A couple of weeks back, Medtronic, Inc. (NYSE: MDT) got FDA approval for its transcatheter CoreValve system, which came three months earlier than expected. The FDA granted early approval because the Extreme Risk Study results for CoreValve were overwhelmingly positive, with low rates of stroke as well as valve leakage. The medical device maker can now start selling its CoreValve (a Transcatheter Aortic Valve (TAVR) device) in the U.S. market, which Edwards Lifesciences (NYSE:EW) has dominated with its Sapien Valve since November 2011. 
The CoreValve device is used to replace impaired heart valves in patients who are too weak for traditional open heart surgery. Statistics suggest that there are about 100,000 such patients in North America, increasing annually by about 9%.  Outside the U.S., CoreValve devices have been implanted in close to 50,000 patients since 2007, and it is currently a leading player in the TAVR device market in Europe. 
CoreValve systems are a part of the Structural Heart business, under Medtronic’s Cardiovascular division. While Structural Heart business revenues increased by only 4% year-over-year to $281 million in Q2 2014, we expect to see stronger revenue growth in this segment going forward, as CoreValve finds its footing in the U.S. market.
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We currently have a $58 price estimate for Medtronic, which is in line with the current market price.
Medtronic’s CoreValve Versus Edwards’ Sapien Valve
Edwards’ Sapien valve is the biggest competitor for Medtronic’s CoreValve system. In the global transcatheter aortic valve market – valued at over $1 billion in 2013 – Medtronic had a 31% market share against market leader Edwards’ 65%. ((Medtronic’s CoreValve Ready For Takeoff, SeekingAlpha, Jan 21 2014))  In the U.S., CoreValve will cater to patients suffering from severe Aortic Stenosis (AS) who cannot risk undergoing traditional open-heart surgery. However, the Sapien valve has a much larger potential market because in addition to severe AS patients, it caters to high-risk (but operable) AS patients as well. 
Medtronic’s CoreValve is implanted by the standard transfemoral procedure, which involves accessing the heart through femoral artery in the thigh. In addition to transfemoral procedures, Edwards Lifesciences has FDA approval to implant its Sapien valve through transapical procedures (accessing heart through the breastbone) as well. ((Edwards Lifesciences Receives FDA Approval to Add Transapical Delivery System, Edwards, Jan 29 2008)) Therefore, Sapien gives clinicians and surgeons more flexibility in valve replacement operations and helps treat a larger patient base.
However, CoreValve has an advantage over Sapien in terms of its broad range of sizes. CoreValve has FDA approval for devices with diameters of 23 mm, 26 mm, 29 mm and 31 mm. Its smallest offering, with a 23 mm diameter, is called the CoreValve Evolut™. In comparison, Sapien is available in only 23 mm and 26 mm sizes. Moreover, CoreValve requires a smaller insertion site of 6 mm (18 French) as compared to over 7 mm (22 French) for the Sapien. This implies that CoreValve can be used for elderly patients more easily, whose constricted arteries do not permit passage of bigger devices, such as valves, through catheters.
CoreValve Could Grab 15-20% U.S. Market Share In 2014
Edwards generated $172 million in Sapien sales in Q3 2013, including $86 million from its U.S. operations.  At the time, it was the only player offering Transcatheter Aortic Valves (TAVR) in the U.S. This means that total TAVR sales in the U.S. in Q3 2013 were $86 million. Looking at its TAVR sales in the previous quarters and forecasting moderate single-digit sales growth in Q4, we estimate the U.S. TAVR market size to be roughly around $350 million in 2013.  
We believe that CoreValve can grab a considerable market share in its first year because of several factors. Firstly, it is a formidable player in Europe and boasts a sound reputation in the global market, where it has over 30% market share. Secondly, its FDA trials results have been very promising. About 75% of the Extreme Risk Study patients implanted with CoreValve survived after one year. This indicates a 32% increase in survival rate than previously expected.  Additionally, Medtronic’s CoreValve is likely to take share of the elderly patient market from Sapien because of its smaller insertion size requirement (18 French as compared to Sapien’s 22 French). Lastly, it only has to compete with one other player in the U.S. currently, which gives the company enough room to grow in the fast-expanding market, which grew approximately 40% in 2013.
If Medtronic capitalizes on the aforementioned factors effectively, we believe it could garner 15-20% market share in the U.S. over the next year. Forecasting the U.S. TAVR market size to increase 20% in 2014, CoreValve could potentially generate about $50-$70 million in revenues in CY 2014. However, the company might face resistance due to Edwards’ new product, Sapien XT, which is expected to be launched in the U.S. in the second half of the year. Medtronic is also involved in a patent-infringement dispute with Edwards over the CoreValve device. As part of the dispute, Edwards is looking to get a preliminary injunction against the company to prevent it from selling its CoreValve devices in the U.S. Such an injunction is considered implausible but the lawsuit is not expected to settle anytime soon. This could drive market sentiment against CoreValve in the U.S. and unfavorably impact its sales as well.
The Minnesota-based company repeatedly stated in 2013 that it was banking on its CoreValve TAVR device and its ‘Simplicity’ renal denervation system to deliver sustainable future sales growth for the company. Since the renal denervation system trials have not been successful, we expect the company to promote and sell its CoreValve devices at an accelerated pace in the U.S., to partially offset the ‘Simplicity’ setback.  This should help Medtronic in steadily increasing its share in the global Cardiovascular market as well.
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- Transcatheter Aortic Valves Market, Medtech Ventures, Oct 2013 [↩]
- FDA expands approved use of Sapien artificial heart valve, FDA, Oct 19 2012 [↩]
- Edwards Lifesciences Management Discusses Q3 2013 Results – Earnings Call Transcript, SeekingAlpha, Oct 28 2013 [↩]
- Edwards Lifesciences Management Discusses Q2 2013 Results – Earnings Call Transcript, SeekingAlpha, Jul 25 2013 [↩]
- Edwards Lifesciences Management Discusses Q1 2013 Results – Earnings Call Transcript, SeekingAlpha, April 23 2013 [↩]
- Medtronic’s Renal Denervation System Fails, MedPageToday, Jan 09 2014 [↩]