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Edwards Lifesciences

Equity Research Report – Edwards Lifesciences (NYSE: EW)

Sergey Baykov • Noé Bellet • Joshua Hernandez • Jack Lester

Nate Marks • Maggie Reigelsperger • Wissam Tekarli • Preston Williams

March 10, 2017

University of Utah Student Investment Fund

Table of Contents Executive Summary .................................................................................................................................... 1

An Overview of the Heart .......................................................................................................................... 2

Heart Valve Disease .................................................................................................................................. 2

Treatment Options ...................................................................................................................................... 3

Company Strategy ...................................................................................................................................... 6

Business Model ............................................................................................................................................ 7

Supply Chain and Cost Structure.............................................................................................................. 8

Pricing Structure ....................................................................................................................................... 9

Cost ........................................................................................................................................................... 9

Sales Methodology .................................................................................................................................. 10

Industry ...................................................................................................................................................... 10

Porter's Five Forces Analysis .................................................................................................................. 11

Business Segments ..................................................................................................................................... 14

Critical Care .......................................................................................................................................... 15

Surgical Heart Valve Replacement ..................................................................................................... 16

Heart Surgery Trends & Growth Areas .................................................................................................. 17

Transcatheter Heart Valve Replacement ........................................................................................... 18

Transcatheter Future Growth .................................................................................................................. 20

Centera Valve (R&D) ............................................................................................................................. 20

Sapien 3 Ultra System (R&D) ................................................................................................................ 20

TAVR and Patient and clinician education ............................................................................................. 21

Indication expansion ............................................................................................................................... 21

Transcatheter Mitral Valve Initiatives ................................................................................................... 22

CardiAQ Valve Replacement .............................................................................................................. 22

Cardioband System ............................................................................................................................. 23

Pascal .................................................................................................................................................. 23

Harpoon............................................................................................................................................... 23

Company Risks.......................................................................................................................................... 24

Management Team ................................................................................................................................... 25

Summary Valuation Methods .............................................................................................................. 29

EBITDA EXIT Multiple ..................................................................................................................... 29

............................................................................................................................................................ 30

Perpetuity Growth Method.................................................................................................................. 30

P/E Multiple ........................................................................................................................................ 31

EV/EBITDA Multiple Approach ........................................................................................................ 32

Conclusion ................................................................................................................................................. 33

Appendix ................................................................................................................................................ 34

Income Statement Projections ................................................................................................................. 34

Revenue Breakdown and Assumptions ............................................................................................... 34

Working Capital Assumptions/Drivers ............................................................................................... 37

Other Assets & Liabilities ................................................................................................................... 39

Long Term Debt Schedule .................................................................................................................... 40

Cash Flow Statement ............................................................................................................................ 41

Discounted Cash Flow Model .............................................................................................................. 42

Cost of Capital Assumptions ................................................................................................................ 43

1

Executive Summary

In 1958, Miles “Lowell” Edwards, an engineer, began work towards developing an artificial heart.

Within two years, he and a cardiologist invented an artificial heart valve and formed Edwards

Laboratories. American Hospital Supply Corporation purchased Edwards Laboratories in 1966

and sold it to Baxter International Inc. in 1985. The structural heart unit spun off from Baxter

International in 2000 and began trading as Edwards Lifesciences Corporation (NYSE: EW).

Edwards Lifesciences is the largest global provider of artificial heart valves and hemodynamic

monitoring products. The company sells devices in more than 100 geographic locations and has

served over 2 million patients worldwide. It has key operations in the United States, Singapore,

Costa Rica, and Switzerland.

Edwards Lifesciences is unique because of its singular focus on structural heart defects. This

specialization allows for economies of scale in the research and development of innovative

products. The company has a history of being first to market and has developed substantial

intellectual property that makes it difficult for competitors to enter the same markets. EW also

spends significant capital investing in new technologies from start-ups and receives the right of

first refusal should any of these companies wish to be acquired.

The company has an extensive clinical pipeline focused on 1) expanding indication for current

products and 2) bringing novel, minimally-invasive products to market. These products target a

large patient population that is not adequately treated through open-heart surgery.

The Edwards Lifesciences management team is led by Michael Mussallem, the current CEO, who

began his career 38 years ago, as an engineer at Baxter International. The rest of the management

team has significant industry experience and has a proven track record of successfully

implementing the company’s growth initiatives.

We issue a BUY recommendation with a 52-week price target of $123, implying an upside of 37%.

Edwards Lifesciences is the technology leader in a large, underpenetrated market. The company’s

focus on patient outcomes leads it to develop innovative solutions to solve unmet needs. We

believe the market is ignoring the value implicit in EW’s pipeline of mitral valve repair products.

EW’s exceptional management team has a proven track record of taking full advantage of

overlooked opportunities. Lastly, a recent correction has the stock trading close to its 6-month low,

which provides a favorable opportunity to invest in Edwards Lifesciences.

2

An Overview of the Heart

Edwards Lifesciences focuses on treating structural heart defects. The heart is divided into four

different chambers: the left and right atria and the left and right ventricles. Deoxygenated blood

from the body flows into the heart through the right atrium. Blood then flows into the right ventricle

where it is pumped through the pulmonary arteries to the lungs. Oxygenated blood returns from

the lungs to the heart through the left atrium. Blood then flows into the left ventricle where the

blood is pumped to the rest of the body through the aorta (see figure 1).

Anatomy of the Heart

Figure – 1

Heart Valve Disease1

Heart valves form a barrier between the different chambers of the heart. These valves prevent the

backflow of blood in the cardiovascular system. Valves need to operate continuously to maintain

cardiovascular efficiency. Heart valve disease occurs when one or more heart valves fail to work

properly. Age-related calcification is the leading cause of heart valve failure, but failure may also

be due to congenital defects. Untreated valve disease can cause infection, heart failure, stroke,

blood clots, and cardiac arrest. Heart valves can have three problems: stenosis, regurgitation, and

atresia.

- Stenosis: Occurs when the leaflets of a valve thicken or fuse together, thus preventing blood

from flowing properly through the valve.

1 Source: WebMD

Left Atrium

Aortic Valve

Mitral Valve

Left Ventricle

Pulmonary Valve

Right Atrium

Tricuspid Valve

Right Ventricle

3

- Regurgitation (backflow): Occurs when a valve does not close properly. Blood leaks

backwards through the circulatory system.

- Atresia: Occurs when the heart valve lacks an opening and blood is unable to travel through

the circulatory system. Primarily caused by a congenital defect.

Heart valve problems are serious conditions and often carry a prognosis worse than most metastatic

cancers (see figure 2).

5 – Year Mortality Rates

Figure – 2

Treatment Options

Physicians have only a limited set of options to treat valve disease. Medication can help control

symptoms, but a failing valve is a structural issue and cannot be remedied through medication.

Valvuloplasty, the widening of a stenotic valve using a balloon catheter, can be used to temporarily

improve valve function but is not a long-term solution. An artificial heart valve, placed through

surgery or via transcatheter, is the only permanent way to treat stenosis and regurgitation.

Surgical Valve Replacement2

Surgical valve replacement has been the industry standard since its introduction in 1960. The

procedure typically lasts 3-4 hours, and requires the use of a general anesthetic and a heart-lung

machine. During the procedure, the surgeon opens the patient’s chest, breaks his/her ribs, removes

the failing valve and sews an artificial valve into place. This method is incredibly traumatic, and

is generally not suitable for frail or elderly patients.

2 Source: WebMD

4

Transcatheter Valve Replacement3

Transcatheter valve replacement is a minimally invasive alternative to open heart surgery.

Although there are multiple approaches, most physicians perform the procedure with a catheter

inserted through an incision in the femoral artery. The new valve leaflets are mounted within a

balloon-expandable frame and threaded through the artery into the heart. Once in the correct

position, the balloon expands, crushing the defective valve and replacing it with the new valve.

EW's clinical trials found that transcatheter aortic valve replacement (TAVR) is a superior

alternative to open-heart surgery. TAVR reduces the 30-day mortality rate by 77% and the one-

year mortality rate by 50% compared to patients undergoing surgical valve replacement.4 Stroke

rates, another key metric in valve replacement, yield similar results to mortality rates. Clinical trial

results show a 77% reduction in stroke after 30 days compared to surgical valve replacement.

Faster recovery times and shorter surgery durations help TAVR decrease total procedure costs

from $76,063 to $45,485.5

Comparison between Surgical Valve and Transcatheter Valve

Figure – 3

3 Source: WebMD 4 See Mortality rates for surgery and TAVR graph 5 Source: Edwards Lifesciences

5

Mortality Rates for Surgery and TAVR

Figure – 4

Mortality Rates for Surgery and TAVR

Figure – 5

6

Although treatment options are readily available, most patients with heart valve defects do not

receive treatment. 18% of the 650,000 persons with aortic stenosis receive heart valve replacement

each year, compared to 5% in 2007.6 This percentage has increased in recent years due to the

advent of minimally-invasive procedures. An uneasiness to undergo open-heart surgery and a

general lack of awareness by patients contribute to the low number. The increased acceptance of

minimally-invasive transcatheter products will likely increase the percentage of patients who

decide to be treated.

