Back to main

Edwards Lifesciences Q1 Earnings Top, Revs Miss - Analyst Blog

Posted
4/25/2014 9:57:00 AM
By: Zacks.com
Referenced Stocks:EPS;ASP;ESR;AMGN;ENZY

Edwards Lifesciences Corporation 's( EW )first-quarter 2014 adjusted earnings per share (EPS) rose nominally by 2.7% year over year to 76 cents, reflecting a beat of 11.8% over the Zacks Consensus Estimate. In first-quarter fiscal 2013, the company had earned 43 cents in intellectual property litigation compared to an expense of 4 cents in the reported quarter.

However, without taking into consideration the one-time items, reported EPS for the first quarter came in at 56 cents, down 54.8% year over year.

Revenue Details

Edwards reported sales of $522.4 million, up 5.2% year over year (excluding the impact of foreign exchange fluctuations and the transcatheter heart valves [THV] sales return reserve, underlying growth was 8.0%). The top line was below the Zacks Consensus Estimate of $524 million.

During the quarter, Edwards Lifesciences continued to add new commercial sites and is steadily moving toward its goal of adding 45-65 new sites during 2014.

Domestically, sales amounted to $222.4 million, down 2.4% year over year while internationally, sales were $300.0 million, up 11.6% year over year.

Revenues by Product Groups

In first-quarter 2014, surgical heart valve therapy product group reported sales of $202.6 million, up 2.3% year over year (up 4.3% on an underlying basis). The quarter's performance was driven by decent unit growth, partially offset by a small decline in average selling price (ASP).

THV product group reported sales of $189.2 million, up 11.5% year over year (up 14.0% on an underlying basis). Outside the U.S., sales grew by 36.4 percent (33.0 percent on an underlying basis). However, THV product exchanges led to a net $6 million decline in THV sales during the quarter.

Revenues of this product group were mainly driven by strong growth in Europe on the back of greater adoption of THV. Growth in this product category was also driven by strong procedural growth and share gains with SAPIEN XT in Japan and the launch of SAPIEN 3 in Feb 2014 in Europe.

Critical Care product group sales were $130.6 million, up 1.2% year over year (up 4.6% on an underlying basis). Growth in this category can be primarily attributed to core hemodynamic products outside the U.S. and enhanced surgical recovery (ESR) products in the U.S. (mainly FloTrac and ClearSight).

Edwards Lifesciences continues to expect underlying sales growth in surgical heart valve therapy in the range of 4-7% (on revenues of $810-$850 million), while THV and Critical Care product groups are expected to grow at 15-20% ($700-$820 million) and 3-6% ($535-$575 million) respectively.

Margins

In the first quarter, gross margin contracted 350 basis points (bps) to 72.1%. Despite a more profitable product mix, margin contraction was primarily due to reduced benefit from foreign exchange hedges, an approximate 200 bps-impact from the THV product exchanges, the impact from the sales return reserve and higher manufacturing costs for new THV product launches in the U.S. and Europe.

Selling, general and administrative expense increased 8.1% year over year to $197.2 million (or 37.7% of sales), primarily due to the transcatheter valve-related expenses incurred in Japan and the U.S. coupled with increased accrual for incentive compensation.

Research and development expenditure increased 7.5% year over year to $85.8 million or 16.4% of sales. The higher expenses were on account of additional investments in multiple heart valve clinical studies and transcatheter R&D projects. With higher operating expenses, adjusted operating margin contracted 500 bps to 17.9% in the quarter.

Cash Position

Edwards Lifesciences exited the fiscal with cash, cash equivalents and short-term investments of $831.6 million compared with $936.9 million at the end of 2013. Long-term debt of the company was $725.4 million compared with $593.1 million at the end of 2013.

Edwards Lifesciences repurchased shares for $300.0 million during the quarter. The company's consistent share buyback activity reduced outstanding shares by 6.9% from the year-ago quarter, lending a positive impact to the bottom line.

Guidance

Edwards Lifesciences revised its EPS guidance for full year 2014 to reflect the changes in the accounting treatment of intellectual property litigation expenses. The company now expects earnings to be in a range around $3.10 (from earlier guidance $3.00). The change includes an assumed benefit of 10 cents from the change in the treatment of intellectual property litigation expenses. The current Zacks Consensus estimate for EPS is pegged at $3.04.

However, the company reiterated its full year 2014 total sales in the band of $2.05-$2.25 billion. The current Zacks Consensus estimate for revenues is pegged at $2.16 billion.

Additionally, 2014 free cash flow (excluding special items) is still expected to remain within $325-$425 million.

For the second quarter of 2014, adjusted EPS is expected to remain within 71-81 cents on revenues of $525-$565 million. The Zacks Consensus Estimate for EPS of 76 cents and revenues of $545 million fall within the guidance range.

Our Take

Edwards Lifesciences, for all good reasons, managed to be in the news since the beginning of 2014. The company kick-started the year with the receipt of CE mark for its SAPIEN 3 in January and SAPIEN XT in February followed by the INTUITY Elite Valve System winning the same in April.

However, Edwards Lifesciences delivered mixed first-quarter 2014 results with a bottom-line beat and a top-line miss.

Medtronic's comparable offering - CoreValve was granted the U.S. Food and Drug Administration (FDA) approval in Jan 2014. Now, with the favorable court ruling announced in Apr 2014 and next-generation transcatheter valve SAPIEN XT in the company's pipeline, Edwards Lifesciences is well positioned to continue dominating and strengthening its foothold in the U.S. transcatheter aortic heart valve market.

Edwards Lifesciences currently carries a Zacks Rank #2 (Buy). Some other well-placed stocks in the broader healthcare sector that warrant a look are Enzymotec Ltd. ( ENZY ), Myriad Genetics Inc. ( MYGN ) and Amgen Inc. ( AMGN ). Enzymotec and Myriad Genetics sport a Zacks Rank #1 (Strong Buy) while Amgen carries a Zacks Rank #2 (Buy).



AMGEN INC (AMGN): Free Stock Analysis Report

ENZYMOTEC LTD (ENZY): Free Stock Analysis Report

EDWARDS LIFESCI (EW): Free Stock Analysis Report

MYRIAD GENETICS (MYGN): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research