Edwards Lifesciences Corporation
) reported earnings of 58 cents per share in the third quarter of
2012 (within the guidance range of 57−61 cents per share),
surpassing the Zacks Consensus Estimate by a couple of cents and
the year-ago quarter's 43 cents per share. After taking into
account tax adjustment in the year-ago period (5 cents per
share), earnings in the reported quarter increased 52.6%.
Net sales increased 8.5% year over year (sales growth at
constant exchange rate or CER was 14.3%) to $447.9 million during
the quarter, in line with the preliminary result declared earlier
this month.Third quarter revenues lagged Edwards' original
guidance of $465−$485 million provided along with the second
quarter results, primarily due to lower-than-expected
transcatheter heart valve ('THV') sales.
Sales from the domestic market were $193.6 million with 28.5%
growth while international sales, contributing 57% to total
sales, dropped 3% to $254.3 million. In the international market,
barring Europe that dropped 12.5% year-over-year to $121.8
million, sales from both Japan and Rest of World increased 6% to
$71.8 million and 9.8% to $60.7 million, respectively.
Edwards' three segments - Surgical Heart Valve Therapy product
group (combination of surgical heart valves and cardiac surgery
systems), THV and Critical Care product group (including
vascular) - recorded respective sales of $185.7 million (down
2.5%), $123.8 million (up 49.9%) and $138.4 million (down 1%).
Unfavorable currency movement has been a major dampener during
the reported quarter.
Surgical Heart Valve Therapy included $26 million of cardiac
surgery system sales. Sales of surgical heart valves at $159.7
million dropped 2.3%, but grew 2% at CER. While sales growth
improved sequentially in the international market, sales in the
domestic market were marginally negative compared to the year-ago
period due to flat procedures and the adverse (though
diminishing) impact from the introduction of
St Jude Medical's
) pericardial valve, Trifecta, last year. Pricing, however,
Edwards' THV, Sapien, recorded sales of $55.3 million in the
US, with clinical sales of $5 million, lower from $9 million in
the prior quarter as two Partner II Registries enrolled in the
second quarter. Besides, net stocking units of $8 million were
lower ($14 million in the second quarter) as fewer centers were
trained during summer. However, the 14% sequential increase
in reorder sales is encouraging.
The company also noted that THV sales in the US were hampered
by the provisions of the National Coverage Decision, which did
not provide reimbursement for inoperable patients without femoral
access. A clinical protocol for reimbursement for these patients
was expected earlier, but got delayed. These issues have created
a hurdle for new centers, though Edwards was able to train 150
centers at the end of the third quarter (110 centers at the end
of the second quarter) since the launch of Sapien in US.
Edwards Lifesciences also announced the much awaited approval
from the US Food and Drug Administration ('FDA') of its Sapien
THV to treat high-risk aortic stenosis patients delivered both
transfemorally and transapically. Subsequent to this
approval, the targeted patient population who could be treated
with Sapien valve would expand. Previously, the valve was
approved in the US only for the treatment of inoperable patients
via the transfemoral approach.
Sales in the international market dropped 8.3% or up 4.8% at
CER. Performance in Europe was adversely affected due to
austerity measures adopted thereby resulting in
lower-than-expected procedure growth and lower pricing. This was
on the back of negative growth rates in Italy and Spain as
hospital budgets were constrained with increased economic
pressure. Moreover, the treatment expansion in UK and France were
not as expected while the 13% procedure growth in Germany was at
par with the second quarter.
Edwards reported gross margin of 75.1% in the reported
quarter, up 550 basis points (bps) driven by foreign exchange
(300 bps) and favorable product mix (200 bps), primarily
resulting from the US launch of Sapien.
Higher expenses associated with the launch of Sapien in the US
led to a 1.4% rise in selling, general and administrative
(SG&A) expenses to $167.8 million. However, lower incentive
compensation and other variable expenses led to
less-than-expected SG&A expenses, which as a percentage of
sales dropped 260 bps to 37.5%.
The company's ongoing investments in various programs led to a
20% rise in research and development (R&D) expenses to $73.8
million. R&D expenses, as a percentage of sales, increased
150 bps to 16.5%. Despite a 6.3% rise in operating expenses,
adjusted margin improved 660 bps to 21.1% during the quarter.
Better margins enabled Edwards to meets its earnings guidance
despite a disappointment on the sales front.
Edwards exited the third quarter of 2012 with cash and cash
equivalents of $305.8 million, up from $171.2 million at the end
of December 2011 and a debt of $175.4 million. The company
repurchased 174,000 shares for $13.1 million during the quarter
and was left with $435 million of authorization.
With later-than-anticipated approval of Sapien in high risk
patients, Edwards now expects to report US THV sales in the range
of $230−$240 million in 2012, down from the previous outlook of
$240−$260 million. Global THV sales outlook for the year was
lowered to $530−$560 million from the previous outlook of
Guidance for Surgical Heart Valve Therapy segment stood at
$775−$805 million (with $115 million from cardiac surgery system
sales). Growth rate of surgical heart valve sales in the fourth
quarter is likely to improve as prior year comparisons moderate.
Sales in Total Critical care is likely to be at the low end of
the previous range of $550−$580 million, which includes
approximately $50 million of vascular sales.
Based on a challenging third quarter, Edwards now expects 2012
sales at the bottom of the previous range of $1.90−$1.97 billion,
representing underlying growth of more than 15%. The outlook for
adjusted EPS now stands at $2.54−$2.58, lower from
Meanwhile, the company expects to report revenues of $490−$520
million and adjusted EPS of 76−80 cents in the fourth quarter of
2012. While the revenue guidance is in line with the current
Zacks Consensus Estimate of $506 million, the EPS outlook is
slightly below the consensus estimate of 81 cents per share.
Neutral on Edwards
We are disappointed with a challenging third quarter that led
Edwards to lower its outlook for 2012. However, the FDA approval
of Sapien for high-risk patients is encouraging. The company's
bottom line also benefited from improved margins. However,
currency movement and economic uncertainties in Europe remained
Although Edwards has the first mover advantage in the US with
its launch of Sapien in November 2011, the scenario in Europe is
competitive with the presence of
) and other players.
We are, nonetheless, optimistic about the company over the
long term and have a 'Neutral' recommendation. The stock retains
a Zacks #3 Rank (Hold) in the short term.
EDWARDS LIFESCI (EW): Free Stock Analysis
MEDTRONIC (MDT): Free Stock Analysis Report
ST JUDE MEDICAL (STJ): Free Stock Analysis
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