Figure – 6

Company Strategy

Edwards’s strategy is built on three core elements: patient outcomes, product innovation, and

industry leadership. The company focuses on improving patient outcomes by addressing

underserved patient populations with minimally invasive therapies. A survey of Edwards

employees found that the overwhelming majority cite improving patient care as the primary

motivation for working at Edwards.7 The company’s narrow focus on structural heart defects

allows it to maximize the effectiveness of research processes and reduce the risk of surgical

complications.8

Since the development of the first artificial valve in 1960, Edwards has been a market leader in

product innovation.9 In addition to developing new products segments (e.g., transcatheter

valves), the company continues to expand its existing portfolio of surgical valves and critical

6 Ibid. 7 Interview with Edwards management, 2017 8 Edwards 2016 Investor Conference 9 http://www.edwards.com/aboutus/OurHistory

Total prevalence refers to the estimated number of patients that suffer from aortic disease.

7

care monitors. Key to Edwards’s strategy is its focus on a niche medical device industry.

Company management attributes its success to Edwards’s focus on products treating structural

heart defects.10 Clinical trials and targeted investments into new technologies drive Edwards’s

goal of increasing treatment efficacy. A mix of internal product development and external

acquisitions boost the company’s product portfolio expansion by allowing Edwards to divide

resources effectively.

Edwards builds on its industry-leading technology through strong relationships with patients,

physicians, regulators, and payers. By liaising with doctors and hospital administrators, Edwards

gains information about additional treatment opportunities and unmet patient needs. The

company has also established online resources to better inform patients about heart valve

conditions and how to receive treatment with an Edwards product. This strategy allows Edwards

to act as an educator to both patients and doctors, thus increasing brand awareness.11 From a

regulatory standpoint, Edwards has a successful track record of product approval. Management

credits this to long-term experience bringing products to market, and establishing positive

relations with regulators.12

Business Model

Edwards Lifesciences develops innovative heart valve products. EW keeps a first-mover

advantage in the medical devices industry by consistently improving its existing product lines and

by developing or acquiring new technology. This first-mover advantage is key as medical devices

have a long product development cycle and regulatory approval process.13 By being the first

company to receive approval, EW realizes a substantial advantage over competitors. In addition,

Edwards invests in smaller firms with new technologies, which expands its product portfolio and

reduces competitive threats as EW typically receives the right of first-refusal to acquire these new

technologies.14

Edward Lifesciences maintains growth and market leadership through product innovation. Thus,

EW’s continued research and development spending is key to its success. Furthermore, a large

portion of R&D spending is attributed to clinical trials. Management expects R&D spending to be

16-17% of sales for product pipeline development.15 Acquisitions also aid in growth and

production innovation. Notably, EW acquired two mitral valve companies, CardiAQ and Valtech

Cardio for approximately $350M each in 2015 and 2017, respectively.16 These acquisitions allow

10 Edwards 2016 Investor Conference 11 Ibid. 12 Ibid. 13 It can take upwards of two years to advance a medical device from clinical trials to CE mark approval assuming

no development obstacles 14 Source: Securities and Exchange Commission 15 Source: Edwards Lifesciences 10-K, 2016 16 Source: ir.edwards.com

8

EW to capitalize on previously developed products to expand its treatment and intellectual

property portfolio.

Edwards manufactures and distributes all of its own products. The company is headquartered in

Irvine, California and owns manufacturing centers in Draper, Utah, Switzerland, and Singapore.

Additionally, the company leases a plant in Costa Rica but intends to acquire the facility in late

2017. This globally diversified manufacturing system allows Edwards to keep profits within

geographical areas and reinvestment in each segment instead of repatriating profits and incurring

foreign exchange losses. EW also has a small supply chain presence in Australia. Australia offers

an attractive place to manufacture parts involving bovine tissue used in artificial heart valves due

to the minimized risk of mad cow disease.17 However, Australian production presents a supply-

chain challenge as the company incurs high costs to ship the bovine tissue to other manufacturing

plants within a strict 24-hour window.18

Edwards sells its products to hospitals through a consignment model. The company provides a

certain number of valves to each hospital, which are stored until they are needed for procedures.

During this time, the valves stay as inventory on EW’s balance sheet. The valves’ stable shelf-life

allow hospitals to stock enough product to meet patient needs. EW’s products have a shelf-life

of five years but a hospital will turn over its inventory supply within six months on average. This

allows hospitals to maintain a sufficient inventory of valve products. When a valve is eventually

used, EW is reimbursed through private insurance providers or through government-subsidized

programs. Because of this revenue structure, insurance providers have negotiating power that

could potentially influence EW’s revenues.19 The majority of patients receiving valve replacement

treatment are over the age of 65, and are thus covered by Medicare in the United States.20 In the

European market, government-subsidized healthcare programs affect Edwards's sales strategies.

Notably, in the third quarter of 2016, the French government failed to budget enough funds for

transcatheter heart valve replacement. Edwards stopped selling TAVR treatments until the

government readjusted healthcare cost allocations.21

Supply Chain and Cost Structure

For its primary transcatheter and surgical products, Edward Lifesciences has manufacturing

facilities in Utah, California, Singapore, and Switzerland. The company receives raw materials

through a variety of international sources, but completes manufacturing internally at its own

facilities. Edwards current leases a manufacturing facility in Costa Rica, but expects to fully

17 Source: Edwards Lifesciences 10-K, 2016 18 Source: Global Trade Magazine 19 Edwards management call 20 A non-trivial portion of U.S. revenue comes younger patients with congenital valve problems that are covered by

private insurance 21Source: Edwards Lifesciences management call

9

purchase the location in late 2017.22 Man-made resins and materials are integral to EW’s product

line. Resins are typically purchased in the US and bovine tissue used in pericardial valve products

comes from Australia.

Within the supply chain, shipping costs remain a large cost for EW’s products. Especially in

manufacturing pericardium products requiring organic tissue, Edwards focuses on overnight

turnaround in sterile conditions to ensure both fast delivery and ensuring that the product can be

directly used with a patient.23

Pricing Structure

EW’s current aortic valve products vary significantly in price. For its more traditional surgical

valves, management provides an aggregate cost estimate of $6,000. It is estimated that the

company sells the Sapien 3 transcatheter for an average of $27,000 globally and about $30,000 in

the U.S.24 As surgical valves remain the most common form of treatment in emerging markets,

EW focuses on selling TAVR products in more developed economies. TAVR valves have gross

margins of about 80%, while the surgical valves have gross margins of about 72%. Management

expects Edwards’s overall gross margin to improve over time with increased adoption of TAVR

products over surgical alternatives.

Forward looking, price structures for the anticipated mitral valve products are estimated to remain

within line of current portfolio offerings. The CardiAQ mitral valve is estimated at $30,000, while

the suite of valve repair products has an average price of $18,000. As a new industry treatment, a

price premium is reasonable as EW rolls out mitral treatment options, and may see overall

reduction as adoption increases and the company increases volume through large sales to

government healthcare centers and insurance providers.

Cost

Transcatheter valves are three times as expensive for hospitals. Hospitals are willing to pay that

premium because the technology saves lives, reduces recovery time, reduces costs of people

staying in the hospital, and makes insurance companies comfortable. According to EW’s

management, for every $1 lost in surgical growth due to cannibalization by its transcatheter

products, EW generates $3. Management expects revenues from Edwards’s surgical segment to

slow to 1-3% growth, while transcatheter increased approximate 30% YoY through 2016.25

22 Source: ir.edwards.com 23 Source: Edwards Lifesciences management call 24Source: Edwards Lifesciences 10-K, 2016 25 Ibid.

10

Sales Methodology

EW utilizes a standard sales practice within the medical device field. Doctors typically select their

preferred device. Therefore, the company sells directly to doctors and hospital administrators.26

Edwards is limited to contracting with hospitals which can provide reimbursement for its products.

Edwards Lifesciences leverages its patient outcome results to drive differentiation, focusing on

patient well-being, reduced complications, and lower mortality to sell its product. Internationally,

the sales methods differ slightly. Whereas doctors have the final say about products in the U.S.,

and insurance providers/Medicare consequently make payments, in more socialized countries,

agencies play a more active role in determining treatment choice. Especially in Europe, countries

have fixed budgets for medical costs, and Edwards Lifesciences must take these limits into

account. This results in slight price variances across borders.

Industry

Edwards Lifesciences is a heart valve manufacturer within the medical device industry. The World

Health Organization defines a medical device as "an article, instrument, apparatus or machine that

is used in the prevention, diagnosis or treatment of illness or disease, or for detecting, measuring,

restoring, correcting or modifying the structure or function of the body for some health purpose."

These items can include objects as diverse as a tongue depressor, an X-ray machine, and a

pacemaker. The global medical device industry is estimated at nearly $300 billion in revenue and

is projected to grow annually at 2.6%. The size of the U.S. medical device market is nearly $140

billion in revenue.27

The cardiovascular medical device segment is highly competitive and is reaching market

saturation. Some products, such as pacemakers and electrocardiograph machines, have become

commoditized. Thus, innovation in heart valves or niche areas pose greater growth opportunities.

