The announcement of Edwards Lifesciences’ (EW - Analyst Report) second quarter fiscal 2012 results as on July 24, 2012, has led analysts to lower their estimates for the third quarter and fiscal 2012.
Second Quarter Highlights
Edwards Lifesciences reported adjusted EPS of 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.
The company’s 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 has been a dampener during the reported quarter.
Based on the 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.
For a full coverage on the earnings, read: Edwards’ Mixed 2Q, Revises View
Agreement of Analysts
With Edwards lowering its guidance for 2012, all the 16 analysts covering the stock have reduced their estimates for the third quarter. Maintaining the same downward trend, 11 analysts slashed their estimates with only 2 upward revisions for 2012, over the past 30 days.
Edwards witnessed strong growth in Germany, which was partially offset by lower volumes in Southern Europe due to economic uncertainties and a sharp decline in procedures in the Netherlands with the delay in reimbursement process. The company expects market share gain from the recently launched Sapien XT 29 mm valve and better uptake in Germany, France and UK. Yet, the guidance for outside US THV growth rate was lowered to 15−20% from the previous outlook of 20−25% given the various challenges currently at play in the European market.
Moreover, sales of surgical heart valves in the international market 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 St Jude Medical’s (STJ - Analyst Report) Trifecta in Japan, which will continue to be a challenge for the remainder of the year. These unfavorable factors led the company to lower its 2012 sales outlook.
On a positive note, 9 of the 16 analysts have raised their estimates for the fourth quarter with only 4 moving in the reverse direction. We believe this optimistic revision stems from the fact that the company’s Sapien for the high-risk patients is expected to receive US approval around November, similar to the timeline of approval granted last year for the inoperable population. On receiving approval, the company plans to use its current network of training centers to impart training on the transapical approach.
In addition, Sapien sales in the US benefited from the national coverage determination (‘NCD’) release in May 2012 that ended reimbursement uncertainties. Besides, Edwards is progressing well with respect to imparting training to centers 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 Sapien sales in the US in the range 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 high risk patients.
Magnitude of Estimate Revisions
The magnitude of estimate revisions has been significant for the third quarter, in the past 30 days. Overall, the consensus estimate for the current quarter has gone down by 4 cents to 61 cents while the fourth-quarter estimate increased by a penny to 84 cents over the past 30 days. For 2012, the estimates dipped by a penny to $2.65 over the last 30 days.
Edwards reported a mixed second quarter with adjusted EPS surpassing the Zacks Consensus Estimate and revenues missing the consensus. We are impressed with the uptake of Sapien in the US so far that led the company to raise its outlook for 2012. The robust performance was helped by the NCD release earlier in May. We are also impressed with Edwards’ progress with respect to its pipeline, which should boost its top line in the forthcoming period.
Although Edwards has the first mover advantage in the US, the European market is a lot more competitive with the presence of Medtronic’s (MDT - Analyst Report) CoreValve and some other products. Economic uncertainties in southern Europe along with unfavorable currency continue to remain an overhang for the company. Additionally, the litigation with Medtronic evokes concern, the outcome of which is expected shortly.
We are nonetheless optimistic about Edwards over the long term and maintain our Neutral recommendation.The stock corresponds to a Zacks #3 Rank (Hold) in the short term.
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