EW Misses on Revs, 1Q Guidance Weak

Edwards Lifesciences Corporation (EW - Analyst Report) has reported an adjusted EPS of 62 cents in the fourth quarter of fiscal 2011, surpassing both the Zacks Consensus Estimate of 59 cents and the year-ago quarter’s adjusted EPS of 55 cents. For the full year, the adjusted EPS came in at $2.02, ahead of the Zacks Consensus Estimate of $1.99 and $1.84 recorded a year ago.

Revenues increased 9.6% year over year (underlying sales growth of 8.3%) to $430.2 million during the quarter, missing the Zacks Consensus Estimate of $447 million. For the fiscal year, revenues increased 16% to $1.68 billion, nominally missing the Zacks Consensus Estimate of $1.69 billion.

Segments

Heart Valve Therapy remained the strongest segment at Edwards with an underlying growth of 12.5% to $256.6 million during the quarter. Transcatheter heart valve (THV) sales were $93.2 million, up 42.7% year over year with US sales (including both clinical and commercial) of $17.1 million.  Surgical heart valve sales increased 1.6% to $163.4 million. While sales of surgical heart valve sales in the international market grew 7.2% on the back of robust performance of premium products in Asia, US sales dropped due to the introduction of a competitor’s product and flat procedural volume.

The other segments of the company, namely Critical Care, Cardiac Surgery Systems and Vascular recorded sales of $133.3 million (underlying growth of 4.5%), $27.2 million (up 8%) and $13.1 million (down 3.2%), respectively. Impressive sales of the company’s advanced monitoring products as well as pressure monitoring products continued to drive growth at the Critical Care segment.

Expenses

During the quarter, Edwards’ gross margin improved 110 basis points (bps) to 72.2% primarily due to a more profitable product mix.

Higher expenses associated with the launch of Sapien in the US led to a 14.7% rise in selling, general and administrative (SG&A) expenses to $163.4 million. Besides, SG&A expenses, as a percentage of sales, increased by 170 bps to 38%. The company’s ongoing investments in the THV program led to an 8.6% rise in research and development (R&D) expenses to $60.7 million. However, R&D expenses, as a percentage of sales, remained almost flat at 14%.

Operating margin declined 40 bps to 20.1% during the quarter. Edwards’ bottom line experienced a positive impact from decline in adjusted tax rate to 15.1% from 21% in the year-ago quarter.

Balance Sheet

Edwards exited fiscal 2011 with cash and cash equivalents and short-term investments of $450.5 million, up from $396.1 million at the end of December 2010 and a debt of $150.4 million. Free cash flow for the quarter was $62.4 million and the company repurchased 560,000 shares for $40.1 million.

Guidance

Edwards reiterated its guidance for fiscal 2012 that was provided during the investor conference in December 2011. Sales are expected to record 18−22% underlying growth to reach $1.95−$2.05 billion in 2012 with adjusted EPS of $2.70−$2.80. While the company expects to record free cash flow of $240−$260 million based on a strong cash balance, gross margin should be around 73−75%. The company expects THV sales of $560−$630 million in 2012, representing underlying growth of 70−90%, with $200−$260 million of sales generated in the US. The guidance assumes a mid-year 2012 approval of Cohort A of the Partner trial.

Meanwhile, the company expects to report revenues of $440−$460 million and adjusted EPS of 47−49 cents in the first quarter of fiscal 2012. The company’s guidance missed the current Zacks Consensus Estimate of $464 million in revenues and earnings of 55 cents per share.

Our Take

We are disappointed with Edwards missing the revenue estimates for the fourth quarter. Besides, guidance for the first quarter was lower than our estimates.  Economic pressure in southern Europe resulted in lower procedural volumes, which affected the company’s performance in the THV business.

As a reminder, in September, the Centers for Medicare & Medicaid Services (CMS) decided to initiate a National Coverage Analysis (NCA) of transcatheter aortic valve replacement (TAVR) to formulate a national coverage determination (NCD). This development has resulted in inconsistent interpretations among the regional Medicare contractors, which in turn led to lower than expected sales of Sapien. Although Edwards has the first mover advantage in the US, the competitive landscape in Europe is tough with the presence of Medtronic’s (MDT - Analyst Report) CoreValve.

Yesterday, the CMS posted on its website a proposed decision memo for TAVR. This has set off a 30-day public comment period after which a formal NCD will be issued in the next 90 days. As per the memo, CMS will provide coverage only if 5 conditions are met. These criteria might hamper the procedure growth for Sapien.  

We are currently Neutral on Edwards in the long term. The stock retains a Zacks #3 Rank (“Hold”) in the short term.

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