Large companies have acquired smaller companies to expand their product portfolios and gain

market share in new regions. Drivers for the industry are technological advances, indication

expansion, improving economies, federal funding of Medicare and Medicaid, and an aging

population.28

Similar to pharmaceutical products, many medical devices are heavily regulated and must pass

through a rigorous approval process. The FDA has primary control over the process in the U.S.,

but has help from other organizations such as the FTC. In Europe, a device needs CE Mark

approval before it can be used in patient care. If the device has received the CE Mark or FDA

approval, it can usually be used in any country in the world.

26 Source: Edwards Lifesciences. “Careers.” 27 Source: IBIS World. "Medical Device Manufacturing in the US". 28 Source: IBIS World. "Medical Device Manufacturing in the US".

11

The FDA has three different classifications of medical devices based on their primary use and level

of invasiveness.29 These classifications include regulations that dictate when the device can be

used and how it is manufactured. A Class I medical device is simple in design and provides no

potential safety risks to the patient. The majority of medical devices fall under the Class II label.

This area includes devices such as needles, monitors and X-ray machines. These devices must

meet predetermined performance standards and are subject to post market surveillance. Class III

medical devices support or sustain human lives and a malfunction of any kind is unacceptable.

These devices must receive pre-market approval from the FDA and pass clinical trials that prove

efficacy. The heart valves manufactured by Edwards Lifesciences are considered Class III devices

while the critical care segment falls under the Class II label.

Edwards is committed to developing innovative technologies to advance solutions to treat

structural heart diseases. As a result of the aging world population, an increasing number of people

have been diagnosed with cardiovascular diseases. Overall, the population with structural heart

diseases is increasing. This creates opportunities for EW to increase revenues by innovating and

making heart valve replacement a less invasive procedure.

Porter's Five Forces Analysis

Threat of Buyers – High

Edwards has a threat of buyers from two distinct sources: doctors and hospitals, and insurance

providers. As a number of competitors also provide similar heart valve devices, Edwards must

continually update and innovate its product portfolio to remain attractive to doctors and hospital

administration. There are low switching costs between Edwards products and competitors,

sometimes only differentiating products by brand reputation and clinical trial data. Edwards

minimizes this risk by investing in physician education to illustrate the benefits of the company’s

products.

Insurers, whether private companies or through government-run programs, provide almost the

entirety of reimbursement for Edwards. As such, these firms and agencies have a non-trivial

negotiating power to determine acceptable prices for Edwards’s products. The threat of diminished

reimbursement is possible, and occurred in 2016 in France. Instead of the French government

holding pricing power over Edwards, the company simply stopped selling valves in the country

until proper reimbursements became available.30 While buyers may have some purchasing

leverage, Edwards’s life-saving products are a necessity for many patients, and help reduce

supplier bargaining power.

29 Source: Classify Your Medical Device - FDA 30 Source: Edwards Lifesciences management call

12

Threat of Suppliers – Low-Medium

Given Edwards’s manufacturing facilities around the world, there is little supplier power from a

single source. In addition, Edwards’s cost structure minimizes foreign exchange loss by keeping

costs and profits within localized regions. This severely fragments the company’s purchasing

needs and further limits the influence of a single supplier. Edwards also conducts all manufacturing

in house, which avoids the need for highly specialized suppliers to the supply chain.31 It is very

unlikely that any of the company’s raw material providers would be able to forward integrate and

begin producing FDA or CE-mark approved valves in the foreseeable future.

This does not hold true for Edwards’s bovine tissue demand. Edwards obtain bovine pericardial

tissue only from Australia, and as such is beholden to Australian suppliers in order to ensure mad-

cow disease tissue is not used.32 Edwards’s current demand for bovine tissue is significantly

inelastic, and will remain so until substitute materials prove equally effective. If Australian tissue

suppliers choose to raise prices, there is little Edwards can do without sacrificing the safety of its

valve products.

Barriers to Entry – High

Barriers to entry in the medical device industry are high due to significant research and

development costs, long regulatory approval time, and potential for existing patent infringement.

Edwards is set to earmark up to 17% of revenue for R&D in upcoming years, a significant capital

contribution that both deters competitive entry and strengthens Edwards’s product portfolio. In

addition, developing a new product goes far beyond R&D and manufacturing. Clinical trials and

regulatory approval in both Europe and the United States are costly and time-consuming. High

risk approvals (product classification for heart valves) can take multiple years of clinical trials

and cost upwards of $90M.33 This provides a significant time and cost barrier to dissuade

potential competitors.

As the earliest producer of artificial heart valves, Edwards controls more than 2,700 patents in

the space. This patent moat creates a threat of litigation to any company attempting to duplicate

Edwards ‘s valve replacement products in the U.S. As there is little room for significant product

differentiation while still effectively treating patient conditions, most potential entrants would be

unlikely to enter the market without litigation. Currently, Edwards receives ongoing royalty

payments from a rival product in the United States that infringed upon existing Edwards

patents.34

31 Source: Edwards Lifesciences 10-K, 2016 32 Source: Edwards Lifesciences management call 33 Source: http://www.mddionline.com/blog/devicetalk/how-much-does-510k-device-cost-about-24-million 34 Source: http://newsroom.medtronic.com/phoenix.zhtml?c=251324&p=irol-newsArticle&ID=1932573

13

Threat of Competition – Medium

Edwards Lifesciences has two main competitors, Medtronic and Boston Scientific. St. Jude

Medical and Symetis are two smaller competitors that are new to the industry and have only a

small market share in Europe.

Medtronic is Edwards Lifesciences’s largest competitor. Medtronic is a large, multinational

corporation with expertise in various clinical areas. EW directly competes with Medtronic's

cardiovascular division in developing transcatheter and surgical heart valves. Medtronic’s

transcatheter aortic valve, CoreValve, received FDA approval seven years after EW. In order to

enter the U.S. market, Medtronic settled a patent lawsuit with Edwards in 2014 for $740 million.

As part of the settlement, Medtronic pays Edwards royalties of $40-60 million each year until

2022.

Boston Scientific is a specialized medical device company that competes with Edwards. The

company focuses on implantable pacemakers, defibrillators, and artificial heart valves. Boston

was recently forced to recall its only approved transcatheter valve, Lotus, for undisclosed

mechanical issues. This recall damages Boston’s European market presence, and may further

delay entry to the U.S. market.35 Boston is involved in an ongoing lawsuit with Edwards over

patent infringement.36

Physicians play a crucial role within the medical device industry because they have the highest

influence on which products are purchased and eventually used in surgery. Surgeons choose

products primarily based off of clinical trial data. Edwards's TAVR 30-day mortality and

disabling stroke rates are lower than any of its closest competitors.37 The rates of Edwards's

competitors are only marginally better than the mortality and disabling rates of surgical valves.

Due to Edwards's clinical data results, some hospitals and surgeons only use Edwards's products

in the operating room. After speaking with several hospital employees, we found this to be true.

Employees from multiple different hospitals have all indicated that Edwards Lifesciences is the

industry leader within the cardiovascular medical device industry. One hospital we spoke to only

uses Edwards's products and does not even stock cardiovascular devices from any other

company. A hospital administrator also stated that after touring Edwards's headquarters in Irvine,

CA, they were very impressed with the management and overall experience.38

35 Source: http://www.reuters.com/article/us-boston-scientific-recall-idUSKBN1621NA 36 Boston alleges that Edwards has infringed on replacement heart valve patents. Edwards states the suit is “without

merit” and is confident that Edwards will prevail (FierceBiotech). 37 Source: TCT MD 38 Interview with Debra Yoshimura, St. Marks Hospital. February 14, 2017.

14

Competitive Landscape

Figure – 7

Threat of Substitutes – Low

Due to the high barriers of entry and the limited number of competitors, the threat of substitutes

is low. Additionally, heart valve failure is a structural problem and cannot currently be solved

through medication. Some diuretics may ease symptoms, but provide no long-term solution.39

Ultimately, physical heart valve replacement is the only solution for patients.

Patients that undergo a heart valve replacement procedure are patients diagnosed with severe

aortic stenosis that could lead to death within five years. However, the majority of patients are

left untreated as their aortic stenosis is not as severe to warrant a risky procedure. The same

pertains to mitral stenosis where the disease largely does not threaten the lives of patients. It is

about symptom improvement and the degree of a patient’s mitral stenosis. There could be a case

that medications are sufficient enough for most patients as Edwards Lifesciences continues to

introduce transcatheters for less severe patients.40

Business Segments

Edwards is organized into three distinct business segments. This includes critical care, surgical heart

valve therapy, and transcatheter heart valve therapy. The critical care segment includes patient

monitoring systems for hemodynamic monitoring using sensors and catheters during and after

surgeries. These are products made to monitor cardiovascular performance, heart pressure, and oxygen

saturation. Critical care also includes consumable equipment that aids in hemodynamic monitoring.

Critical care makes up 19% of total revenues. The surgical heart valve therapy segment represents

Edwards products that are made for surgical replacement and repair of the heart valve. This segment

39 Source: http://www.mayoclinic.org/diseases-conditions/aortic-stenosis/basics/treatment/con-20026329 40 Source: TCT MD

Product Sapien 3 Corevalve Evolut Lotus Edge Portico Acurate

CE Mark ü ü ü ü ü

FDA Approval ü ü Late 2018 Late 2018 2019

30-Day Mortality Rate

1.1% 2.8% 2.2% 2.9% 3.4%

Disabling StrokeRate

1.0% 3.3% 2.2% 2.4% 3.3%

15

makes up 26% of total revenues. The fastest growing segment is the transcatheter heart valve segment.

