Edwards Lifesciences (EW) Q3 Earnings in Line, Sales Miss
Edwards Lifesciences Corp. EW reported third-quarter 2016 adjusted earnings per share (EPS) of 68 cents, in line with the Zacks Consensus Estimate. However, adjusted earnings improved 25.9% year over year, primarily driven by strong sales growth.
Unfavorable impact of foreign exchange and increased selling, general and administrative (SG&A) along with research and development (R&D) expenses partially stemmed this growth. Further, the bottom-line results were at the upper end of Edwards Lifesciences’ guidance of 62–68 cents.
Excluding one-time items, net income in the third quarter improved 19.7% or 20.4% year over year to $141.4 million or 65 cents per share, respectively.
Sales Details
Edwards Lifesciences’ third-quarter sales improved 20.1% to $739.4 million. The top line, however, failed to meet the Zacks Consensus Estimate of $748 million. However, it managed to reach the midpoint of the company’s guidance of $720–$760 million. Revenues were primarily driven by considerable growth in transcatheter heart valve (THV) sales as well as strong performance of the Critical Care segment.
In the third quarter, underlying sales increased 18.4% (excluding the impact of foreign exchange fluctuations and the THV sales return reserve). In the U.S., sales improved 28.6% year over year to $417.1 million on an underlying basis. In the international market, underlying sales grew 7.4% to $322.3 million.
EDWARDS LIFESCI Price, Consensus and EPS Surprise
EDWARDS LIFESCI Price, Consensus and EPS Surprise | EDWARDS LIFESCI Quote
Sales by Product Groups
In the third quarter, sales from the surgical heart valve therapy product group edged up 1.6% year over year to $190.9 million (flat on an underlying basis). Globally, mitral valve sales grew slightly, offset by a modest decline in aortic valve sales.
The THV product group’s sales grew 38.5% to $410.1 million (up 37.3% on an underlying basis), primarily on the back of continued strong therapy adoption across all geographies, with notable strength in the U.S. and Japan. THV sales rose 54.8% on an underlying basis in the U.S., driven by continued strong procedure growth in both large and small TAVR programs.
Critical Care product group sales improved 5.2% to $138.4 million (up 2.5%). Global growth in this product group was driven primarily by double-digit growth witnessed in Edwards Lifesciences’ core products and its Enhanced Surgical Recovery Program across most regions.
Propelled by THV’s strong momentum, Edwards Lifesciences reiterated its guidance for sales from THV products in the range of $1.5–$1.7 billion for full-year 2016, reflecting more than 30% growth on an underlying basis. Also, management continues to anticipate underlying sales growth in the range of 0%−2% for Surgical Heart Valves and 5%−7% for Critical Care.
Margins
In the third quarter, gross margin contracted 340 basis points (bps) to 72.8%, in line with management’s expectation. This decline can be attributed to the unfavorable foreign exchange fluctuations that had negatively impacted the company’s gross margins in the first half of 2016. Edwards expect this to continue through the fourth quarter.
SG&A expenses rose 8.3% year over year to $229.6 million, on account of sales and personnel related expenses, primarily in THV, partially offset by the suspension of the medical device excise tax. On the other hand, R&D expenditures grew 11.9% year over year to $113 million, owing to continued investments in the company’s transcatheter mitral valve and aortic valve programs. Adjusted operating margin in the quarter expanded 110 bps to 26.4% as the rise in revenues outweighed the increase in operating expense.
Cash Position
Edwards Lifesciences exited the third quarter with cash and cash equivalents and short-term investments of $1.2 billion, compared with $1.1 billion at the end of second-quarter 2016. Long-term debt was $600.6 million compared with $602.5 million at the end of the prior quarter.
Cash flow from operating activities was $205.9 million in the third quarter. Excluding capital spending of $48 million, free cash flow was $158 million. Year to date, Edwards Lifesciences repurchased 4.6 million shares of its common stock for $415.7 million.
Guidance
Edwards Lifesciences reiterated its full-year 2016 revenue guidance. Management continues to expect total sales at the high end of its previous guidance range of $2.70–$3 billion.
However, the company raised its 2016 adjusted earnings per share guidance to the range of $2.82–$2.92 from the earlier view of $2.78–$2.88, as a result of an upward revision in estimates for sales.
Management reiterated its expectation to deliver 2016 free cash flow in the range of $500–$600 million.
For third-quarter 2016, at current foreign exchange rates, adjusted EPS is projected within 67–77 cents on revenues of $750–$790 million.
Our Take
Edwards Lifesciences ended the third quarter, with its earnings in line with the Zacks Consensus Estimate and revenues lagging the same. While we are concerned about the 2016 sales guidance reiteration by the company, the upward revision in EPS expectations raises investor optimism about the stock. We are currently looking forward to the continued strong global adoption of the company’s SAPIEN 3 platform, which remains on track to generate over $300 million additional in sales during 2016.
However, the company continued to perform poorly on its gross margin front. On the other hand, although Edwards Lifesciences’ higher operating expenses might have made investors anxious, it is a relief to know that the higher expenses were on account of advanced initiatives adopted by the company to improve its overall sales growth.
Nevertheless, management expects to gain traction in the ever expanding TAVR market, based on increasing preference in favor of transcatheter aortic valve replacement as well as compelling clinical evidences, leading to strong adoption of its THV therapy.
Zacks Rank & Key Picks
Edwards Lifesciences currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the medical space include GW Pharmaceuticals plc GWPH, Quidel Corp. QDEL and Baxter International Inc. BAX. GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), while Quidel and Baxter carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
GW Pharmaceuticals surged 70.3% year to date compared to the S&P 500’s 4.85% over the same period. The company’s four-quarter average earnings surprise is 41.7%.
Quidel rallied 23.8% in the past one year, higher than the S&P 500’s 3.74%. Over the next five years, the stock is estimated to record an earnings growth rate of 20%, higher than the industry average of 15.1%.
Baxter’s shares soared 28.86% year to date,. Over the next five years, the stock is expected to see 12.3% earnings growth. It has a trailing four-quarter average earnings surprise of 30.55%.
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