Edwards Lifesciences Corporation (EW) reported fourth-quarter 2012 earnings per share of 77 cents, up 45.3% year over year. However, excluding the impact of one-time items, adjusted earnings per share came in at 90 cents. This represents a beat of 16.9% over the Zacks Consensus Estimate. Moreover, the adjusted EPS exceeded the company’s guidance for the quarter and sailed past the year-ago earnings by 45.2%. Growth on the sales front, margin expansion and a lower tax rate helped Edwards exceed its EPS projection.
Adjusted EPS in 2012 was $2.69, a beat of 5.1% over the corresponding Zacks Consensus Estimate. Moreover, 2012 adjusted EPS exceeded the prior-year figure by 33.2% as well as the company’s expectation
Revenues
Net sales surged 18.7% year over year (sales growth at constant exchange rate or CER was 21.2%) to $510.5 million in the quarter, which was within the company’s guidance range. However, total sales in the fourth quarter surpassed the Zacks Consensus Estimate of $499 million. Growth was led by commercialization of the Sapien technology in the domestic market and robust performance across all operating platforms. Nonetheless, unfavorable currency movement had dilutive impact of $9 million on revenues in the quarter.
Full year 2012 sales increased 13.2% (16.2% at CER) to $1,899.6 million, edging past the corresponding Zacks Consensus Estimate of $1,888 million. However, the annual sales came in at the bottom of Edwards’ outlook, in line with the company’s recent expectation.
Sales from the domestic market (contributing 44.1% to total sales) were $224.9 million, up 45.5% year over year while international sales (contributing 55.9% to total sales) improved 3.6% to $285.6 million. In the international market, barring Europe where sales dropped 0.8% year over year to $142.6 million, sales from both Japan and Rest of World increased 3% to $79.2 million and 16% to $63.2 million, respectively.
Segments
Surgical Heart Valve Therapy group recorded sales of $197.7 million, up 5.5% (at CER) on a year-over-year basis. Surgical Heart Valve Therapy included cardiac surgery system sales of $29.1 million, up 8.4% at CER. Sales of surgical heart valves of $168.6 million grew 5% at CER. While sales growth in the domestic market was 3.5%, revenues in the overseas market grew 7.2% at CER. The robust growth in the international market reflects the increasing adoption of Magna Mitral Ease Valve in Japan and double-digit growth in emerging markets. Although pricing remained stable, worldwide Average Selling Price (ASP) decreased marginally due to accelerated growth in emerging markets.
Global Transcatheter Heart Valves (THV) sales were $161 million, up 77.2% year over year. After a dismal performance in the third quarter, Edwards’ THV sales improved (46% on a sequential basis) on account of the ongoing launch of Sapien valve in the U.S. THV sales in the U.S. came in at $80.7 million, with clinical sales of $7 million (up from $5 million in the third quarter) and net stocking sales of $16 million (up from $8 million in the third quarter). Meanwhile, revenues in the international market grew 10% at CER.
Revenues from Critical Care product group were $151.8 million, up 6.1% year over year. Vascular sales increased 6.6% at CER to $13.8 million while Critical Care sales improved 6% at CER to $138 million in the quarter. The year-over-year growth was led by advanced monitoring offerings in the domestic market and Japan.
Margins
Edwards reported gross margin of 75.4% in the reported quarter, up 320 basis points (bps). The positive impact from foreign exchange and favorable product mix led to gross margin expansion.
Higher expenses associated with the launch of Sapien in the U.S. led to 8.9% rise in selling, general and administrative (SG&A) expenses to $177.9 million. However, lower incentive expenditure and disciplined spending ensured that as a percentage of sales, SG&A expenses dropped 320 bps to 34.8%.
The company’s ongoing investments in various clinical trials and pipeline development led to a 23.4% rise in research and development (R&D) expenses to $74.9 million. R&D expenses, as a percentage of sales, increased 60 bps to 14.7%. Despite a rise in operating expenses, adjusted operating margin improved 570 bps to 25.8% in the quarter.
Balance Sheet
Edwards exited 2012 with cash and cash equivalents of $310.9 million, up 81.6% year over year. The company’s long-term debt was $189.3 million, up 25.9% year over year. Edwards repurchased 4 million shares for $353.2 million in 2012.
Guidance
Edwards reiterated its guidance for 2013. The company envisages annual sales in the range of $2.1-$2.2 billion and adjusted earnings per share in the band of $3.21 and $3.31 for 2013.
Further, Edwards expects total sales in the range of $505-$530 million for the first quarter. The company’s forecast for adjusted earnings per share for the upcoming quarter lies in the range of 74-78 cents.
Our Take
Edwards exited 2012 on a positive note. After a challenging third quarter, the fourth quarter results surpassed expectations and helped to boost investor sentiments. While the contagion of economic problems affected the company’s performance in Southern Europe, the financial results from Japan and emerging markets are encouraging. Product approvals and penetration in lucrative markets should bolster Edwards’ top-line going forward.
In light of these facts, the estimate revision trend for 2013 reflects a bullish sentiment for Edwards. Accordingly, the stock carries a Zacks Rank #2 (Buy). Other medical stocks such as Cyberonics (CYBX), ResMed (RMD) and Smith & Nephew (SNN), carrying a Zacks Rank #1 (Strong Buy), are expected to do well and warrant a look.
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