This segment makes valves that are designed to replace a faulty heart valve with an artificial valve

delivered through a catheter rather than implanted surgically. This segment makes up 55% of total

revenues.

Figure – 8

Critical Care

EW’s critical care segment includes hemodynamic monitoring systems used to measure patient's

heart function and fluid status in surgical and intensive care settings. EW hemodynamic

monitoring technologies are used before, during, and after surgery.41

Hemodynamic Monitoring System

Figure – 9

41 Edwards Lifesciences 10-K, 2016

16

Over the last ten years EW’s Critical Care revenues have grown at a CAGR of 3%. Management

estimates these revenues to grow 5% to 7% in 2017.42

Critical Care Revenues CAGR

Figure – 10

The increase in expectations for 2017 is driven by EW’s expansion into emerging markets and the

release of new Critical Care products. Acumen Hypotension Probability Indicator (HPI) received

the CE Mark in October 2016. What makes HPI unique is its ability to predict issues before they

occur allowing cardiologists to take preemptive measures to prevent surgical complications.

Surgical Heart Valve Replacement

The surgical tissue heart valve segment is made to replace defective heart valves through

surgery. Surgical heart valve therapy is a 1.8 billion dollar market and EW is the global leader.43

Surgical heart valve therapy (SHVR) primarily treats two areas in the heart. The first is the aortic

heart valve and the second is the mitral valve. The core product line in SHVR is the carpentier-

Edwards PARIMOUNT valve platform. The highest tier product in this platform is the

PERIMOUNT Magna Ease Valve which is designed to treat the aortic and mitral valve with the

most features for both patients and surgeons.

42 Ibid. 43 Edwards company filings 10-k 2017 & investor presentation 2016 conference

17

The PARIMOUNT Platform

Heart Surgery Trends & Growth Areas

Figure – 11

Surgical heart valve revenues have been level historically (see figure 11). Management guides 1-

3% growth due to trends and growth areas affecting surgical heart valve replacement. First, surgical

aortic heart valve replacement is slowly losing market share to transcatheter therapy in developed

regions. Other trends include an aging population and an increase in valve surgery in emerging

18

markets. An additional reason for growth in this segment is due to a new product called the

Edwards INTUITY Elite valve system, which was built based on the PARIMOUNT platform. The

valve supports minimally invasive surgery by design. It lessens the exposure surgeons need to the

heart in order to replace the faulty valve. The INTUITY Elite is made to integrate transcatheter

technology and surgical heart valve replacement. The Elite replaces the heart valve via open heart

surgery, but is then later replaceable with transcatheter therapy should the patient have heart

complications in the future.44 Edwards received FDA approval and CE mark in 2016.45

Transcatheter Heart Valve Replacement

Transcatheter heart valve replacement (THVR) is EW’s fastest growing segment. Comprising 55%

of Edwards’s total revenues in 2016, management guidance expects continued growth of 20-25%

YoY. This is due primarily to increased adoption of transcatheter procedures over surgical

alternatives. Since the introduction of Edwards’s first transcatheter valve, the Sapien, revenue has

consistently increased over time. 2014-2016 growth increased to approximately 30% YoY with

the introduction and adoption of the newest Sapien 3 valve, a slimmer and more versatile iteration.

Sapien Valve Evolution

Figure – 12

44 http://www.edwards.com/devices/Heart-Valves/intuity video information 45 Edwards company filings 10-k 2017

http://www.edwards.com/devices/Heart-Valves/intuity

19

Given the large, untreated population with aortic stenosis, transcatheter products provide Edwards

with the best method to treat members of that population set who cannot undergo standard surgical

procedures. Although at a higher price point than surgical valve alternatives, the less invasive

TAVR procedure results in fewer complications, and four times fewer mortalities and strokes after

30 days.46 Not only are transcatheter options providing long-term health benefits over surgery, but

they also reduce recovery times for hospitals by up to 60%. This generates increased incentives

for both hospitals and insurance providers to adopt transcatheter procedures, as it increases patient

turnover in hospitals and decreases overall costs. 47

Transcatheter Revenues

Figure – 13

Transcatheter currently only treats aortic valve defects (TAVR), and currently holds an 8.4%

penetration of the aortic stenosis market. With the adoption of more transcatheter procedures,

management expects Edwards market penetration to rise upwards of 30A% by 2021.48 Outside of

Edwards’s own projections, industry analysis expects the transcatheter addressable market to reach

$8.6B by 2020.49 Edwards currently controls approximately 55% of the transcatheter market, and

should maintain market leadership with continued product innovation.50

46 Source: Edwards Lifesciences 10-K, 2016 47 Source: Edwards Investor Presentation, 2016 48 Source: Edwards Lifesciences management call 49 Source: http://www.grandviewresearch.com/press-release/global-transcatheter-valve-market 50 Source: Edwards Lifesciences 10-K, 2016

20

Transcatheter Future Growth

Edwards’s focus on new transcatheter products is making products smaller and less invasive. The

company is currently developing new products in both valve and valve delivery segments. As more

at-risk patients are eligible for transcatheter treatments, providing the least-traumatic and invasive

procedures will drive positive patient outcomes and market adoption.

Centera Valve (R&D)

The Centera Valve is a self-expandable transcatheter heart valve that incorporates bovine tissue

and is delivered through a delivery system. The valve itself has a low profile and is designed to

produce accurate valve placement by a single operator.51 More compact than the Sapien 3,

Centera’s core improvement comes from being repositionable. If a doctor needs to make slight

adjustments to valve placement to ensure proper alignment, the Centera valve is more flexible

and adaptable before being fully implemented. This should allow for both shorter procedure

times and fewer valve complications. CE Mark is expected in late 2017.52

Centera Valve

Figure – 14

Sapien 3 Ultra System (R&D)

The Sapien 3 Ultra System is a delivery system for EW’s Sapien 3 and subsequent transcatheter

products. The system features dynamic expansion and contraction making the procedure faster

and more efficient when implanting the catheter. Along with slimmer dimensions, this should

reduce the potential damage to veins and arteries when implanting valves. The Sapien 3 Ultra

system is expected to receive CE Mark in late 2017.53

51 Source: Medscape 52 Source: Edwards Investor Presentation, 2016 53 Ibid.

21

Sapien 3 Ultra System

Figure – 15

TAVR and Patient and clinician education

Edwards Lifesciences believes that patient and clinician education is essential to increased

adoption of TAVR. Given the severity of stenosis, and its somewhat complex treatment process,

Edwards wants to inform patients and doctors about the superiority of transcatheter procedures

over traditional surgery. In 2015, Edwards Lifesciences created a website called

NewHeartValve.com to educate both doctors and patients about stenosis and potential treatment

options. Since inception, over 720,000 individuals have visited the website, 520,000 patients and

200,000 clinicians. Additionally, over 70,000 patients used the site to “find a TAVR hospital”

where they can receive Edwards transcatheter procedures.54 In addition to the services included on

the website, Edwards distributes educational materials to physician’s offices and hosts information

seminars to increase transcatheter awareness in the medical community.

Indication expansion

As part of a highly regulated industry, Edwards Lifesciences must receive approval from the

government before it can use its devices to treat patients. Product approval depends on having

successful clinical trials that demonstrate the product’s safety and efficacy in a subset of the

population. In 2007, Edwards received approval to treat only a small subset of patients with its

TAVR technology. The patients in this group have severe, symptomatic aortic stenosis and are at

a high risk for surgical complications. In 2016, Edwards Lifesciences received approval to treat

patients that are at an intermediate risk for surgical complications. This approval adds 260,000

patients to Edwards’s current addressable market.

54 Source: www.newheartvalve.com

22

Figure – 16

Looking to the future, Edwards Lifesciences is performing two clinical trials to seek additional

indication expansion for its Sapien 3 valve. The PARTNER 3 trial aims to treat patients at a low

risk for surgical complications and the EARLY-TAVR trial will target asymptomatic patients.

Both trials expect results by the end of 2018 and, if successful, would triple the addressable market

for the Edwards’s transcatheter aortic valve replacement program.

Transcatheter Mitral Valve Initiatives Following the success of its TAVR program, Edwards Lifesciences is developing transcatheter

technologies to treat mitral valve defects. Over 2.5 million people have mitral valve disease and

only 2% receive treatment each year. Edwards hopes that the introduction of minimally-invasive

technologies will push more patients to receive treatment.

CardiAQ Mitral Valve Replacement

Figure – 17

CardiAQ Valve Replacement

The CardiAQ valve is a mitral valve replacement program acquired by Edwards in 2015. 20

patients have been treated successfully and a CE Mark clinical trial is currently underway in

23

Europe. Trial enrollment was briefly paused in February to work out a small issue. The market

responded negatively, but the stock recovered two weeks later when trials resumed. Sell-side

analysts are very bullish on this program and any complications could affect the stock price.

Mitral Valve Repair

Figure – 18

Cardioband System

The Cardioband system repairs mitral valves that have a defective annulus.55 It uses transcatheter

technology to deliver the band. Once placed, the band is inflated to seal the valve, reducing

leakage. The device has received a CE mark. To date, over 125 patients have been treated

successfully and a U.S. Trial is expected to begin in 2017.

