to study patients who are of high risk for conventional open-heart surgery, and it will compare the Edwards Sapien valve with traditional treatments. There are two arms to the trial: comparison with open-heart surgery and comparison with medical management. In addition, the valve can be implanted via two delivery techniques: a transfemoral and a transapical approach. In the transfemoral approach, the valve is delivered via the patient's circulatory system through the leg. In the transapical approach, it is inserted between the ribs.

Edwards has already received FDA approval to increase the size of the trial to 600 subjects. We're now requesting to expand that to more than 1000 subjects and add the transapical delivery approach as well.

What other significant clinical research activities is the company undertaking?

We continue to follow all of our heart valve products—such as our family of Magna valves—for a long time, well after they receive FDA approval. We're also engaged in multicenter clinical trials for our FloTrac system. The FloTrac system is the minimally invasive hemodynamic monitoring system in our critical-care business, and we have quite a bit of research going on in that space.

Portfolio Development

Describe the intellectual property (IP) portfolio surrounding Edwards Lifesciences' products and the company's strategy for protecting its technology. Does Edwards file everything as patent applications or does the company hold back some intellectual property as trade secrets?

It's a sophisticated process. Most IP is filed as patents. But there are some elements that we keep inside the company as trade secrets. The question of how to protect intellectual property becomes a factor when considering new markets. We have to consider how sound our intellectual property protection is when we enter some emerging markets. For example, we feel more vulnerable from an IP standpoint when operating in a market like China.

Edwards is spending about 11% of its revenue on R&D. Are you comfortable with that level of investment? And where are the funds being focused?

Yes. At our recent investor conference, we stated that we believe that R&D will be around 11.5% of sales in 2008. That percentage has been steadily increasing. Edwards was at about half that level when the company was spun out from Baxter in 2000.

Recently, most of our R&D money has been spent within our heart valve and critical-care businesses, with our transcatheter valve technology being the single largest investment.

What percentage of Edwards Lifesciences' technology expansion is developed internally versus through acquisitions or licensing?

Historically, most of Edwards's technology expansion has come from internal development rather than through acquisition. There are a couple of recent examples of Edwards's growth through acquisition. In 2004, Edwards acquired Percutaneous Valve Technologies Inc. (Fort Lee, NJ). More recently, in November 2007, our company entered into a definitive agreement to acquire the CardioVations division of Ethicon Inc. (Somerville, NJ), a Johnson & Johnson company. The CardioVations acquisition will enhance our tools for minimally invasive cardiac surgery and be a stimulus for continuing R&D spending.

Reimbursement

To what extent do Edwards's research efforts seek to address reimbursement-related issues such as comparative clinical outcomes or cost-effectiveness?

Those issues are becoming more important than ever. In the past, manufacturers were only focused on achieving FDA approvals. But today, it's important for companies to be able to demonstrate a technology's economic viability in addition to strong clinical data. Therefore, it's not uncommon for Edwards to collect economic data as we go through our clinical trials.

Are those factors being considered as part of the ongoing PARTNER trial?

They are. The proper way to go about capturing those data is to start as early as possible. So, as we are collecting clinical data, we'll also be collecting quality-of-life data for the patients. We'll also be collecting data about the duration of hospital stays and other economic issues that are associated with the procedure. These data will enable us to lay out a cost-benefit analysis for all the parties that will have to consider reimbursement of the new procedure.

What does the current reimbursement landscape for Edwards Lifesciences' products and procedures look like? Are significant changes expected in the future?

Edwards's legacy products are already an integral part of the healthcare systems, so we don't have major payment concerns in those areas. However, that's not the case with newer, more-innovative technologies. Those are going to require a significant amount of credible data to support long-term reimbursement.

Poised for Growth

At its investor conference in December 2007, Edwards Lifesciences reported that it expects to strengthen its position in the heart valve market through several new product launches in 2008. Tell me a little bit more about the company's plans in this area.

Let me walk you around the globe a little bit. In the United States, we expect to launch our Magna mitral tissue valve and our Physio II heart valve repair ring. These are substantial new products that we expect will be very meaningful.

