Boston Scientific Corp. said it is initiating a global, voluntary recall of all unused inventory of the Lotus Edge aortic valve system, blaming complexities associated with the product delivery system.
The Marlborough, Mass.-based company emphasized that the valve itself continues to achieve positive and clinically effective performance post-implant. However, because of the time and investment needed to develop and reintroduce a delivery system, the company believes it is necessary to retire the entire Lotus platform immediately. It also will halt all related commercial, clinical, R&D and manufacturing activities.
The company reported in April 2019 that it had gained the U.S. FDA’s nod for Lotus Edge.
Mike Mahoney, CEO of Boston Scientific, expressed enthusiasm about the benefits Lotus Edge has afforded patients. However, “we have been increasingly challenged by the intricacies of the delivery system required to allow physicians to fully reposition and recapture the valve."
In the wake of this action, the company will focus on the Acurate Neo2 aortic valve system, Sentinel cerebral embolic protection system and other promising areas.
According to the company, this decision is expected to result in estimated total pre-tax GAAP charges of about $225 million to $300 million due to inventory, fixed asset, intangible asset and certain other exit charges, and roughly $100 million to $150 million of these charges will have an impact on adjusted results. Most of these charges will be recorded during the fourth quarter of 2020. The decision is expected to be accretive to GAAP and adjusted earnings per share in 2021 by about one to two cents and neutral thereafter.
Edwards Lifesciences Corp.’s Sapien 3/Ultra transcatheter aortic valve replacement (TAVR) franchise could prove the beneficiary of this announcement, at least according to Cowen’s Josh Jennings. "The risk of TAVR share loss to Lotus was a significant element of the EW bear thesis, which has not only been wiped away, but completely reversed.” Jennings reiterated his organization’s Outperform rating.
In a separate note, Jennings labeled the impact of the discontinuation as “manageable,” adding that his group previously forecast 2021 and 2022 Lotus sales of $150 million and $250 million.
With the announcement, BTIG’s Marie Thibault noted that the impact to her organization’s revenue and earnings per share forecasts is minimal. However, the news comes a month after the company expressed confidence in its dual-valve TAVR strategy at the Transcatheter Cardiovascular Therapeutics (TCT) meeting.
Beyond Lotus, the company has hopes for Acuate Neo and its next-gen version. Boston Scientific reported in September that it had launched Acurate Neo2 in Europe.
Against this backdrop, Thibault sees the potential for additional “investor frustration on product timeline slippage and increases skepticism about BSX's ability to execute consistently.” She added that her group likes the diverse product portfolio, R&D and potential growth profile, but Boston Scientific should trade at a slight discount to its large-cap peers for a while. “We remain at Buy but reduce our price target from $48 to $41, using a valuation multiple below the comp group average.”
Wells Fargo’s Larry Biegelsen expressed concern about the company’s TAVR business, particularly as it relates to the ability of Acurate Neo2 to demonstrate noninferiority to Edward Lifesciece’s Sapien 3 and the Evolut PRO in the pivotal U.S. trial. He further highlighted that Boston Scientific recently pushed the U.S. launch of Neo2 to 2024.
Despite that concern, during a Nov. 17 call on the news, Boston Scientific CFO Dan Brennan noted that the European Neo2 outsold Lotus this year.
Danielle Antalffy, of SVB Leerink LLC, echoed Thibault on the potential for investor frustration. “But we would point to areas where BSX has excelled and exceeded expectations, within MedSurg broadly, within Complex Coronary, and – most notably – within Watchman as more important indicators of this management team’s ability to execute, and while confidence in that might be a bit shaken temporarily, it is still high for us.”
She concluded that the company’s story involves top-line growth and should continue to attract investors.
“For now, we remain MP-rated, as it could take some time for the long-term growth story to become clear again, as BSX works through COVID-related headwinds and now a delayed presence in the high-growth TAVR market.”
Behind its peers?
Analysts had plenty of questions for management during Tuesday’s call. For example, Bob Hopkins of Bank of America noted that the company will not have a U.S. TAVR program until 2024, giving it a less attractive interventional cardiology portfolio vs. its peers.
Mahoney pointed to the Watchman program, which has exceeded expectations this year. He has high hopes for that program going into next year and beyond.
Previously in the call, Mahoney noted that structural heart had the Watchman Flx device. “We estimate the left atrial appendage closure market will represent a $1.5 billion opportunity in 2024 and over $3 billion by 2026 and beyond given the ability of Watchman Flx to reduce the risk of stroke and discontinue lifelong oral anticoagulant therapy for over 33 million atrial fibrillation patients worldwide.”
He did acknowledge that the company has a hole in TAVR in the U.S., but it will do everything it can to enroll the Acurate study in that market. He concluded that the company would rather have a U.S. TAVR program, but this is the best move for it in the long term.
Morgan Stanley’s David Lewis wanted to know how the company would reassure investors and convince them that this action was isolated to a particular product and not related to strategic thinking or issues in its core portfolios.
In reply, Mahoney highlighted the successes reported in the third quarter. “Other businesses are really growing fast in their peer growth, if you look at our Endo business, our Uro business, the strength of the PI business, the Neuromod business, and really, everything within cardiology except TAVR. So the rest of the business is performing extremely well.”
Indeed, this decision is expected to help the company to focus on other areas in cardiology and raise them to anticipated growth levels.
Antalffy asked about what will happen to those focused on U.S. Lotus sales. Joe Fitzgerald, executive vice president and president, interventional cardiology, replied that the company plans to maintain a U.S. structural heart valve sales force. “It will be smaller without a Lotus marketed product,” he acknowledged, but there is a need to continue its drive-in market leadership.
In addition, the sales force will be needed for the expected Neo2 launch, as well as for efforts related to the IDE. “And we also will take the opportunity for those that are displaced to move them into growth areas like Watchman and complex PCI calcium management,” Fitzgerald added.