Pascal

The Pascal mitral valve repair tool is used to treat mitral valve regurgitation caused by a defective

leaflet. The Pascal uses a spacer to attach the leaflets of the heart and prevent the backflow of

blood. A CE mark study is scheduled for 2017.

Harpoon

The Harpoon tool is used to repair mitral degeneration caused by chordal disrepair. The chordae

tendinae hold the mitral valve in place and can sometimes become frayed or dislodged from the

side of the heart. The Harpoon uses a minimally invasive approach to reattach the chordae to the

cardiac muscles. It has successfully been used in over 30 patients and is currently being evaluated

in a CE Mark trial in Europe.

55 The base of the valve that supports the leaflets

24

Most sell-side analysts seem to ignore the three mitral valve repair projects. In earnings calls and

reports, they tend to talk about valve replacement and spend less time on repair. When asked about

the market’s reaction to its mitral repair initiatives, management expressed surprise that analysts

are not interested in the projects. Management said that these devices could become as large as

TAVR if one or two of them receive FDA approval.

Company Risks

Product Innovation

The medical device industry is highly competitive and bringing products to market quickly is

important for EW’s success. Competing medical technologies are developed continuously and

many companies have more research and development resources. If such a company were to

surpass EW’s technology, it could be detrimental to the company’s sustainable competitive

advantage.

Product Failure

Edwards Lifesciences faces risks due to potential product failures. Heart valves are intended to

remain in a patient’s body for a long period, putting the patient at a higher risk for device

malfunction. If one of EW’s devices malfunctioned while inside of a patient, legal costs could

increase and brand reputation could be at risk.

Clinical Trials

An unsuccessful clinical trial or delay could negatively affect the company’s stock price, brand,

and reputation. Clinical trial results are unpredictable. A successful clinical trial of a competitor

could also be a major setback for Edwards Lifesciences as the market could see this as a threat to

company’s competitive advantage and market share.

Third-Party Payers

All of the company’s products are paid for by a third-party payer such as a government health care

plan or private insurance.56 Third-party payers often attempt to decrease health care costs by

limiting the reimbursement amount for medical procedures. This could make physicians and/or

hospitals revert to less expensive products. If Edwards Lifesciences receives pressure from payers,

it might have to decrease the price of its devices, hurting revenues and margins in the process.

Edwards Lifesciences faced a demand problem in France in 2016. Growing interest and demand

for transcatheter products outpaced the French government's budget for procedures. Edwards

Lifesciences halted sales in France until a new budget could be enacted. Consequently, this opened

space for competitors such as Medtronic to enter the market and absorb any available funds.

Similar events could happen again in France or another country with socialized medicine.

Regulatory Environment

56 Source: Edwards Lifesciences 10-K, 2016

25

Edwards Lifesciences is subject to a highly-regulated international and domestic market. An

increase in regulations or a change in the device approval process could be costly for the company.

Intellectual Property

If Edwards Lifesciences is unable to protect its intellectual property from competitors or cyber-

attacks, the company could lose its competitive advantage or face additional litigation costs.

Management Team

Michael Mussallem – Chairman & CEO since 2000

Mussallem has 38 years of industry experience and has been CEO since 2000.

Mussallem has a successful track record of developing and implementing growth

strategies.

Donald Bobo – CVP Strategy & Corporate Development

Bobo joined Baxter in 1995 and continued with Edwards Lifesciences after it

was spun off. Along with CEO Mussallem, Bobo has guided the company

strategically towards new opportunities in transcatheters and mitral repair

solutions.

Scott Ullem – CFO since 2015

Ullem worked in investment banking prior to moving to corporate finance at

Bemis Company. Bemis is a global supplier of packaging used in consumer and

healthcare products. Ullem joined Edwards in 2015 and his experience with

mergers and acquisitions are a critical asset for the company to acquire companies

developing innovative cardiovascular solutions effectively.

Catherine Szyman – CVP Critical Care since 2015

Szyman worked for Medtronic for twenty-five years before joining Edwards in

2015. Szyman is experienced in managing complex global channels. It is a

necessary skill in managing the critical care segment, which encompasses a

wide range of margin-thin products.

Larry Wood – CVP Transcatheter since 2007

Wood joined Edwards in 1985 and was responsible for developing the SAPIEN

products. His leadership in the transcatheter segment is critical for EW’s future

growth.

26

Bernard Zovighian – CVP Surgical Valves since 2015

Zovighian has 22 years of industry experience. Prior to joining Edwards

Lifesciences, Zovighian worked at Johnson & Johnson for nearly 20 years,

where he served as worldwide president of Advanced Sterilization Products.

Bernard’s experience aids in the development of the surgical valve segment in

international markets.

Executives’ compensation

During fiscal year 2015, the top five executives received compensation totaling $8.8 million.57

Executive compensation makes up 1.78% of net income, which is more than Medtronic’s at 0.48%

of net income.58

Executive Compensation Plan

Figure – 19

Annual incentive reward

The annual incentive reward is calculated by multiplying the financial measure achievement by

key operational drivers. This is determined by the compensation committee at the beginning of

each fiscal year. The financial achievement components include revenue growth, net income, and

free cash flow. The key operating drivers consist of over 50 different metrics selected by the Board

to assess whether the management met strategic goals. In 2015, this annual incentive reward

program reached 182%, but was capped at 175% under company compensation policy.

Long-term stock-based incentive

The long-term stock-based incentive uses an individual evaluation criterion for each executive.

The total incentive is composed stock options (55%), performance-based restricted stock units

(25%), and 20% of restricted stock units (20%).

57 Excludes stock and option awards 58 The total compensation comprises a base pay, an annual incentive reward, and a long-term stock-based incentive.

Name and Principal Position Year Salary Bonus Stock Awards Option AwardsIncentive

CompensationAll Other Comp. Total

Mr. Mussallem 2015 973,077 - 2,674,188 3,161,339 2,074,800 178,142 9,061,546$

CEO - Chairman 2014 900,000 - 1,375,688 4,126,298 2,123,820 90,764 8,616,570$

2013 879,808 - 1,482,117 4,125,859 - 124,166 6,611,950$

Mr. Ullem 2015 557,308 - 675,278 796,272 721,000 70,593 2,820,451$

CFO 2014 508,846 250,000 3,876,387 2,724,810 682,290 160,529 8,202,862$

2013 - - - - - - -$

Mr. Bobo 2015 543,046 - 675,278 796,272 689,325 61,130 2,765,051$

VP - Strategy & Cor. Dev. 2014 469,740 - 337,125 1,013,511 658,350 56,363 2,535,089$

2013 440,646 - 318,592 955,541 166,320 49,376 1,930,475$

Ms. Szyman 2015 503,846 300,000 2,667,945 1,438,048 608,825 220,966 5,739,630$

VP - Critical Care 2014 - - - - - - -$

2013 - - - - - - -$

Mr. Wood 2015 519,750 - 651,620 771,051 750,000 81,920 2,774,341$

VP - Transcatheter Heart Valves 2014 466,452 - 426,300 1,024,819 688,275 58,594 2,664,440$

2013 440,646 - 318,592 955,541 128,520 61,636 1,904,935$

27

Figure – 20

Historical Performance

Edwards Lifesciences provides updates and forecasts concerning its strategic development during

its annual investor conference each December. To assess management’s credibility, we examined

management’s forecasts against its actual achievements. In each of the last three years, Edwards's

THVT segment had results between 7.2% and 16.3% above guidance. The company was within

its projections for its Surgical Heart Valve Therapy segment in 2014 and 2015. Currency

fluctuations caused Edwards to miss 2016 global sales guidance by 0.7%.

Company Guidance Compared to Actual Results

Figure – 21

Earnings track record

Edwards Lifesciences has a history of giving conservative earnings guidance, and then

outperforming guidance by an average of 10 to 15%. Management explains that “surprise product

adoption rates” in the transcatheter segment have been the main driver for positive earnings

surprises.59 Because of this, analysts have the tendency to inflate their forecasts to account for the

company’s conservative behavior in forecasting earnings. Edwards Lifesciences is subject to

missing analyst estimates when it reports earnings closer to its own earnings estimates. Today, the

company has improved its communication and sell-side expectations are closer to management

guidance. Edwards Lifesciences has met sell-side estimates 65% of the time in the last ten years.

59 2Q16 Press Release

Global sales in million 2014

Projected Actual Projected Actual Projected Actual

THVT $700 to $820 $943.6 $1,000 to $1,100 $1,180.3 $1,200 to $1,400 $1,628.5

Surgical Heart Valve Therapy $810 to $850 $826.1 $780 to $820 $785.0 $780 to $820 $774.9

Critical Care $535 to $575 $553.2 $520 to $570 $528.4 $510 to $550 $560.3

2015 2016

Source: Company's investor conference

28

Figure – 22

Employees

As of December 31, 2015, Edwards Lifesciences had approximately 9,800 employees across the

world with the majority of them located in the United States. Other employees are located in

Europe, Japan, Asia Pacific, and Latin America.60 The company interacts with trade unions and

work councils representing a minority of employees internationally. There were no layoffs

mentioned in the company’s last three annual reports.

