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A Challenging 3Q for Edwards

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Edwards Lifesciences Corporation (EW - Free Report) 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 43 cents per share. After taking into account tax adjustment in the year-ago period (5 cents per share), earnings in the reported quarter increased 52.6%.

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.Third quarter 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.

Sales from the domestic market were $193.6 million with 28.5% growth while international sales, contributing 57% to total sales, dropped 3% to $254.3 million. In the international market, barring Europe that dropped 12.5% year-over-year to $121.8 million, sales from both Japan and Rest of World increased 6% to $71.8 million and 9.8% to $60.7 million, respectively.


Edwards’ three segments – Surgical Heart Valve Therapy product group (combination of surgical heart valves and cardiac surgery systems), THV and Critical Care product group (including vascular) – recorded respective sales of $185.7 million (down 2.5%), $123.8 million (up 49.9%) and $138.4 million (down 1%). Unfavorable currency movement has been a major dampener during the reported quarter.

Surgical Heart Valve Therapy included $26 million of cardiac surgery system sales. Sales of surgical heart valves at $159.7 million dropped 2.3%, but grew 2% at CER. While sales growth improved sequentially in the international market, sales in the domestic market were marginally negative compared to the year-ago period due to flat procedures and the adverse (though diminishing) impact from the introduction of St Jude Medical’s pericardial valve, Trifecta, last year. Pricing, however, remained stable.

Edwards’ THV, Sapien, recorded sales of $55.3 million in the US, with clinical sales of $5 million, lower from $9 million in the prior quarter as two Partner II Registries enrolled in the second quarter. Besides, net stocking units of $8 million were lower ($14 million in the second quarter) as fewer centers were trained during summer.  However, the 14% sequential increase in reorder sales is encouraging. 

The company also noted that 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, though Edwards was able to train 150 centers at the end of the third quarter (110 centers at the end of the second quarter) since the launch of Sapien in US.

Edwards Lifesciences also announced the much awaited approval from the US Food and Drug Administration (‘FDA’) of its Sapien THV to treat high-risk aortic stenosis patients delivered both transfemorally and transapically. Subsequent to this approval, the targeted patient population who could be treated with Sapien valve would expand. Previously, the valve was approved in the US only for the treatment of inoperable patients via the transfemoral approach.

Sales in the international market dropped 8.3% or up 4.8% at CER. Performance in Europe was adversely affected due to austerity measures adopted thereby resulting in lower-than-expected procedure growth and lower pricing. This was on the back of 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.  


Edwards reported gross margin of 75.1% in the reported quarter, up 550 basis points (bps) driven by foreign exchange (300 bps) and favorable product mix (200 bps), primarily resulting from the US launch of Sapien.

Higher expenses associated with the launch of Sapien in the US led to a 1.4% rise in selling, general and administrative (SG&A) expenses to $167.8 million. However, lower incentive compensation and other variable expenses led to less-than-expected SG&A expenses, which as a percentage of sales dropped 260 bps to 37.5%.

The company’s ongoing investments in various programs led to a 20% rise in research and development (R&D) expenses to $73.8 million. R&D expenses, as a percentage of sales, increased 150 bps to 16.5%. Despite a 6.3% rise in operating expenses, adjusted margin improved 660 bps to 21.1% during the quarter. Better margins enabled Edwards to meets its earnings guidance despite a disappointment on the sales front.

Balance Sheet

Edwards exited the third quarter of 2012 with cash and cash equivalents of $305.8 million, up from $171.2 million at the end of December 2011 and a debt of $175.4 million. The company repurchased 174,000 shares for $13.1 million during the quarter and was left with $435 million of authorization.


With later-than-anticipated approval of Sapien in high risk patients, Edwards now expects to report US THV sales in the range of $230−$240 million in 2012, down from the previous outlook of $240−$260 million. Global THV sales outlook for the year was lowered to $530−$560 million from the previous outlook of $550−$600 million.

Guidance for Surgical Heart Valve Therapy segment stood at $775−$805 million (with $115 million from cardiac surgery system sales). Growth rate of surgical heart valve sales in the fourth quarter is likely to improve as prior year comparisons moderate. Sales in Total Critical care is likely to be at the low end of the previous range of $550−$580 million, which includes approximately $50 million of vascular sales.

Based on a challenging third quarter, Edwards now expects 2012 sales at the bottom of the previous range of $1.90−$1.97 billion, representing underlying growth of more than 15%. The outlook for adjusted EPS now stands at $2.54−$2.58, lower from $2.60−$2.68.

Meanwhile, the company expects to report revenues of $490−$520 million and adjusted EPS of 76−80 cents in the fourth quarter of 2012. While the revenue guidance is in line with the current Zacks Consensus Estimate of $506 million, the EPS outlook is slightly below the consensus estimate of 81 cents per share.

Neutral on Edwards

We are disappointed with a challenging third quarter that led Edwards to lower its outlook for 2012. However, the FDA approval of Sapien for high-risk patients is encouraging. The company’s bottom line also benefited from improved margins. However, currency movement and economic uncertainties in Europe remained major headwinds.

Although Edwards has the first mover advantage in the US with its launch of Sapien in November 2011, the scenario in Europe is competitive with the presence of Medtronic (MDT - Free Report) and other players.

We are, nonetheless, optimistic about the company over the long term and have a ‘Neutral’ recommendation. The stock retains a Zacks #3 Rank (Hold) in the short term.

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