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Edwards Lifesciences (EW) Q1 Earnings Top; '16 View Up

Edwards Lifesciences Corp. EW reported first-quarter 2016 adjusted earnings per share (EPS) of 71 cents, beating the Zacks Consensus Estimate by a nickel. Adjusted earnings also improved 24.6% year over year, primarily driven by strong THV sales and solid leverage. However, unfavorable impact of foreign exchange, increased research and development investments and Edwards Lifesciences’ charitable contribution partially hampered this growth. Further, the bottom line results also surpassed Edwards Lifesciences’ guidance of 64–70 cents.




Excluding one-time items, net income in the first quarter improved 15.9% or 17.9% year over year to $143 million or 66 cents per share, respectively.


Sales Details

Edwards Lifesciences’ first-quarter sales improved 18.1% to $697.3 million. The top line also comfortably beat the Zacks Consensus Estimate of $666 million and the company's guidance of $640–$680 million. Revenues were primarily driven by significant growth in transcatheter heart valve (THV) sales and strong performance by its core business, particularly Critical Care.

In the first quarter, underlying sales increased 19.7% (excluding the impact of foreign exchange fluctuations and the transcatheter heart valves sales return reserve). In the U.S., sales improved 32.5% year over year to $353.6 million. In the international market, sales grew 4.9% to $321.7 million.

Sales by Product Groups

In the first quarter, sales from the surgical heart valve therapy product group dropped 0.5% year over year to $195.9 million (up 0.9% on an underlying basis). Globally, sales growth in this group was supported by an increase in surgical heart valve units, primarily driven by greater aortic disease awareness that prompted a larger number of surgical procedures. However, this growth was neutralized by the ongoing exit of non-strategic cannula products.

The transcatheter heart valves (THV) product group sales grew 37% to $367.8 million (up 38.3%), primarily driven by continued strong therapy adoption in the U.S. Outside the U.S., THV sales climbed 13% on an underlying basis, driven by ongoing therapy adoption in Europe and Japan. In the U.S., THV sales rose 64.1% on an underlying basis, driven by better-than-expected procedure growth.

Critical Care product group sales improved 7% to $133.6 million (up 9.1%). Global growth in this product group was driven primarily by strong growth observed in Edwards Lifesciences’ core products and the company’s Enhanced Surgical Recovery Program, which has again registered double-digit underlying sales growth across most regions.

Buoyed by THV’s strong momentum, Edwards Lifesciences now expects sales from THV products in the $1.4–$1.6 billion range for full-year 2016, above the company’s earlier guidance of $1.3–$1.5 billion. However, management continues to expect sales in the range of $780–$820 million for Surgical Heart Valves and $510–$550 million for Critical Care.


In the first quarter, gross margin contracted by 290 basis points (bps) to 74.1%, in line with management’s expectation. This decline was primarily a result of foreign exchange impact from overseas inventories sold and higher spending in global manufacturing operations, partially offset by favorable product mix.

Selling, general and administrative expenses rose 5% year over year to $212.7 million, on account of sales and marketing expenses related to THVs. This was partially offset by the suspension of the Medical Device Excise Tax (MDET), as well as the favorable foreign exchange impact on expenses outside the U.S.

Research and development expenditures rose 18.5% year over year to $102.4 million, owing to continued investments in the company’s transcatheter mitral valve and aortic valve programs. Adjusted operating margin in the quarter expanded 100 bps to 29%.  

Cash Position

Edwards Lifesciences exited the first quarter with cash and cash equivalents and short-term investments of $951.8 million, compared with $1.22 billion at the end of 2015. Long-term debt was $602.2 million compared with $599.9 million in 2015.

Cash flow from operating activities was $107 million in the first quarter. Excluding capital spending of $28 million, free cash flow was $79 million. In Feb 2016, Edwards Lifesciences entered into accelerated share repurchase agreements worth $325 million.


Edwards Lifesciences raised its full-year 2016 financial guidance. Management now expects total sales in the range of $2.70–$3 billion, up from the previously announced guidance range of $2.60–$2.85 billion. The current Zacks Consensus Estimate for revenues of $2.81 billion lies within the guided range.

Likewise, the company projects adjusted earnings per share in the range of $2.67–$2.77 (up from the earlier guidance of $2.57–$2.67), as a result of an upward revision in estimates for sales. The current Zacks Consensus Estimate of $2.67 coincides with the lower end of the company-guided range.

Currently, management expects 2016 free cash flow in the range of $500–$600 million, up from the prior guidance of $475–$525 million.

For the second quarter of 2016, at current foreign exchange rates, adjusted EPS is forecasted within 67–73 cents on revenues of $700–$740 million. The Zacks Consensus Estimate for EPS of 66 cents lie below the EPS guidance range, while the same for revenues of $704 million lie within the company’s guidance range. 

Our Take

Edwards Lifesciences wrapped up the first quarter on a positive note, with results outshining estimates on both the top and bottom-line front. Moreover, the upward revision in both EPS and sales expectations for full-year 2016 raises investor optimism in the stock. Incidentally, the upgraded view takes into account the solid sales performance by THV in the first quarter as well as a favorable foreign exchange scenario.

However, the company’s gross margin performance was disappointing. Going ahead, Edwards Lifesciences expects to boost sales through its investment in manufacturing capacity expansion, which might in turn hurt the gross margin figure. The company also suffered a decline in its European market share on account of tough competition.

Nevertheless, management expects to gain traction in the ever expanding TAVR market, based on strong adoption of its THV therapy.

Zacks Rank & Other Key Picks

Currently, Edwards Lifesciences carries a Zacks Rank #2 (Buy). Other favorably ranked medical stocks are Orthofix International N.V. OFIX, Boston Scientific Corporation BSX and Cardiovascular Systems Inc. CSII.  While Orthofix sports a Zacks Rank #1 (Strong Buy), Boston Scientific and Cardiovascular Systems carry a Zacks Rank #2 (Buy).

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