Previous Quarter Highlights
Edwards 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 ahead of the Zacks Consensus Estimate of $424 million.
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.
For fiscal 2011, the company still 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. Meanwhile, Edwards expects to report adjusted EPS of 37−39 cents in the third quarter of fiscal 2011, much lower than the Zacks Consensus Estimate of 44 cents.
For a full coverage on the earnings, read: Edwards Shy of a Penny
Agreement of Analysts
With guidance for the third quarter being lower than the general expectation, the majority of analysts have reduced their estimates for the upcoming quarter. Over the last 7 days, 17 of the 19 analysts covering the stock have lowered their estimates for the third quarter of fiscal 2011, with no revision in the opposite direction. Maintaining the same trend, 13 analysts slashed their estimates with no upward revisions for fiscal year 2011, over the past one week. Another matter of concern is the slowdown in surgical heart valve sales in the US (2% in the reported quarter, lower than 8% in the first quarter) due to slower procedure volume.
Subsequent to favorable recommendation from the Advisory Panel of the US Food and Drug Administration for Sapien THV (for inoperable patients), the company is confident of receiving final approval by October 2011. However, the Panel remained concerned about the higher risk of developing neurological problems, particularly stroke in patients treated with Sapien. Edwards anticipates sales of approximately $20−$25 million during the first quarter of launch and $150−$250 million in the first full year. The company also raised the THV sales projection for fiscal 2011 to $330−$360 million (previous guidance of $300−$340 million).
Edwards stated that the number of targeted centers post-Sapien approval would be 150-250 during the first year, lower than the earlier projection of 200-400. The decision to downsize targeted centers was aimed at treating more patients in each center in order to analyze more effectively the benefits gained from the treatment.
Edwards also recorded robust growth in its Critical Care segment based on strong sales of advanced monitoring products, led by Flotrac systems and pressure monitoring products. Following the recent launch of EV1000 clinical monitoring platform in the US, clinician feedback has been positive and the company expects this device to boost the segment growth over the next couple of years. Moreover, the company is on the verge of completing its in-hospital glucose monitoring program and expects CE Mark approval by the end of 2011 and sales in Europe to commence in 2012.
Magnitude of Estimate Revisions
The magnitude of estimate revisions has been significant for the third quarter, in the past week. Overall, the consensus estimate for the upcoming quarter has gone down by 5 cents to 39 cents while the fourth-quarter estimate gained 2 cents to 62 cents. Estimates for fiscal 2011 witnessed a decline of a penny to $2.05 over the last 7 days.
Edwards recorded strong revenue growth during the reported quarter banking on robust performance of its Heart Valve Therapy products. Apart from Heart Valve Therapy, healthy growth at Critical Care is also encouraging. Moreover, the company’s robust balance sheet enables it to target suitable acquisitions.
However, the company operates in a highly competitive environment with many big players such as Medtronic (NYSE: MDT - News) and Boston Scientific (NYSE: BSX - News) targeting the THV business. Since investors are watching the development of the Sapien portfolio in the US keenly, which is expected to be approved in 2011, any hiccup in the process will be a major dampener for the stock.
We have a ‘Neutral’ recommendation on the stock, which corresponds with the Zacks # 3 Rank (Hold).
About Earnings Estimate Scorecard
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