Edwards Lifesciences provides benefits to employees including 401K plans, health insurance, paid

time off,61 an employee stock purchase program, and a profit sharing plan.62

Based on 300 ratings on Glassdoor.com, EW’s employees rated working at the company a 3.6.63

Based on 175 ratings, 99% of employees approve of the CEO.64 The major criticism provided by

employees is that the company’s middle management lacks leadership skills. Although this is a

concern, it is important to understand reviews can be biased and might not reflect consensus

opinions.

60 Source: Edwards Lifesciences 61 Time-off consists of three weeks per year 62 Source: Edwards Lifesciences 10-K 63 Based on a scale of 1-5 64 Source: Glassdoor

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Earnings Estimate vs. Reported

Reported Estimate

29

Valuation

To determine the value of Edwards Lifesciences, we used a weighted average of four different

valuation methods and projected scenarios to obtain a final value. We also projected a worst

case, a base case, and best case scenario to reflect the company’s growth strategy and risks.

Edwards's key revenue drivers in our model were determined by market penetration in heart

valve therapy and the prevalence of severe and intermediate risk patients with aortic stenosis.

Additional revenue drivers include market size and future adoption of mitral valve products. We

came to our final price target using our base case assumptions as this provided reasonable and

conservative estimates of future financial performance. This gives us a price target of $123.58.

Summary Valuation Methods

EBITDA EXIT Multiple

The first valuation method is an exit EBITDA multiple approach. We forecast the income

statement for five years to obtain free cash flows and EBITDA (see exhibits for income

statement projections). We calculated terminal value by taking terminal year EBITDA (year five)

and multiplying it by a terminal value EBITDA multiple of 16x, based on analyst consensus

estimates. We then discounted this figure back five years using a WACC of 11.02% (see exhibits

for assumptions). We then calculated the present value of the projected free cash flows and

added it to the terminal present value to arrive at our enterprise value. After accounting for net

debt (see exhibits), we arrive at a final enterprise value of $27,885 million. We then divided by

the number of diluted shares outstanding to come to an implied stock price of $132.19 This

method was assigned 50% weight in our final price target as it requires a significant amount of

detail about income statement projections and free cash flows.

Summary of Valuations Weight

Perpetuity Growth Rate $90.11 10% $9.01

Exit Multiple $132.19 50% $66.09

P/E Multiple $139.10 15% $20.86

EV/EBITDA Multiple $110.44 25% $27.61

Average of Methods $117.96 $123.58

Exhibit – 1 Exhibit 1

30

Perpetuity Growth Method

In this method, we calculated

normalized free cash flows by

taking year five free cash

flows and using a long-term

growth rate of 3%. We then

found the present value of the

terminal value by using the

long-term growth rate and

discounting by a WACC of

11.02%. Afterwards, we

computed the present value of

year 1-5 free cash flows. After subtracting net debt, we come to an enterprise value of $18,740

million. We then divided by the number of shares outstanding to come to an implied stock price

of $90.09. This method relies heavily on the diluted long-term growth rate. Given Edwards's

pipeline and the market size for its products, we anticipated growth above 10% for several years

beyond year 5, and therefore, we weighted this value 10% in our final valuation figure.

Perpetuity Approach (in millions)

Normalized FCF in last forecast period (t) 1,611

Normalized FCFt+1 1,660

Long term growth rate (g) 3.0%

Terminal value 21,794

Present value of terminal value 14,499

Present value of stage 1 cash flows 4,241

Enterprise value 18,740

Implied TV exit EBITDA multiple 9.812x

Exit EBITDA multiple approach

Terminal year EBITDA 2,221

Terminal value EBITDA multiple 16.0x





Implied TV perpetual growth rate 5.962%Net Debt (in millions)

Cash & equivalents ST & LT market. securities 1,668

Long term debt 822

Net debt (846)

Exhibit 1

Exhibit 2

31

DCF summary of calculations

Comparable Valuation

P/E Multiple

We also obtain an implied value for Edwards Lifesciences by applying an average P/E ratio of

comparable companies65 to our forecast earnings. Comparable companies were selected carefully

based on products that compete directly with Edwards. We chose companies that have a well-

established history and companies that have high growth prospects. We believe Edwards is a

well-established company with a strong core product line, but also has growth opportunities. We

used the P/E multiple and 2017 projected earnings to come to an implied market value of equity

of $30,233 million. We then divided by diluted share outstanding to come to an implied share

price of $139.10. We assigned this valuation a 15% weight as the P/E reflects potential growth

for the industry and accounts for comparable companies.

Exhibit 4

65 Abbott (ABT), Abiomed (ABMD), Boston Scientific (BSX), Livanova (LIVN), Medtronic (MDT) and Stryker (SYK)

Edwards Lifesciences PE 42.09$

Earnings 718.27

Implied Market Value of Equity 30,233.19

Diluted Shares Outstanding 217.35

Implied Share Price 139.10

Currnet Share Price 89.95

Market premium/(discount) to implied value -35.3%

PE Multiple Valuation (in millions)

Fair Value Per Share (in millions)

Perpetuity EBITDA

Enterprise value 18,740 27,885

Less: Net debt 846 846

Equity value 19,586 28,731

Diluted shares 217.352 217.352

Equity value per share $90.11 $132.19

Market premium / (discount) to fair value (0.2%) (32.0%)

Exhibit 3

32

EV/EBITDA Multiple Approach

Similar to the PE multiple, this method involved comparable companies’ average EV/EBITDA

multiple to determine the valuation. We then multiplied our EV/EBITDA multiple by Edwards’s

one-year EBITDA projections. After accounting for net debt, we come to an implied equity value

of $24,004 million. We then divided by the number of diluted shares outstanding to come to an

implied share price of $110.44.

Exhibit 5

Edwards Lifesciences EBITDA 946.40$

Mean EV/EBITDA 24.49

Implied TEV 23,181.76

Less Net Debt (822.00)

Implied Equity Value 24,003.76

Shares Outstanding 217.35

Implied Share Price 110.44

Currnet Share Price 89.95

Market premium/(discount) to implied value -18.6%

EBITDA Multiple Valuation (in millions)

33

Conclusion

We issue a BUY recommendation for Edwards Lifesciences. The current market price at $89.95

(March 7, 2017) significantly undervalues the company’s growth prospects in new product

development and market opportunity. We come to an average target price $123.58, citing mitral

valve replacement and repair segments as key revenue drivers. Additionally, Edwards’s planned

market expansion with transcatheter products provides a substantial increase in the total

addressable market for current products. Given competitor positions, with Medtronic paying

Edwards substantial royalties, and Boston Scientific issuing mass recalls, Edwards should have

significant room to capture the existing market and expand to lower risk patients relatively

unencumbered.

We believe Edwards’s focus on patient outcomes with high-margin, high quality treatments are a

sustainable competitive advantage. Edwards’s ability to achieve the lowest mortality and stroke

rates among competition, and educate both patients and doctors about those facts is a reiteration

of Edwards’s product quality, and a highly effective advertisement tool. These campaigns, along

with clinical trial data, continue to differentiate Edwards as a market leader, and will keep it in

that position, a sentiment echoed by Edwards own competitors.

Being on the leading-edge of medical technology does present significant risks. We predict

significant growth due to as yet unreleased mitral valve products in the U.S. These products may

not pass CE Mark or FDA approval, and prove costly lost investments to the company.

Competitors may also pose threats to future growth if they are able to gain first-mover

advantages in these new product segments. However, given Edwards positive track record of

product innovation and government approval, we believe this risk is not excessive.

The management team possesses a successful track record of bringing Edwards product

development to market entry. Current CEO Michael Mussallem built the company from its 2000

spin-off through consistent product innovation and quality. Along with specialized and tenured

leadership, we are confident that management will continue to outpace expectations and drive

growth in future markets.

This combination of successful product development and highly defensible market leadership

make Edwards Lifescience a favorable investment opportunity. The current stock price

represents close to a six-month low, and significant investment upside of 37%.

34

Appendix

Income Statement Projections

Exhibit 6

Revenue Breakdown and Assumptions

Revenue forecasts were made by segmenting Edwards into its three primary businesses. This

includes transcatheter heart valve therapy, surgical heart valve therapy, and critical care.

