Edwards Lifesciences Corporation
) reported net income of $67.8 million or 57 cents per share in the
second quarter of fiscal 2012 compared with $58.1 million or 48
cents per share in the year-ago period. Adjusted earnings per share
('EPS') came in at 67 cents, ahead of both the Zacks Consensus
Estimate of 65 cents and the adjusted EPS of 49 cents in the second
quarter of fiscal 2011.
Revenues increased 11.8% year over year (sales growth at
constant exchange rate or CER was 15.7%) to $482 million during the
quarter, but missed the Zacks Consensus Estimate of $488 million.
Edwards' guidance for EPS and revenues was 64−68 cents and
$470−$500 million, respectively.
Sales from the domestic market were $207 million with 36.8%
growth while international sales, contributing 57% to total sales,
dropped 1.8% to $275 million. In the international market, barring
Japan that recorded 3.4% year-over-year growth to $72.3 million,
sales from both Europe and Rest of World dropped 3.4% to $146.5
million and 3.7% to $56.2 million, respectively.
Edwards' three segments - Surgical Heart Valve Therapy product
group (combination of surgical heart valves and cardiac surgery
systems), Transcatheter Heart Valves ("THV") and Critical Care
product group (including vascular) - recorded respective sales of
$200.5 million (down 2.3%), $145.8 million (up 70.8%) and $135.7
million (down 3.6%). Unfavorable currency movement has been a major
dampener during the reported quarter.
Surgical Heart Valve Therapy included $28.7 million of cardiac
surgery system sales. Sales of surgical heart valves at $171.8
million dropped 3.4% or 1% at CER. Sales in the domestic market
were comparable with the year-ago period though it continued to
suffer from the introduction of
St Jude Medical
) pericardial valve, Trifecta, last year. The situation, however,
is expected to improve in the second half with the completion of
one year of the launch.
In the international market, sales of surgical heart valves
declined exacerbated by economic uncertainties in southern Europe.
Besides, the conversion of customers to the recently approved Magna
Mitral ease valve was hampered by the launch of Trifecta in Japan,
which will continue to be a challenge for the remainder of the
For the fiscal, Edwards now expects to achieve underlying sales
growth in the Surgical Heart Valve Therapy segment at the low end
of the previously announced 3-5% band.
Edwards' THV Sapien recorded sales of $61.4 million in the US,
with commercial sales of $53 million. Sales in the international
market increased 5.8% or 15% at CER. Sapien sales in the US
benefited from the national coverage determination release in May
2012 that ended reimbursement uncertainties. Consequently,
hospitals are aware of the requirements to perform transcatheter
aortic valve procedures. The company has trained 110 centers (60
centers at the end of the first quarter) since the launch of the
product in US and is on track to train 150-200 centers within the
first year of launch.
Given the strong second quarter performance, Edwards now expects
to report THV sales in the US of $240−$260 million, up from the
previous outlook of $200−$240 million. This is encouraging as the
company had lowered the outlook of Sapien sales in the US at the
end of the first quarter from the original guidance of $200−$260
million due to the delay in approval for Cohort A patients.
Backed by the favorable recommendation from the advisory panel
of the US Food and Drug Administration ("FDA") for the use of
Sapien via transfemoral and transapical delivery on high-risk
patients, the company is looking for approval around November,
similar to the timeline of approval granted last year for the
inoperable population. We believe that the raised US guidance
reflects the continued strong rollout of the product. For the year,
Edwards raised the low end of its THV guidance by $20 million to
$550−$600 million, representing an underlying growth of 80-90%.
During the quarter, Edwards initiated a voluntary recall of
certain lots of heart valves from the international market due to a
problem with the package equipment in its European manufacturing
facility. As a result, the company incurred an $8.1 million charge
to cost of goods. No further financial liability is expected. After
adjusting for this charge, the company reported gross margin of
74.8%, up 440 basis points (bps) driven by foreign exchange and
favorable product mix, primarily resulting from the US launch of
Higher expenses associated with the launch of Sapien in the US
led to an 11.89% rise in selling, general and administrative
(SG&A) expenses to $182.4 million. However, SG&A expenses,
as a percentage of sales, remained unchanged at 37.8%.
The company's ongoing investments in the Partner II trail and
other THV programs led to a 14% rise in research and development
(R&D) expenses to $74 million. R&D expenses, as a
percentage of sales, increased 30 bps to 15.4%. Despite a 12.4%
rise in operating expenses, adjusted margin improved 410 bps to
21.6% during the quarter.
Edwards exited the second quarter of fiscal 2012 with cash and
cash equivalents of $304.3 million, up from $171.2 million at the
end of December 2011 and a debt of $185.1 million. Free cash flow
for the quarter was $125.6 million and the company repurchased
627,000 shares for $52.9 million.
Based on current exchange rates and updated guidance for the
segments, Edwards now expects fiscal 2012 sales of $1.90−$1.97
billion, down from the previous forecast of $1.95−$2.05 billion,
representing underlying growth of approximately 20%. The outlook
for adjusted EPS now stands at $2.60−$2.68 compared to the earlier
outlook of $2.58−$2.68.The company reiterated its free cash flow
guidance of $240−$260 million.
Meanwhile, the company expects to report revenues of $465−$485
million and adjusted EPS of 57−61 cents in the third quarter of
fiscal 2012. While the revenue guidance is in line with the current
Zacks Consensus Estimate of $484 million, the EPS outlook is well
below the consensus estimate of 65 cents per share.
Neutral on Edwards
We are encouraged by robust THV sales on the back of the
successful US rollout of Sapien. The sales upcast was also helped
by the resolution of reimbursement uncertainties. The company's
bottom line also benefited from improved margins. However, currency
movement and economic uncertainties in Europe remained as
headwinds. We believe these factors forced the company to pare its
outlook for the year.
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. Medtronic,
) and St Jude Medical are also on track to release transcatheter
valves in the US over the next few years.
We have a Neutral recommendation for Edwards. The stock retains
a Zacks #3 Rank (Hold) in the short term.
BOSTON SCIENTIF (BSX): Free Stock Analysis
EDWARDS LIFESCI (EW): Free Stock Analysis
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