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Gargi Bhattacharyya Banerjee

Edwards Downgraded to Underperform

STJ EW

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Based on a challenging third quarter 2013 performance, estimates for Edwards Lifesciences (EW - Analyst Report) have witnessed a substantial decline for the forthcoming quarters. Due to several headwinds, we downgraded the stock to Underperform with a target price of $79.00.

Edwards reported earnings of 58 cents per share in the third quarter of 2012 (within the guidance range of 57−61 cents per share), surpassing the Zacks Consensus Estimate by a couple of cents and the year-ago quarter’s adjusted earnings of 38 cents per share.

Net sales increased 8.5% year over year (sales growth at constant exchange rate or CER was 14.3%) to $447.9 million during the quarter, in line with the preliminary result declared earlier this month. Reported revenues lagged Edwards’ original guidance of $465−$485 million provided along with the second quarter results, primarily due to lower-than-expected transcatheter heart valve (‘THV’) sales.

Edwards reported a less-than-expected 49.9% growth in THV sales in the reported quarter due to disappointing performances from both the domestic and international markets. THV sales in the US were hampered by the provisions of the National Coverage Decision, which did not provide reimbursement for inoperable patients without femoral access. A clinical protocol for reimbursement for these patients was expected earlier, but got delayed. These issues have created a hurdle for new centers. We also believe that identification of suitable patients who would be able to undergo the transcatheter aortic valve replacement (TAVR) procedures is a big challenge for Edwards.

Moreover, performance in Europe was adversely affected due to the adoption of austerity measures, thereby resulting in lower-than-expected procedure growth and lower pricing. This was followed by negative growth rates in Italy and Spain as hospital budgets were constrained with increased economic pressure. Moreover, the treatment expansion in UK and France were not as expected while the 13% procedure growth in Germany was at par with the second quarter.  With later-than-anticipated approval of Sapien in high risk patients, Edwards lowered its 2012 US THV sales outlook to $230−$240 million, down from the previous outlook of $240−$260 million. Global THV sales outlook for the year was also brought down to $530−$560 million from the previous outlook of $550−$600 million.

Over the last few quarters surgical heart valve sales have been struggling due to lower-to-flat procedure volume resulting from economic uncertainty. Moreover, sales in the US were adversely affected due to the introduction of St Jude Medical’s (STJ - Analyst Report) pericardial valve, Trifecta, last year. Despite the expectation of improving sales in the fourth quarter as prior year comparisons moderate, we remain skeptical due to the persisting macroeconomic conditions.

Edwards retains Zacks #5 Rank (strong sell) in the short term.

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