Exhibit 7

The transcatheter heart valve therapy revenue segment was forecast by assuming a constant disease

prevalence of 650,000 people who have severe symptomatic aortic stenosis. Prevalence is the

number of people who currently have severe symptomatic aortic stenosis (ssAS). The size of the

INCOME STATEMENT (in millions)

Fiscal year 2014A 2015A 2016A 2017P 2018P 2019P 2020P 2021P

Fiscal year end date 1/30/13 1/30/14 1/31/16 1/31/17 1/31/18 1/31/19 1/31/20 1/31/21

107% 119% 113% 116% 119% 115% 113%

Revenue 2,323$ 2,494$ 2,964$ 3,364$ 3,911$ 4,649$ 5,333$ 6,020$

Cost of sales (626) (617) (797) (841) (958) (1,139) (1,280) (1,445)

Gross Profit 1,697 1,877 2,166 2,523 2,952 3,510 4,053 4,575

Research & development (347) (383) (443) (555) (645) (744) (827) (903)

Selling, general & administrative (858) (851) (905) (975) (1,114) (1,302) (1,493) (1,685)

Operating profit (EBIT) 493 643 818 992 1,193 1,464 1,733 1,986

Intellecutal property litigatin income (expense) 740 (7) (33) (33) (33) (33) (33) (33)

Interest income 6 8 11 11 11 11 11 11

Special Charges (71) (35) 0 0 0 0 0

Interest expense (17) (17) (19) (26) (25) (25) (25) (25)

Other expense (8) (4) (5) 0 0 0 0 0

Pretax profit 1,144 622 738 945 1,146 1,417 1,686 1,939

Taxes (333) (128) (168) (227) (275) (340) (405) (465)

Net income 811$ 495$ 570$ 718$ 871$ 1,077$ 1,282$ 1,474$

Basic shares outstanding 213 216 213 212 209 208 207 206

Impact of dilutive securities 4 5 5 4 4 4 4 4

Diluted shares outstanding 217 220 218 216 213 212 211 210

Basic EPS $3.81 $2.30 $2.67 $3.39 $4.16 $5.18 $6.19 $7.14

Diluted EPS $3.74 $2.25 $2.61 $3.33 $4.08 $5.08 $6.07 $7.01

EPS Growth % 27% 23% 24% 20% 15%

Growth rates & margins

Revenue growth NA 7.4% 18.8% 13.5% 16.3% 18.9% 14.7% 12.9%

Gross profit as % of sales 73.1% 75.2% 73.1% 75.0% 75.5% 75.5% 76.0% 76.0%

SG&A margin 36.9% 34.1% 30.5% 29.0% 28.5% 28.0% 28.0% 28.0%

R&D margin 14.9% 15.4% 15.0% 16.5% 16.5% 16.0% 15.5% 15.0%

Tax rate 29.1% 20.5% 22.8% 24.0% 24.0% 24.0% 24.0% 24.0%

Operating Margins 21.2% 25.8% 27.6% 29.5% 30.5% 31.5% 32.5% 33.0%

Cost of sales % 26.9% 24.8% 26.9% 25.0% 24.5% 24.5% 24.0% 24.0%

EBITDA reconciliation

Depreciation & amortization 69 66 71 81 94 108 119 131

Stock based compensation 48 50 57 60 68 81 92 103

EBITDA 610$ 758$ 946$ 1,133$ 1,356$ 1,653$ 1,943$ 2,221$

Transcatheter Heart Valve Therapy (in millions) 2014A 2015A 2016A 2017P 2018P 2019P 2020P 2021P

1/30/13 1/30/14 1/31/16 1/31/17 1/31/18 1/31/19 1/31/20 1/31/21

Sapian 3 Units (est.) 31,453 39,343 54,283 66,164 73,332 82,170 88,695 97,200

Sapian 3 Revenue 944 1,180 1,629 1,985 2,200 2,465 2,661 2,916

Prevalance (Severe Symptomatic patients) 650,000 650,000 650,000 650,000 650,000 650,000

Market Penetration 17% 19.5% 22.0% 25.0% 27.5% 30.0%

Prevalance (Asymptomatic patients) 500,000 500,000 500,000 500,000

Market Penetration 1.0% 1.4% 1.5% 2.0%

Total Attainable Market Size in Pts 110,500 126,750 145,500 166,000 182,500 200,000

Total Attaibanle Market Size in Dollars ($30,000) 2,984 3,422 3,928.50 4,482 4,928 5,400

Estimated Market Share 55% 58% 56% 55% 54% 54%

35

prevalence pool is calculated using the previous years’ estimates plus annual incidence minus the

number of people treated and the number of deaths. Annual incidence is the number of people who

enter the prevalence pool each year. This can change based on an aging population and progression

of the disease. We then forecast the size of the market using market penetration rates. This

represents the number of people who are eligible for treatment for aortic stenosis using

transcatheter heart valves. We forecast that market penetration will increase from 17% in 2017, to

30% by 2021, due to increased awareness of transcatheter heart valve therapy in the future, more

technological advancements, and most importantly, through indication expansion. Revenues were

forecast using an average selling price of $27,000 and Edwards's market share.66 We believe that

Edwards's market share will decline to 54% as we expect competition to increase in the next five

years. However, we anticipate that Edwards will remain a market leader in this segment.

Exhibit 8

Surgical heart valve therapy and critical care segments were forecast using management estimates.

Surgical heart valve management guidance is 2-3% growth. We assume a growth rate of 2%.

Management guidance forecasts growth of 5% to 7% for the critical care segment. We assume the

lower end of guidance estimates at 5%, which we expect to fall to 3% by 2021

Edwards's mitral valve products are currently undergoing clinical trials. We segmented this

business into two areas: the act of repairing valves and the act of replacing valves. Each segment

has a different average selling price. We performed our calculations using an average selling price

of $30,000 for the CaridiAQ product and of $18,000 for mitral repair products. The disease

prevalence of 2,500,000 was provided by company estimates. We assumed a market penetration

of 1.5% that will increase to 6% by 2021. Market penetration is expected to double in 2019 and

2020 due to increased adoption of mitral valve therapy. We also expect competitors to enter the

market by 2020, and thus increasing total penetration. Additionally, we anticipate a decline in

66 Source: Investor relations interview

Surgical Heart Valve Therapy' (in millions) 2014A 2015A 2016A 2017P 2018P 2019P 2020P 2021P

1/30/13 1/30/14 1/31/16 1/31/17 1/31/18 1/31/19 1/31/20 1/31/21

Surgical Units 137,683 130,833 129,150 131,733 134,368 137,055 139,796 142,592

Surgical 826 785 775 790 806 822 839 856

Growth 2.0% 2.0% 2.0% 2.0% 2.0%

Critical Care (in millions) 2014A 2015A 2016A 2017P 2018P 2019P 2020P 2021P

1/30/13 1/30/14 1/31/16 1/31/17 1/31/18 1/31/19 1/31/20 1/31/21

Critical Care Revenue 553 528 560 588 612 630 649 669

Growth 5% 4% 3% 3% 3%

Exhibit 9

36

market share for Edwards as other companies enter the market, but we believe that Edwards will

maintain a strong lead, as there are high barriers to entry to the mitral valve market.

Cost Assumptions

The most significant cost drivers in this industry are SG&A and R&D. Edwards relies heavily on

R&D to drive its business. SG&A for Edwards includes wages and shipping costs. Additionally,

the company allocates general and administrative expenses that are related to the production

process to inventory. These costs include insurance, manufacturing accounting personnel, human

resources personal and information technology.

Research & Development - Edwards's guidance for R&D as a percent of sales will increase to 16-

17%. We assume R&D will be 16.5%. The increase in R&D is due to mitral and aortic THVT

product development efforts, which include clinical trials and staffing research teams.

Selling, General & Administrative – Edwards expects SG&A margins to improve to 28%-29%

due to manufacturing efficiencies and economies of scale partly due to a new factory opening in

Costa Rica in 2017. Additionally, the company expects SG&A expenses to grow, but at a slower

pace than revenue growth, and thus we will see margin improvements in SG&A.

Exhibit 10

37

Exhibit 11

Working Capital Assumptions/Drivers

Accounts receivable was forecast using days’ sales outstanding as a driver. The company will

improve days’ sales outstanding to 49 days based off of a historic trend of improvement.

Accounts payable was forecast using AP as a percetage of COGS. We expect accounts payable to

be tied to the purchase of raw materials as the company expands manufacturing.

Inventory was forecast using inventory turnover as a driver.

Accrued expenses were forecast as a percentage of sales. The reason behind this is that accrued

expenses for Edwards is tied to normal operations of the business, and as sales grow, operating

expenses grow.

Exhibit 12

38

Exhibit 13

Property, Plant & Equipment, Intangible Assets, and Depreciation Schedules

Intangible asset amortization forecasts were given by management. Because there are no major

changes in amortization, we assume no additional purchases of intangible assets in the future.

Property, Plant & Equipment is a function of capital expenditures.

Depreciation is a percentage of capital expenditures, and is expected to grow with revenues, as

more revenues require further investments into new manufacturing facilitates. Depreciation

increases to 40% to consider the new opening of the new plant in Costa Rica expected in 2017.

39

Exhibit 14

Other Assets & Liabilities

There is no clear driver for these line-items, and they are not directly tied to the company’s

operations. For this reason, we kept these line-items constant.

40

Long Term Debt Schedule

Repayments of $600 million and 225 million will be due in 2018 and 2019 respectively. We

assume that when debts come due, Edwards will re-finance the loan and take additional debt.

The board of directors has authorized a $1 billion stock repurchase plan.

