California-based medical technology major Edwards Lifesciences Corp.(EW) reported better-than-expected third-quarter 2014 financial results with adjusted earnings per share (EPS) of 80 cents, beating the Zacks Consensus Estimate by 8 cents or 11.1%.
Adjusted earnings also exceeded the year-ago number by a robust 14.3% and surpassed the third quarter guidance range of 66-72 cents.The year-over-year improvement was primarily driven by the strong sales performance delivered by the company's transcatheter heart valves.
However, without taking into consideration the one-time items, reported EPS for the third quarter came in at 87 cents, a significant improvement of 27.9% from the prior-year period equivalent of 68 cents. Foreign exchange rates had an impact of approximately a penny on EPS.
Revenue Details
Edwards Lifesciences reported sales of $607.4 million, up 22.6% year over year (excluding the impact of foreign exchange fluctuations and the transcatheter heart valves sales return reserve, underlying growth was 18.9%). The top line also outshone the Zacks Consensus Estimate of $544 million and the company's guidance range of $530-$570 million.
Foreign exchange rates had a negligible impact on sales in the third quarter compared to the prior year.
In the U.S., Edwards Lifesciences' sales amounted to $296.3 million, up 27.7% year over year. In the international market, sales were $311.1 million, up 18.1% year over year.
Revenues by Product Groups
In third-quarter 2014, the surgical heart valve therapy product group reported sales of $203.4 million, up 6% year over year (up 6.2% on an underlying basis). The quarter's performance was owing to solid growth observed across all regions coupled with slightly higher overall average selling price (ASP) driven by product mix. Unit growth of Edwards' premium valves also contributed to this product group's sales growth.
The transcatheter heart valves (THV) product group reported sales of $267.2 million, up 55.3% year over year (up 43.8% on an underlying basis) primarily driven by strong growth in all regions. Outside the U.S., THV sales grew 41.8% on an underlying basis, on the back of strong market growth in Europe. In the U.S., THV sales grew 46.2% on an underlying basis, largely owing to the adoption of Edwards' lower-profile SAPIEN XT and strong demand for the larger 29-millimeter valve. In the U.S. and Europe, the company experienced better-than-anticipated strong growth in transcatheter valve procedure.
Critical Care product group sales were $136.8 million, up 3.9% year over year (up 4.5% on an underlying basis). Growth in this category can be chiefly attributed to double digit increase in enhanced surgical recovery (ESR) product sales across most regions. Moreover, the company is currently engaged in redirecting the resources from its Glucose monitoring program to its ESR initiative, which also contributed to this product group's growth.
For full year 2014, Edwards Lifesciences now expects underlying sales growth in surgical heart valve therapy to be at the low end of the previously announced range of 4–7% (on revenues of $810–$850 million), while Critical Care product group is expected to grow at the high end of the earlier announced band of 3–6% ($535–$575 million). In the THV product group, Edwards Lifesciences now estimates underlying sales growth of 25% for the full year.
Margins
In the third quarter, gross margin contracted 180 basis points (bps) to 72.3%. A negative impact of 160 bps from foreign exchange and a 140 bps of higher costs associated with Edwards' CSS operations in Utah contributed to this gross margin contraction in the reported quarter. However, a more profitable product mix partially offset these negative impacts.
Selling, general and administrative expense increased 25% year over year to $222.2 million, primarily on account of the company's third quarter transcatheter valve sales performance coupled with larger accruals for sales commissions and incentive compensation.
Research and development expenditure spiked 4.2% year over year to $87.6 million. The higher expenses were incurred due to additional investments carried out in aortic and mitral valve programs. Adjusted operating margin in the quarter remained flat at 21.3%.
Cash Position
Edwards Lifesciences exited the quarter with cash, cash equivalents and short-term investments of $1.52 billion a significant increase $0.9 billion at the end of 2013. Long-term debt of the company was $596.4 million compared with $593.1 million at the end of 2013.
Edwards Lifesciences repurchased roughly 4.4 million shares of common stock for $300.7 million as of Sep 30, 2014. Net cash provided by operating activities was $12.2 million, much less than the year-ago number of $132.2 million.
Guidance
Edwards Lifesciences has raised its financial guidance for full year 2014. The company now expects earnings per share in a range of $3.33–$3.39 (up from earlier guidance of $3.24–$3.34). The current Zacks Consensus Estimate for EPS is $3.30, which lies below the company guided range.
Likewise, the company now expects total sales in 2014 to exceed the high end of its previous $2.05–$2.25 billion range. The current Zacks Consensus Estimate for revenues is pegged at $2.24 billion, which lies near the upper limit of the projected range.
Additionally, 2014 free cash flow (excluding special items) is now expected at the high end of the previously guided range of $325–$425 million.
For the fourth quarter of 2014, adjusted EPS is expected to be within 89–95 cents on revenues of $575–$615 million. The Zacks Consensus Estimate for EPS of 97 cents exceeds the guidance while the same for revenues of $590 million lies within the projected range.
Our Take
We are impressed with Edwards Lifesciences' promising third quarter financial results, which comfortably topped both the top and bottom-line estimates. Given that the company has raised its expectation in each product category, it is reasonable to believe that Edwards will likely deliver positive results in each of its segments by the end of 2014.
Edwards' management expects the adverse effect of foreign exchange rates – which primarily affected the declining gross margin in the reported quarter – to mitigate in the near future. Consequently, the company is confident of an improvement in gross margin in the upcoming quarters.
Currently, Edwards Lifesciences is receiving positive feedback at large from its recent launches of Sapien 3 in Europe and Sapien XT in the U.S. Despite competition intensifying in the medical technology innovation market, we believe Edwards' successful new product launches and pipeline updates strongly position the company to drive solid organic sales growth in the coming quarters.
Zacks Rank
Edwards Lifesciences currently carries a Zacks Rank #2 (Buy). Some other well-placed stocks that warrant a look in the medical instruments industry are AngioDynamics Inc. (ANGO), Pacific Biosciences of California, Inc. (PACB) and Alphatec Holdings, Inc. (ATEC). While AngioDynamics and Pacific Biosciences sport a Zacks Rank #1 (Strong Buy), Alphatec holds a Zacks Rank #2.
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