Edwards Lifesciences Corporation (NYSE:EW) has reported an adjusted EPS of 49 cents in the second quarter of fiscal 2011, a penny below the Zacks Consensus Estimate, although exceeding the year-ago quarter’s adjusted EPS of 46 cents. Revenues increased 18.1% to $431.2 million, also exceeding the Zacks Consensus Estimate of $424 million.
Segments
Heart Valve Therapy remained the strongest segment at Edwards with an annualized growth of 22.5% to reach $263.1 million. Sales of surgical heart valves grew 10% to $177.8 million and transcatheter heart valves (THV) recorded a 60.3% growth to book $85.3 million. The other segments of the company, namely Critical Care, Cardiac Surgery Systems and Vascular recorded sales of $127.7 million (annualized growth of 15.6%), $27.3 million (up 3%) and $13.1 million (down 2.2%), respectively.
The robust growth in THV sales was primarily driven by strong procedure growth and continued adoption of the new 29 mm Sapien XT valve in Europe. Transfemoral sales remained strong and transapical sales, aided by the new 29 mm valve, rose 50% during the quarter. Given strong performance in the first half, Edwards raised its global THV sales guidance for 2011 to $330–$360 million (previous guidance of $300–$340 million), which includes an anticipated $20-$25 million from sales in the US.
Expenses
During the quarter, Edwards’ gross margin contracted 210 basis points to 70.4% primarily due to the effect from foreign exchange. Although the company expects third quarter gross margin at around 70%, the changes in the existing foreign exchange contracts and potential launch of Sapien in the US are estimated to lift margins to 73% by year end.
Higher expenses due to the anticipated launch of Sapien in the US coupled with foreign exchange movement led to a 16.1% rise in selling, general and administrative (SG&A) expenses to $163.2 million. However, as a percentage of sales, SG&A expenses declined by 70 basis points to 37.8%.
The company continues investing in the THV program, which led to a 28.3% rise in research and development (R&D) expenses to $64.9 million. A $2 million in-process R&D charge related to the acquisition of mitral valve technology was also responsible for the increase. Moreover, R&D expenses, as a percentage of sales, increased to 15.1% from 13.8% in the year-ago quarter.
Balance Sheet
Edwards exited the quarter with cash and cash equivalents of $468.2 million, up 18.2% from $396.1 million at the end of December 2010. Free cash flow remained at $42.1 million and the company repurchased 970,000 shares for $83.2 million during the quarter.
Reaffirms Guidance
Edwards reiterated its outlook for fiscal 2011. The company expects to generate revenue of $1.66−$1.74 billion with a gross margin at the low end of the 71%–73% range. Adjusted EPS should be around $2.01–$2.07. Edwards is also confident of generating $190−$200 million of free cash flow during the year.
Meanwhile, the company expects to report adjusted EPS of 37−39 cents in the third quarter of fiscal 2011, lower than the current Zacks Consensus Estimate of 44 cents.
Recommendation
Edwards’ strong quarter was hinged on a robust performance of its Heart Valve Therapy products. Although the Sapien portfolio of products has not yet been approved in the US, the company is quite confident of the regulatory nod following the recent recommendation from the advisory panel. However, leading medical devices player, Medtronic (NYSE:MDT) is also developing its CoreValve in the US (already approved in Europe) targeting this patient population.
| Analysts' Targets | |||||||||||||||||
| Morgan Keegan | $97 | ||||||||||||||||
| Mkt Perform | |||||||||||||||||
| Friday, June 17, 2011 | |||||||||||||||||
| RBC Capital Markets | $105 | ||||||||||||||||
| Outperform | |||||||||||||||||
| Tuesday, May 31, 2011 | |||||||||||||||||
| Barclays Capital | $95 | ||||||||||||||||
| Overweight | |||||||||||||||||
| Monday, March 28, 2011 | |||||||||||||||||
| Stifel Nicolaus | $68 | ||||||||||||||||
| Hold | |||||||||||||||||
| Thursday, February 03, 2011 | |||||||||||||||||
| Deutsche Bank Securities | $80 | ||||||||||||||||
| Hold | |||||||||||||||||
Tuesday, January 18, 2011
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