Rewarding Quarter for Edwards - Analyst Blog

Edwards Lifesciences Corporation (EW) has reported an EPS of 54 cents in the fourth quarter of fiscal 2010 compared to 40 cents in the year-ago period. However, after adjusting for certain items, the EPS came in at 55 cents, beating the Zacks Consensus Estimate by 3 cents and the year-ago quarter's earnings of 42 cents.

For the full year, the EPS was $1.84, higher than both the Zacks Consensus Estimate of $1.82 and $1.52 in the previous year.

Edwards reported revenues of $392.4 million, up 13.2% from the year-ago period and exceeded the Zacks Consensus Estimate of $385 million. For fiscal 2010, revenue increased 9.5% to $1,447 million, and surpassed the Zacks Consensus Estimate of $1,440 million.

Segments

Heart Valve Therapy remained the strongest segment at Edwards with an annualized growth of 20.1% to $226.2 million. Sales of surgical heart valves grew 5% to $160.9 million and transcatheter heart valves (THV) recorded an 87.2% growth to reach $65.3 million.

The launch of Sapien XT valve in Europe primarily led to the growth of THVs while increased adoption of the Magna valve platform and Physio II rings led to the growth of surgical valves.

Other segments of the company, Critical Care, Cardiac Surgery Systems and Vascular recorded sales of $127.5 million (annualized growth of 5.5%), $25.2 million (up 5.4%) and $13.5 million (down 1.5%), respectively. Strong sales of the company's advanced monitoring products, led by FloTrac, continued to drive growth of the Critical Care segment.

Edwards has received conditional IDE approval for Cohort B of the PAERTER II trial, which will study the next generation Sapien XT THV with the NovaFlex delivery system in non-operable patients in the US. The company expects to begin enrollment soon and should be done with by the year-end.

Expenses

During the quarter, Edwards' gross margin improved 40 basis points to 71.1% driven by a favorable currency movement. The launch of THV led to a 7.6% rise in selling, general and administrative (SG&A) expenses to $142.4 million.

However, as a percentage of sales, SG&A expenses declined by 190 basis points to 36.3%. The company continues investing in the THV program, which led to a 15.7% rise in research and development (R&D) expenses to $55.9 million. Moreover, R&D expenses as a percentage of sales increased to 14.2% from 13.9% in the year-ago quarter.

Robust International Growth

Edwards generated 37% of its revenues during the quarter from the domestic market, which recorded a growth of 2.7%. In the international market Europe recorded a  growth of 21.8% to $129.4 million, Japan  grew 16.6% to reach $69.6 million and the highest was recorded by Rest of World (21.9% to $48.9 million).

Balance Sheet

Edwards exited 2010 with cash and cash equivalents of $396.1 million, up 18.6% from $334.1 million at the end of December 2009. Free cash flow remained at $189.6 million and the company repurchased 4.1 million  shares for $200 million during the year.

Guidance

Edwards expects to generate revenue of $1.59-$1.67 billion with an adjusted gross margin of 71%-73%. The company has also taken into account $20-$25 million of sales and initial expenses in relation to the potential launch of Sapien in the US. The Zacks Consensus Estimate of $1.6 billion is within this range.

In addition, the company expects to report adjusted EPS of 40-42 cents in the first quarter of fiscal 2011. The Zacks Consensus Estimate of 44 cents is higher than the company's guidance.

Recommendation

Edwards recorded a strong quarter based on robust performance by its Heart Valve Therapy products. Although the Sapien portfolio of products is not yet approved in the US, the company is quite confident of receiving approval. Data presented in the recent past has been favorable. However, the company faces tough competition from Medtronic (MDT) and St. Jude Medical (STJ).

We are currently Neutral on the stock.

 
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