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Edwards Lags on Earnings & Rev

Zacks Equity Research

Edwards Lifesciences Corporation’s (EW) first-quarter 2013 adjusted earnings per share (EPS) came in at 72 cents, up 35.8% year over year, but lagging the Zacks Consensus Estimate of 76 cents. Adjusted EPS were also below the company-guided range of 74–78 cents. However, including a pre-tax gain of $83.6 million, an initial payment from Medtronic, Inc. (MDT) related to the ongoing U.S. Anderson patent litigation, the company reported a 125.5% year over year increase in EPS to $1.24.

Revenue Details

The company reported sales at $496.7 million, up 8.2% year over year (up 10% at constant exchange rate), but 4.1% below the Zacks Consensus Estimate of $518 million. Domestically, sales were $227.9 million, while internationally sales were $268.8 million. The reported sales figure was also below the previously guided range of $505–$530 million. This was primarily due to sluggish surgical heart valve and critical care segments’ performance, which counterbalanced in the transcatheter heart valves segment’s growth.


In the first-quarter 2013, surgical heart valve therapy product group reported sales of $198.1 million, down 2.7% year over year (down 0.8% at constant currency). The slowdown in the segments sales is attributable to tougher comparison and the effect of a competitor’s introduction in Japan. In spite of a decline in revenues, the company expects the segment to register underlying sales growth in the range of 2%–5% for the full year.

Globally, transcatheter heart valves (:THV) product group reported sales at $169.7 million, up almost 40% year over year. Revenues of this product group were mainly driven by the U.S. launch of the SAPIEN valve. Including the net stocking orders of $6.0 million and clinical sales of $6.7 million, domestic sales stood at $83.0 million. Internationally, THV sales increased 7.6% year over year. For fiscal 2013, the company expects the THV underlying sales to increase in the range of 25% – 30%.

Critical care product group sales were $128.9 million, down 3.9% year over year (down 0.2% at constant currency rate). The downside in sales is attributable to the reduction in distributor inventories in China. The company expects sales growth to be between 2% and 4% on an underlying basis in fiscal 2013.


In first-quarter 2013, gross margin expanded 310 basis points (bps) to 75.4%. The expansion in the gross margin was a result of strong THV product sales and positive impact of foreign exchange.

Selling, general and administrative expense increased 4.5% year over year to $185.2 million (or 37.3% of sales), primarily driven by the U.S. Medical Device Excise Tax and U.S. transcatheter valve expenses.

Research and development expense for the reported quarter surged 16.3% year over year to $79.8 million (or 16.1% of sales). The increase in research and development expense is on account of high investments in various active heart valve clinical studies.

Cash Position 

Edwards exited the reported quarter with cash & cash equivalents and short-term investments of $557.9 million, up 7% on a sequential basis. Long-term debt of the company increased marginally by 1.8% on a sequential basis to $192.7 million. During the quarter, the company repurchased 1.3 million shares for $107.7 million.


Edwards revised its guidance for fiscal 2013 in the range of $2.0− $2.1 billion from previously guided range of $2.1−$$2.2 billion. The company also revised adjusted earnings per share in the range of $3.00−$3.10 from previously guided adjusted earnings per share of $3.21−$3.31.
For second quarter 2013, the company guided the revenue in the range of $500−$550 million while the adjusted earnings per share is projected in the band of 75−79 cents.

Our Take

Edwards exited first-quarter 2013 on a sluggish note. In light of a challenging first quarter in the form of disappointing performance of surgical heart valve and critical care segments’, the company has lowered its guidance for revenue and earnings per share. Inventory problems in China and competitors in Japan remain a challenge for the company. However, the company believes the transcatheter heart valves product group to remain as the revenue driver and is expected to do well in the upcoming quarters. Critical care and surgical heart valve therapy are expected to grow at low-single digit.

Moreover, Edwards is optimistic about its research and development investments on its product line, especially heat valve clinical studies.
Based on the above-mentioned facts, Edwards currently carries a Zacks Rank #3 (Hold). Other medical stocks worth considering are NuVasive, Inc. (NUVA), which carries a Zacks Rank #1 (Strong Buy), and Exactech Inc. (EXAC), which carries a Zacks Rank #2 (Buy).

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