3 Reasons Edwards Lifesciences Corp.'s Stock Could Fall

Edwards Lifesciences (EW 1.19%) has pulled off a remarkable turnaround in 2014.

This stock, crushed by the market throughout late 2012 and 2013, has gone on a tear so far this year. Edwards' shares have surprised Wall Street with a 53% year-to-date climb, rewarding investors who have stuck to this medical tech company's side through its prior stock troubles. Edwards' star product, the Sapien heart valve, has rallied to a strong showing in 2014 as well.

But can this company's success last? While Edwards has held on to its dominant position as the top player in the increasingly competitive transcatheter aortic heat valve replacement, or TAVR, market with the Sapien, competitors are gunning to chip away at the Sapien's success. Let's take a look at three possibilities that could stymie Edwards' surge in the near future (although predicting the future is impossible).

Will the TAVR market continue its surge?
While Edwards boasts products over three different product groups, Wall Street has kept its closest watch on the company's Sapien product. Edwards' transcatheter heart valve segment made up more than 38% of the company's overall sales in its most recently reported quarter and posted the best group revenue growth with a 21% year-over-year gain. Despite a struggle in the U.S. market in the quarter, Edwards' ongoing Sapien launch in Japan helped keep its flagship product line ahead of Wall Street's expectations – a trend over the past year that's been the key catalyst of this stock's rebound.

Yet Edwards' reliance on the Sapien for a significant portion of the company's performance means that it needs the TAVR market to continue its surge. The Millennium Research Group estimated back in 2012 that the U.S. heart valve replacement market could grow to more than $1.5 billion annually by 2016, with growth driven primarily by TAVR devices, in a trend that allows room for the Sapien to continue its upward trajectory alongside hard-charging rival products. Additionally, any expanded approval for devices such as the Sapien to patients at an intermediate risk of surgery – the device is currently approved for high-risk surgery patients and those too weak entirely for traditional valve-replacement operations – would boost sales as well.

However, a slowdown in market growth in the short-term could have withering effects on Edwards' stock if the Sapien can't keep up with Wall Street's expectations. That's exactly what happened in the first quarter of 2013, when the Sapien missed growth projections in a move that saw the stock fall more than 20% in a single day.

But the market itself might not be the biggest challenge facing the Sapien. Rivals such as Medtronic (MDT 1.37%), eager to gain a foothold in the U.S. TAVR market, may be Edwards' biggest hurdle in the coming years.

Competition looks to chip away
Edwards scored FDA approval first in the U.S., giving it a huge first-mover opportunity in the domestic TAVR market. The company has run with those gains for quite a while, but exclusivity ran out after Medtronic received its own FDA approval this January for its rival CoreValve product. The two corporations have dueled viciously over TAVR market share in Europe in the past, and while Edwards has a leg up on its competitor, expect Medtronic to make a dent in U.S. market share.

The Sapien has at least one study backing it over its Medtronic rival, however. In the first head-to-head transcatheter heart valve study between the CoreValve and the Sapien released this May, the Sapien XT trumped its competitor in device success. If the Sapien can score victories in more head-to-head trials in the future, Edwards will be poised to better fend off its domestic competitor for sales.

Yet Medtronic isn't the only rival looking to capture part of this growing market. Boston Scientiifc (BSX 1.02%), while somewhat late to the party, received CE Mark approval in Europe for its own Lotus transcatheter valve last year. While the Lotus is likely a long way away from even sniffing U.S. approval, the European market's still worth quite a bit to Edwards – and with St. Jude Medical also a player in Europe with its Portico valve, Edwards faces a steeper challenge in maintaining its dominance across the Atlantic.

Time to diversify?
In the long run, all the focus on the Sapien leads to a broader challenge facing Edwards and its stock. This is a company overly reliant on its Sapien valves for revenue growth, and if Edwards can't diversify successfully, investors will be left placing their faith on the continued success of the TAVR market.

Edwards' critical care and surgical heart valve groups still make up a majority of the company's overall sales, even with the spotlight on transcatheter valves. However, growth is slower in these divisions: Over the company's most recently reported six months, critical care revenues rose less than 5%, while surgical heart valve sales gained 3.6%. That's a far cry from the 16% revenue growth that the Sapien line raked in during that time, and Edwards will need to find new avenues of growth to take the pressure off its leading product line in the long run as competition mounts – particularly Medtronic's CoreValve can post a strong challenge to the Sapien in the U.S.

Can this market keep up?
In the near term, Edwards' stock looks like anything but a disappointment. With the Sapien still selling well amid its Japan launch and Medtronic's CoreValve still getting its feet under it in the U.S., Edwards' flagship product is poised to continue its dominance atop this growing market. But if the TAVR market growth slows in coming years – and if rivals can chip away at the Sapien's leadership – Edwards' remarkable rise over the past year could slam to a halt.