Edwards Lifesciences Corporation (EW) reported net income of $65.1 million or 55 cents per share in the first quarter of fiscal 2012 compared with $63.9 million or 53 cents per share in the year-ago period. Adjusted earnings per share (EPS) came in at 53 cents, ahead of the Zacks Consensus Estimate of 48 cents but unchanged from the first quarter of fiscal 2011.
Revenues increased 13.5% year over year (underlying sales growth of 13.4%) to $459.2 million during the quarter, surpassing the Zacks Consensus Estimate of $452 million. Sales from the domestic market were $186.6 million with 25.2% growth while international sales, contributing 59.4% to total sales, rose 6.7% to $272.6 million.
In the international market, Europe, Japan and Rest of World recorded sales of a respective $148.8 million (up 6.6% year over year), $70.8 million (up 2.3%) and $53 million (13.6%).
Segments
From this quarter, Edwards reported under three segments – Surgical Heart Valve Therapy (combination of surgical heart valves and cardiac surgery systems), Transcatheter Heart Valves (“THV”) and Critical Care (including vascular).
Surgical Heart Valve Therapy sales were $203.6 million, up 2.7% year over year. It included $27.6 million of cardiac surgery system sales. Sales of surgical heart valves at $176 million increased 2.2%. International growth of 6.6% was primarily on the back of penetration of Edwards’ premium products in Europe and Japan.
Edwards’ THV Sapien recorded sales of $41 million in the US (including $7 million of clinical sales), exceeding the company’s guidance of $30−$40 million. Total THV sales increased 67.2% year over year to $121.5 million with 18% growth emanating from the international market.
The Advisory Panel of the US Food and Drug Administration (“FDA”) will review Sapien in high risk patients (Cohort A) on June 13, 2012. The company had expected a speedier review. Consequently, Edwards lowered its THV guidance for the fiscal by $30 million to $530−$600 million.
The cut in forecast was due to several negatives like a full quarter delay in the approval of Sapien in the high-risk patient population, dismal performance in southern Europe and the adverse impact of foreign exchange rates. Sales of Sapien in the US are expected to be $200−$240 million, lower than the previous guidance of $200−$260 million due to the delay in approval for Cohort A patients.
Critical Care recorded sales of $134.1 million, flat on a year-over-year basis with $12.5 million of sales coming from vascular. Critical Care sales of $121.6 million recorded 0.9% growth driven by advanced monitoring products in Europe and US, offset by a $4.3 million decline in discontinued products.
Expenses
During the quarter, Edwards’ gross margin improved 120 basis points (bps) to 72.3% primarily due to a more profitable product mix.
Higher expenses associated with the launch of Sapien in the US led to a 17.9% rise in selling, general and administrative (SG&A) expenses to $177.2 million. Besides, SG&A expenses, as a percentage of sales, increased by 140 bps to 38.6%.
The company’s ongoing investments in the THV program led to a 16.3% rise in research and development (R&D) expenses to $68.6 million. R&D expenses, as a percentage of sales, increased 30 bps to 14.9%. Higher expenses led to a 230 bps contraction in operating margin to 18.6% during the quarter.
Balance Sheet
Edwards exited the first quarter of fiscal 2012 with cash and cash equivalents and short-term investments of $409.5 million, down from $450.5 million at the end of December 2011 and a debt of $179.4 million. Free cash flow for the quarter was $48.7 million and the company repurchased 1.2 million shares for $100.3 million.
Guidance
Based on current exchange rates, Edwards now expects fiscal 2012 sales to be on the lower end of the original range of $1.95−$2.05 billion, representing approximately 20% underlying growth. Moreover, the outlook for adjusted EPS was lowered to $2.58−$2.68 from the previous level of $2.70−$2.80. The company reiterated its free cash flow guidance of $240−$260 million.
Meanwhile, the company expects to report revenues of $470−$500 million and adjusted EPS of 64−68 cents in the second quarter of fiscal 2012. The current Zacks Consensus Estimate for the second quarter stands at $486 million in revenues and earnings of 59 cents per share.
Neutral on Edwards
We are disappointed with Edwards lowering its THV sales guidance for the fiscal as economic pressure in southern Europe resulted in lower procedural volumes, which affected the company’s performance. Sapien reimbursement issues add to the uncertainty in the US market, causing some centers to postpone their training and others to delay procedures. The company expects the final national coverage determination in early May.
We also await the already delayed Advisory Panel meeting for Sapien in the high risk patients. Any further hiccup in the approval process will have an adverse impact on the company.
The development of the Sapien portfolio holds immense potential for Edwards as it provides surgeons the option to eliminate the necessity of open heart procedures. While the company 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) and other players.
Boston Scientific Corporation (BSX) is geared to enter the transcatheter aortic valve market. The company recently completed enrollment in a clinical trial to evaluate the Lotus aortic valve system.
We are currently Neutral on Edwards in the long term. The stock retains a Zacks #3 Rank (Hold) in the short term.
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
EDWARDS LIFESCI (EW): Free Stock Analysis Report
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