EW Edwards Lifesciences Corp

Edwards Lifesciences Corporation’s (EW) fourth-quarter 2013 adjusted earnings per share (EPS) rose 1.1% year over year to 91 cents, reflecting a beat of 9.6% over the Zacks Consensus Estimate. Fiscal 2013 adjusted earnings of $3.13 per share showed a robust 16.4% growth from the year-ago figure and also remained well ahead of the Zacks Consensus Estimate of $3.05. Apart from healthy sales growth, EPS growth was boosted by a reduced share count.

However, without taking into consideration the one-time items, reported EPS for the fourth quarter came in at 68 cents, up 11.7% year over year. Full year reported EPS surged 38.7% from the prior year to reach $3.44.

Revenue Details

Edwards reported sales of $536 million, up 5.1% year over year (considering foreign exchange fluctuations and the transcatheter heart valves (THV) sales return reserve, underlying growth was 10.3%). The top line was on par with the Zacks Consensus Estimate. Sales for full year 2013 came in at $2.05 billion, registering an increase of 7.7% (or up 10.8% on an underlying basis). Revenues were, once again, in line with the Zacks Consensus Estimate. The figure also remained within the company provided guidance range.

During 2013, Edwards launched many new products, demonstrated strong clinical data and made significant progress on several key developments indicating sustainable future growth at the company.

Domestically, sales amounted to $239.1 million, up 9.6% year over year (underlying growth rate) while internationally, sales were $296.9 million, up 10.9% year over year. In the overseas market, sales in Europe improved 13.9% to $162.3 million while revenues from rest of the world were up 10.6% at CER to $67.0 million. Sales in Japan increased 6.1% to $67.6 million.

Segments

In fourth-quarter 2013, surgical heart valve therapy product group reported sales of $207.0 million, up 4.7% year over year (up 7.6% on an underlying basis). The quarter’s performance reflects solid contributions from the U.S. and Europe. Also, strong sales of Intuity valve in Europe contributed to growth.

Globally, THV product group reported sales of $183.9 million, up 14.2% year over year (up 21.6% on an underlying basis). Revenues of this product group were mainly driven by healthy growth in Europeon the back of greater adoption of THV and the expected contribution from the Sapien valve in the U.S.

Critical care product group sales were $145.1 million, down 4.4% year over year (up 1.8% on an underlying basis). Strength in most of the regions globally was tempered by the continued reduction of distributor inventories in China and the ongoing exit of the Access product line.

Margins

In the fourth quarter, gross margin contracted 250 basis points (bps) to 72.9%. Despite a more profitable product mix, margin contraction was primarily due to reduced benefit from foreign exchange hedges, the impact from the sales return reserve and higher manufacturing costs for new THV product launches in the U.S. and Europe.

Selling, general and administrative expense increased 7.1% year over year to $190.5 million (or 35.5% of sales), primarily due to the U.S. Medical Device Excise Tax and transcatheter valve launch-related expenses in Japan, partially offset by foreign exchange.

Research and development expenditure increased 4.9% year over year to $78.6 million or 14.7% of sale. The higher expenses were on account of additional investments in multiple heart valve clinical studies. With higher operating expenses, adjusted operating margin contracted 319 bps to 22.6% in the quarter.

Cash Position

Edwards exited the fiscal with cash, cash equivalents and short-term investments of $936.9 million compared with $521.4 million at the end of 2012. Long-term debt of the company was $593.1 million compared with $189.3 million at the end of 2012.

Operating cash flow was $111.3 million while capital spending came in at $20.1 million. Consequently, free cash flow was $91.2 million in the fourth quarter. Edwards repurchased almost 6.8 million shares for $496.9 million during the quarter. Edwards’ consistent share buyback activity reduced outstanding shares by 5.8% from the year-ago quarter, leading to a positive impact on the bottom line.

Guidance

Following the fourth quarter, Edwards maintained its guidance for 2014 which it first announced at the annual investor conference last December. The company continues to expect adjusted EPS for 2014 in a wide range around $3.00 on revenues of $2.05 billion to $2.25 billion (unchanged).

The current Zacks Consensus estimate for EPS and revenues of $3.00 and $2.14 billion respectively remain in line with the company’s projection. Moreover, 2014 free cash flow (excluding special items) is still expected to remain within $325 million and $425 million. Also full year diluted shares outstanding should remain within 107 million and 109 million.

For the first quarter of 2014, adjusted EPS is expected to remain within 61 cents to 71 cents on revenues of $500 million to $550 million. The Zacks Consensus Estimate for EPS of 72 cents exceeds the guidance range while revenues of $528 million fall within the range.

Our Take

Edwards exited the year 2013 with several positive takeaways including the recent European CE mark approval for its latest transcatheter aortic valve, Sapien 3; reimbursement for Sapien XT in Japan (effective Oct 1, 2013); regulatory approval for Sapien in Australia and Sapien XT in Canada. Edwards is also optimistic about the expected U.S. approval of the company’s next generation Sapien XT valve in the first half of 2014.

Nonetheless, we are worried about the earlier-than-expected FDA approval of its peer Medtronic Inc.’s (MDT) less-invasive heart valve, CoreValve. This approval will enable the launch of CoreValve in the U.S. market – the only U.S. rival of Edwards’ Sapien. CoreValve – whose market price is expected to remain on par with that of Sapien – should bring down Edwards' revenue growth rate significantly by weakening its dominance in the U.S market.

Edwards currently carries a Zacks Rank #5 (Strong Sell). Some of the better-placed medical devices stocks such as Covidien plc (COV) and Stryker Corporation (SYK), which carry a Zacks Rank #2 (Buy), are worth considering.

 
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