A Member of Pat McKeough’s Inner Circle recently asked for his advice on a healthcare technology company that treats structural heart disease and critically ill patients.

Pat sees value in the company’s TAVR device as sales rose 15.2% in the most recent quarter and could address a total market of 5 million U.S. patients alone. Pat also likes the strong balance sheet but notes the company’s shares have already risen 52% over the last year.

Q: Pat, can I have your advice on whether to buy Edwards Lifesciences? Thanks.

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Edwards Lifesciences, (Symbol EW on New York; www.edwards.com) is focused on technologies and products that treat structural heart disease and critically ill patients. The company operates in three segments: Transcatheter Heart Valves (62%), Surgical Heart Valve Therapy (20% of revenue) and Critical Care (18%).

Edwards is a leader in a procedure called transcatheter aortic valve replacement, or TAVR. The procedure allows for patients with aortic stenosis to have a heart valve replaced via a catheter, thereby avoiding full open-heart surgery. That enables shorter recovery times, which is a clear benefit for patients. It also can result in lower total health-care costs since hospital stays are shorter.

The pool of patients who could conceivably benefit is large: More than five million U.S. adults have aortic valve disease. TAVR isn’t a new procedure, but its availability to patients is expanding.

Aortic stenosis typically occurs when calcium builds up on the valve, limiting the amount of blood pumped into the aorta, the body’s largest artery, and causing fatigue and shortness of breath.

In the three months ended June 30, 2019, the cardiovascular-focused medical-device company reported that its sales rose 15.2% to $1.09 billion from $943.7 million a year earlier. That beat the consensus estimate of $1.05 billion. Sales were boosted by increased demand for TAVR procedures. TAVR sales, in fact, grew 16% to $678 million from a year earlier.

Inner Circle: FDA approval for low-risk patients could be imminent

TAVR is approved in the U.S. for patients with severe, symptomatic aortic stenosis—they have an intermediate or high risk of death from surgery. However, the procedure has yet to be approved for the treatment of low-risk patients, though that could soon change. The company expects new approval from the U.S. Food and Drug Administration (FDA) later this year. Clinical data from 1,000 patients presented to the FDA in April 2019 showed a 46% reduction in events, including death, stroke or hospitalization, over those patients who had undergone traditional valve-replacement surgery.

Excluding one-time items, earnings per share rose 11.3% in the quarter, to $1.38 from $1.24. That topped the consensus estimate of $1.33.

Edwards’ balance sheet is strong: it holds cash of $934.3 million and its long-term debt of $594.1 million is just 1.2% of its market cap. The company’s shares have moved up almost 52% over the last year, and now trade at a high 44.4 times this year’s forecast earnings of $5.30 a share. However, Edwards devotes 18% of its sales to research and development. These high outlays get deducted from its income in the year in which it’s spent; this depresses its earnings and pushes up its P/E ratio. It helps Edwards to stay ahead of the competition, which includes Medtronic (symbol MDT on New York) and Boston Scientific (symbol BSX on New York).

Note that medical-device stocks have been largely spared the rising scrutiny that the U.S. government is placing on drug companies.

Recommendation in Pat’s Inner Circle: Edwards Lifesciences is a hold.