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Edwards Lifesciences Corporation’s ((EW - Analyst Report)) third-quarter 2013 earnings per share (EPS) rose 17.2% year over year to 68 cents, reflecting a beat of 3.0% over the Zacks Consensus Estimate. EPS was also ahead of the company’s guided range of 63–67 cents.

Apart from healthy sales growth, the EPS growth was led by a lower tax rate and reduced share count. Net income increased 11.6% from the year-ago quarter to $77 million in the third quarter.

Revenue Details

Edwards reported sales of $495.6 million, up 11% year over year (up 13% at constant exchange rate or CER). The top line was ahead of the Zacks Consensus Estimate of $488 million. The result was in line company’s expectations of $475−$505 million.

Domestically, sales were $232.1 million, up 19.9% year over year while internationally, sales were $495.6 million, up 10.6% (up 12.7% at CER) year over year. In the overseas market, sales in Europe improved 12.7% at CER to $144.4 million while revenues from rest of the world were up 5.4% at CER to $62.4 million. However, sales in Japan decreased 2.2% at CER to $56.7 million. This reflects another quarter of poor performance in Japan.

Segments

In the third-quarter 2013, surgical heart valve therapy product group reported sales of $192 million, up 3.3% year over year (up 6.0% at CER). The third-quarter performance reflects solid worldwide performance with robust contributions from the U.S. and Europe, somewhat offset by poor performance in Japan due to competitor’s product launch.

Globally, transcatheter heart valves (THV) product group reported sales of $172 million, up 38.9% year over year (up 35.5% at CER). Revenues of this product group were mainly driven by the ongoing launch of the SAPIEN valve in the domestic market and healthy growth in Europe. The growth in Europe was on the back of greater adoption of THV, with small impact from the favorable patent infringement ruling in Germany.

Critical care product group sales were $130.8 million, down 3.6% year over year (up 0.6% at CER). Strength in the U.S. and Europe was offset by the continued reduction of distributor inventories in China and the ongoing exit of the Access product line.

Margins

In the third quarter, gross profit increased 8.8% to $365.9 million. However, with higher manufacturing costs that the company incurred through its preparations for the launch of SAPIEN XT in the U.S. and the SAPIEN 3 in Europe, as well as a reduced benefit from foreign exchange, gross margin contracted 123 basis points (bps) to 73.8%.

Selling, general and administrative expense increased 7.5% year over year to $180.5 million (or 36.4% of sales), primarily due to the U.S. Medical Device Excise Tax and transcatheter valve launch related expenses in the U.S. and Japan.

Research and development expenditure increased 13.9% year over year to $84.1 million. The higher expenses were on account of additional investments in multiple heart valve clinical studies. With higher operating expenses, operating margin contracted 68 bps to 20.4% in the quarter.

Cash Position

Edwards exited the quarter with cash, cash equivalents and short-term investments of $757.6 million compared with $521.4 million at the end of 2012. Long-term debt of the company was $532 million compared with $189.3 million at the end of 2012.

Operating cash flow was $147 million while capital spending came in at $37 million. Consequently, free cash flow was $110 million in the third quarter. Edwards repurchased almost 3.1 million shares for $250 million during the quarter. The company’s consistent share buyback activity reduced outstanding shares by 5.1% from the year-ago quarter, leading to a positive impact on the bottom line.

Guidance

Following the third quarter, Edwards maintained its guidance for 2013. Annual sales are expected in the range of $2.0−$2.1 billion. For 2013, the Zacks Consensus Estimate is pegged at $2.04 billion.

The company also retained its EPS outlook in the range of $3.00− $3.10 for 2013. The current Zacks Consensus Estimate of $3.06 lies within the guidance range.

Our Take

Edwards surpassed the Zacks Consensus Estimate in the third quarter with several positive takeaways. Of late, a flow of good news for this medical device maker remains uninterrupted. After winning a patent infringement case over medical devices major Medtronic (MDT - Analyst Report) in Germany, Edwards disclosed that the injunction against Medtronic’s transcatheter heart valves has gone into effect on Aug 26, 2013.

It is seen that the launch of Edwards Sapien XT in the U.S. is almost neck to neck with that of Medtronic’s CoreValve. Meanwhile, notwithstanding the macroeconomic climate, Europe presents a large and growing market for the valves. Further, the market opportunity is likely to grow significantly on the back of demographic trends and increasing awareness. Unlike the past several quarters, the company recorded healthy performance in Europe, especially for the THV franchise.

Besides, in Aug 2013, Edwardsdisclosed the approval of Japan's Central Social Insurance Medical Council (Chuikyo) to provide reimbursement for the Edwards Sapien XT transcatheter aortic heart valve in the country (effective Oct 1, 2013).

With lucrative product approvals and expansion of geographic foothold, the stock appears to be an attractive pick.

Edwards currently carries a Zacks Rank #3 (Sell). Other, well-performing medical devices stocks such as Align Technologies Inc., (ALGN - Analyst Report) and Mindray Medical International Ltd (MR - Analyst Report), which carry a Zacks Rank #1 (Strong Buy), are also worth considering.

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