Tuesday, November 11, 2008

Edwards Life Sciences

Here is a solid, low-growth, small cap medical device company with good cash flows that was always underwhelming at analyst conferences, where I got to listen to their presentation, after having presented for Possis Medical. I posted earlier today about acquisitions, and just got an email from the Canaccord Adams medical device analyst about Edwards ("EW")

"EW signed an agreement with Dexcom to develop continuous glucose monitors for the hospital market, which represents a multi-billion dollar annual revenue opportunity, in our estimation. That said, product and market development are long-term projects at this point." (Nothing wrong with that!)

Access to this opportunity costs a small upfront R&D payment, plus ongoing product development support for three years, the net effect of which, according to Canaccord Adams, is to raise the ratio of R&D to sales by ten bp or so in that period. Big deal!

For Edwards, which has historically had free cash flow not returned to shareholders, this seems very much in the spirit of our thoughts in the previous post about acquisitions. Good luck to Edwards and congratulations for not standing pat, but for taking what seems like a minimal, measured risk for a potentially large reward.

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