CAPITAL STOCK (in millions)

Fiscal year 2015A 2016A 2017P 2018P 2019P 2020P 2021P

Fiscal year end date 1/30/14 1/31/16 1/31/17 1/31/18 1/31/19 1/31/20 1/31/21

Common stock / APIC

Beginning of period 1,410 1,470 1,539 1,619 1,711

Plus: new share issuances 0 0 0 0 0

Plus: Stock based compensation 60 68 81 92 103

End of period 1,186 1,410 1,470 1,539 1,619 1,711 1,814

New share issuance 141 94 0 0 0 0 0

Stock based compensation 50 57 60 68 81 92 103

SBC as % of all operating expenses 3.4% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3%

Treasury stock

Beginning of period (2,499) (2,949) (3,149) (3,299) (3,449)

Less: Stock repurchases (450) (200) (150) (150) (50)

End of period (1,837) (2,499) (2,949) (3,149) (3,299) (3,449) (3,499)

Stock repurchases (280) (662) (450) (200) (150) (150) (50)

Exhibit 15

Exhibit 16

41

Cash Flow Statement

Exhibit 17

CASH FLOW STATEMENT (in millions)

Fiscal year 2015A 2016A 2017P 2018P 2019P 2020P 2021P

Fiscal year end date 1/30/14 1/31/16 1/31/17 1/31/18 1/31/19 1/31/20 1/31/21

Net income 495$ 570$ 718$ 871$ 1,077$ 1,282$ 1,474$

Depreciation and amortization 66 71 81 94 108 119 131

Stock based compensation 60 68 81 92 103

Accounts receivable (46) (75) (88) (92) (76)

Inventory (24) (59) (63) (67) (47)

Accounts payable 5 14 22 17 20

Accrued expenses & def revenues 59 80 109 101 101

Prepaid expenses and other 0 0 0 0 0

Other Current Assets 0 0 0 0 0

Other assets 0 0 0 0 0

Other current liabilities 0 0 0 0 0

Other non current liabilities 0 0 0 0 0

Uncertain Tax Positions 0 0 0 0 0

Non-cash (PIK) interest 0 0 0 0 0

Cash from operating activities 853$ 995$ 1,244$ 1,450$ 1,707$

Capital expenditures (198) (231) (265) (293) (331)

Purchases of intangible assets 0 0 0 0 0

Cash from investing activities (198)$ (231)$ (265)$ (293)$ (331)$

Long term debt 0 0 0 0 0

Common dividends 0 0 0 0 0

New share issuances 0 0 0 0 0

Share repurchases (450) (200) (150) (150) (50)

Other comprehensive income / (loss) 0 0 0 0 0

Revolver 0 0 0 0 0

Cash from financing activities (450)$ (200)$ (150)$ (150)$ (50)$

Net change in cash during period 205$ 564$ 829$ 1,007$ 1,326$

42

Discounted Cash Flow Model

Exhibit 18

Discounted Cash Flow Model for Edwards Life Sciences(in millions)

General assumptions

Share price as of last close $89.95

Latest closing share price date 3/7/2017

Latest basic share count 213.8

Weighted average cost of capital 11.0%

Free cash flow buildup (in millions)

Fiscal year 2014A 2015A 2016A 2017P 2018P 2019P 2020P 2021P

Fiscal year end date 1/30/14 1/30/15 1/30/16 1/30/17 1/30/18 1/30/19 1/30/20 1/30/21

EBITDA 610 758 946 1,133 1,356 1,653 1,943 2,221

EBIT 493 643 818 992 1,193 1,464 1,733 1,986

tax rate 29.1% 20.5% 22.8% 24.0% 24.0% 24.0% 24.0% 24.0%

EBIAT (NOPAT) 349 511 632 754 906 1,113 1,317 1,510

Depreciation and amortization 81 94 108 119 131

Stock based compensation 60 68 81 92 103

Accounts receivable (46) (75) (88) (92) (76)

Inventory (24) (59) (63) (67) (47)

Accounts payable 5 14 22 17 20

Accrued expenses & def revenues 59 80 109 101 101

Other current assets (inc. non-trade receivables) 0 0 0 0 0

Deferred tax assets (DTAs) 0 0 0 0 0

Other assets 0 0 0 0 0

Other non current liabilities 0 0 0 0 0

Unlevered CFO 889 1,031 1,280 1,486 1,743

Less: Capital expenditures (198) (231) (265) (293) (331)

Less: Purchases of intangible assets 0 0 0 0 0

Unlevered FCF 691 800 1,015 1,193 1,412

% growth 15.8% 26.9% 17.5% 18.3%

Discount factor 10% 90% 190% 290% 390%

Assume cash flows are generated at: Middle of period

Midperiod adjustment factor 105.4% 0.10 0.8 1.0 1.0 1.0

Present value of Unlevered FCF 687 759 877 928 989

43

Cost of Capital Assumptions

Exhibit 19

Cost of Capital Assumptions

Cost of debt 3.1%

Tax rate 24.0%

After tax cost of debt 2.4%

Risk free rate 2.5%

Beta 0.96

Market risk premium 8.50%

Cost of equity 10.6%

Capital weights

Amount % of total

Market value of equity 19,550.8 104.5%

Net debt (845.8) (4.5%)

Cost of capital (WACC) 11.02%

44

Sensitivity Analysis

Exhibit 20

We performed sensitivity on the perpetuity method with assumptions to the long-term growth rate

and the WACC. The pink represents stock prices which are lower than the intrinsic price of $90.11

in the base case for the perpetuity method.

Exhibit 21

We performed sensitivity on the EBITDA multiple and the WACC for the exit multiple approach.

The pink represents stock prices which are lower than our base-case intrinsic price of $132.19 for

the EBITDA exit DCF.

Exhibit 22

Equity Value Per Share

Long Term Growth Rate (g):

$90.11 2.0% 2.5% 3.0% 3.5% 4.0%

12.5% 71.11 73.76 76.69 79.94 83.58

11.5% 78.09 81.42 85.13 89.31 94.04

11.0% 82.17 85.93 90.15 94.93 100.40

10.5% 86.73 91.00 95.84 101.36 107.73

9.5% 97.69 103.34 109.85 117.44 126.41

Equity Value Per Share

Exit EBITDA Multiple

$132.19 14.0x 15.0x 16.0x 17.0x 18.0x

12.8% 112.29 118.68 125.07 131.45 137.84

11.8% 115.74 122.35 128.96 135.57 142.19

11.0% 118.60 125.40 132.20 139.00 145.80

10.3% 121.19 128.16 135.13 142.10 149.07

9.3% 125.02 132.25 139.47 146.69 153.91

Equity value per share

Exit EBITDA Multiple

EBITDA % of plan $132.19 14.0x 15.0x 16.0x 17.0x

70% 1,555 90.03 94.79 99.54 104.30

85% 1,888 104.30 110.08 115.86 121.64

100% 2,221 118.58 125.38 132.18 138.97

115% 2,554 132.86 140.67 148.49 156.31

130% 2,887 147.13 155.97 164.81 173.64

45

We also varied 2021 EBITDA forecasts along with the EV/EBITDA multiple to determine a

valuation range. A summary of valuation ranges is shown below.

Exhibit 23

Football field

118.66

86.78 81.12

149.14

107.79 121.75

0.00

50.00

100.00

150.00

200.00

250.00

DCF Value at 14.0x-18.0x

Exit EBITDA Range

DCF Value at 2.0%-4.0%

Perpetuity Range

52 Week Market High/Low

DCF Valuation Summary

46

Scenario Analyses

In our base case analysis, we used relatively conservative estimates for market penetration,

structural heart disease prevalence, and clinical trial outcomes. We employ various scenarios to

reflect the growth potential and risks associated with Edwards.

Bull Case Assumptions

The bull case scenario reflects favorable FDA approvals for future products and a sustained market

share lead for Edwards compared to its competitors due to barriers to entry and protecting patents

in litigation. We also estimate better than expected adoption of transcatheter therapy reflected by

market penetration. A summary of our bull case is shown below.

Exhibit 24

Exhibit 25


Normalized FCF in last forecast period (t) 2,088

Normalized FCFt+1 2,150







Exit EBITDA Multiple Approach (in millions)







Implied TV perpetual growth rate 5.954%

47

Exhibit 26

Bear Case Assumptions

The bear case scenario reflects unfavorable FDA approvals for future products and a decline in

market share due to increased competition. Additionally, we forecast weak product adoption for

transcatheter therapy. We also forecast loss of operational efficiency for the company and a

depressed gross margin due to intense competition. A summary of our bear case is shown below.

Exhibit 28


Perpetuity EBITDA






Market premium / (discount) to fair value (20.9%) (46.5%)


Normalized FCF in last forecast period (t) 940

Normalized FCFt+1 968







Growth rates & margins

Revenue growth NA 7.4% 18.8% 15.2% 32.8% 24.7% 19.4% 13.9%

Gross profit as % of sales 73.1% 75.2% 73.1% 75.0% 75.8% 76.0% 76.3% 76.5%

SG&A margin 36.9% 34.1% 30.5% 29.0% 28.5% 28.0% 28.0% 28.0%

R&D margin 14.9% 15.4% 15.0% 16.5% 16.5% 16.0% 15.5% 15.0%

Tax rate 29.1% 20.5% 22.8% 24.0% 24.0% 24.0% 24.0% 24.0%

Operating Margins 21.2% 25.8% 27.6% 29.5% 30.8% 32.0% 32.8% 33.5%

Cost of sales % 26.9% 24.8% 26.9% 25.0% 24.2% 24.0% 23.8% 23.5%

Exhibit 27

48

Exhibit 29

Exhibit 30

Exit EBITDA Multiple Approach (in millions)







Implied TV perpetual growth rate 4.248%


Perpetuity EBITDA






Market premium / (discount) to fair value 58.3% 39.4%

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