In Europe, we are already in the process of rolling out the Edwards Sapien transcatheter heart valve. Also, we have received European approval to commercialize our Ascendra transapical delivery system. In Japan, we plan to launch our Magna aortic valve. The Japanese approval process is traditionally much longer than elsewhere in the world, and we are excited about introducing this market-leading valve in Japan during the second quarter of 2008.

Edwards has seen steady sales growth in recent years. In 2002, the company's share price was around $22. Now it's trading at about $49, meaning the stock has appreciated 100% over five years. The company doesn't pay dividends—are the investors remaining happy with the appreciation that they're getting from the company's shares?

Yes. A lot of investors are happy with our long-term share appreciation. We currently don't have any intention to begin paying dividends. We believe that investing our cash back into the business—and sometimes also buying back shares of stock—is the best way to drive growth and generate returns.

You already mentioned Europe and Japan. What other geographical markets does Edwards operate in, and how do you assess the opportunities in those markets?

Similar to many other medical technology companies, 90% of our sales today come from the United States, Europe, and Japan. But we find that the emerging markets that make up that remaining 10% of our business represent the fastest-growing portion of it. We think that's very exciting, and we're making investments in those markets. As they become wealthier, they are able to access our advanced technology.

There is still great opportunity for growth in our major markets, especially outside the United States. In Japan, we have a very strong and long-term customer-based organization. As we're able to finally move new products to market there, we see our business in Japan as a nice growth driver.

The most interesting growth opportunities for Edwards over the next several years will be in Europe, due largely to the region's regulatory climate. As an innovator, our company's products tend to be based on new technology, and new technologies tend to become available in Europe first. Thus, we expect our sales in Europe to grow quickly over the next several years.

Past, Present, and Future

In March, you will assume the role of chairman of the board of directors for the industry association AdvaMed (Washington, DC). What are some of the key strategic initiatives you will be focusing on during your two-year term as chairman?

We're still in the process of developing our strategic plan for AdvaMed in 2008. But without going into too much detail, I can tell you that we're going to continue to focus on making AdvaMed the leading advocacy organization for the medical technology industry by strengthening our partnerships with key stakeholders in Washington, DC. We're working to generate greater awareness for the organization and the valuable life-saving technologies produced by its members.

During my term, I'll be continuing AdvaMed's current initiative to strengthen the industry's image and visibility through its Progress You Can See campaign. Medical technology is being mistakenly branded as one of the drivers of the increase in healthcare spending. In reality, though, it's the diseases themselves. And the value that medtech manufacturers provide through early diagnosis of disease, better treatment options, and improved patient outcomes is really substantial.

The lines between the medical device, pharmaceutical, and biotech industries are becoming increasingly blurred as technologies continue to converge. What role does this convergence play in the sectors in which Edwards Lifesciences operates? In the near and long term, how do you see Edwards Lifesciences continuing to evolve as a company?

The convergence of devices, drugs, and biologics is contributing to a holistic philosophy for treating patients and fighting disease. There's significant value in bringing combination technologies together for the good of physicians and patients. Today's life sciences industry is sophisticated enough to bring together devices, drugs, and biologics in ways that can have an unprecedented impact. At Edwards, we certainly keep our eyes open for these opportunities, and there are many great examples of other companies in the industry doing the same.

In 2008, Edwards is celebrating its 50th anniversary. The company began as a collaboration between Miles "Lowell" Edwards, an electrical engineer, and Albert Starr, MD. The collaboration led to the first successful artificial heart valve and the founding of our company.

We're proud that, after all this time, Edwards is still focused on pioneering the cardiology market and introducing many 'firsts' to market. In the valve area, for example, Edwards pioneered mechanical valves and, later, tissue valves. Now we're looking to pioneer less-invasive replacement technologies. Similarly, in the critical-care segment, we have a legacy of innovation in hemodynamic monitoring and look forward to continuing that legacy. As we celebrate Edwards's 50 years of lifesaving innovations, we're also reflecting on our roots. We want to continue the company's legacy of innovation for the next 50 years and beyond.

Copyright ©2008 MX