Edwards Lifesciences Corp. ( EW) reported promising second-quarter 2014 results with adjusted earnings per share ( EPS) of 88 cents beating the Zacks Consensus Estimate by 11 cents or a robust 14.3%. Earnings in the reported quarter also exceeded the year-ago number of 84 cents by 4.8%. The earnings improvement came on the back of stronger-than-expected sales growth across all of the company's product lines.
However, without taking into consideration the one-time items, reported EPS for the second quarter came in at $5.09, a significant improvement from the prior-year period's reported EPS of 81 cents. This drastic rise in the reported EPS was primarily due to certain intellectual property litigation income that the company earned related to an agreement with Medtronic Inc. ( MDT) to settle all outstanding patent litigation.
Edwards Lifesciences reported sales of $575.1 million, up 11.2% year over year (excluding the impact of foreign exchange fluctuations and the transcatheter heart valves sales return reserve, underlying growth was 10.5%). The top line also outpaced the Zacks Consensus Estimate of $546 million.
During the quarter, Edwards Lifesciences continued to add new commercial sites and is steadily moving toward its prior-stated goal of adding 45–65 new sites during 2014.
Domestically, Edwards Lifesciences' sales amounted to $242 million, up 0.6% year over year. In the international market, sales were $333.1 million, up 20.4% year over year.
Revenues by Product Groups
In second-quarter 2014, the surgical heart valve therapy product group reported sales of $214 million, up 4.7% year over year (up 4.3% on an underlying basis). The quarter's performance was driven by growth across all regions, partially offset by a small decline in average selling price ( ASP) due primarily to regional mix. However, the company's premium valves drove solid growth in both aortic and mitral units.
The transcatheter heart valves (:THV) product group reported sales of $219.7 million, up 20.6% year over year (up 18.8% on an underlying basis). Outside the U.S., sales grew 45.1% (34.7% on an underlying basis). Revenues in this product group were mainly driven by strong growth in Europe on the back of greater adoption of THV. Moreover, the company also gained market share with its SAPIEN 3, which represented more than 50% of its European THV sales. Growth in this product category was also driven by share gains with the launch of SAPIEN XT in Japan and better-than-expected strong procedural growth in U.S. THV sales.
Critical Care product group sales were $141.4 million, up 8.1% year over year (up 8.5% on an underlying basis). Growth in this category can be primarily attributed to double digit increase in enhanced surgical recovery ( ESR) product sales across most regions, aided by Edwards' most recent launch of the ClearSight non invasive monitoring system.
Edwards Lifesciences continues to expect underlying sales growth in surgical heart valve therapy in the range of 4–7% (on revenues of $810–$850 million), while Critical Care product group is expected to grow at 3–6% ($535–$575 million). However, in the THV product group, Edwards Lifesciences now expects sales of $830–$900 million.
In the second quarter, gross margin contracted 240 basis points (bps) to 73.7%. A negative impact from foreign exchange and the smaller impact of the write-off of SAPIEN valves in the U.S. resulting from the company's SAPIEN XT launch contributed to this gross margin contraction in the reported quarter.
Selling, general and administrative expense increased 15.5% year over year to $215.5 million, primarily due to the transcatheter valve-related expenses incurred in Japan and the U.S. coupled with increased accrual for incentive compensation.
Research and development expenditure increased 10.7% year over year to $89.1 million. The higher expenses were on account of additional investments in multiple heart valve clinical studies. Operating margin in the quarter is pegged at 141.4% a huge jump from the year-ago margin of 23.2%.
Edwards Lifesciences exited the quarter with cash, cash equivalents and short-term investments of $1.48 billion compared with $0.9 billion at the end of 2013. Long-term debt of the company was $598 million compared with $593.1 million at the end of 2013.
Edwards Lifesciences repurchased roughly 4.4 million shares for $300.6 million as of June 30, 2014. In July 2014, Edwards' board of Directors authorized a new share repurchase program under which the company will acquire up to an additional $750 million of its outstanding common shares. This will supplement the approximate $200 million remaining of its current share repurchase program, as of June 30, 2014.
Edwards Lifesciences raised its financial guidance for full year 2014. The company now expects earnings per share in a range of $3.24–$3.34 (up from earlier guidance of around $3.10). The current Zacks Consensus Estimate for EPS is pegged at $3.14, which lies below the company guided range.
The company also raised its full year 2014 total sales and now expects it at the high end of its previous $2.05–$2.25 billion range. The current Zacks Consensus Estimate for revenues is pegged at $2.16 billion, which falls below the high end of the projected range.
Additionally, 2014 free cash flow (excluding special items) is expected to remain within $325–$425 million.
For the third quarter of 2014, adjusted EPS is expected to remain within 66–72 cents on revenues of $530–$570 million. The Zacks Consensus Estimate for EPS of 73 cents lies above the guidance range.
We are encouraged with Edwards Lifesciences' second quarter results, which comfortably topped both the top and bottom line estimates. Through the entire second quarter, the company remained in the headlines owing to positive results for the SAPIEN 3 transcatheter valve; the launch of SAPIEN XT in the U.S.; and more recently, for receiving the FDA approval for its ClearSight non invasive monitoring system. Management expects to gain substantially in its critical care product line aided by increased sales of Edwards' best-in-class monitoring technology, including the newest ClearSight system.
In May 2014, Edwards Lifesciences had agreed to settle all outstanding patent litigation with Medtronic, including cases related to THV. As part of this settlement, Medtronic has made a one-time payment of $750 million to Edwards. In addition, Medtronic will also pay Edwards quarterly license royalty payments through April 2022. We believe this settlement is in the best interests of Edwards Lifesciences and will allow the company to continue its leadership position in the U.S. transcatheter aortic heart valve market.
Edwards Lifesciences currently carries a Zacks Rank #3 (Hold) and Medtronic carries a Zacks Rank #2 (Buy). Some better-placed stocks in the medical instruments industry that warrant a look are RTI Surgical Inc. ( RTIX) and Accuray Incorporated ( ARAY). Both these stocks carry a Zacks Rank #1 (Strong Buy).