Edwards Lifesciences Corp. EW reported better-than-expected first-quarter 2015 financial numbers with adjusted earnings per share (EPS) of $1.12 beating the Zacks Consensus Estimate by a solid 7.7%.
Adjusted earnings also improved from the year-ago number by an impressive 47.4%, primarily driven by a strong THV sales performance. Moreover, the bottom line comfortably surpassed Edwards’ first-quarter guidance of $1.02–$1.10, owing to strong sales and certain anticipated selling, general and administrative expenses and research and development spending that have been postponed to the second quarter.
Without taking into consideration the one-time items, reported EPS for the first-quarter doubled to $1.12, from the prior-year equivalent of 56 cents.
Edwards Lifesciences reported sales of $590.3 million in the first quarter, up 13% year over year. The top line also outshone the Zacks Consensus Estimate of $584 million and fell in line with the company's guidance range of $570–$610 million.
In the first quarter, underlying sales increased 21.3% (excluding the impact of foreign exchange fluctuations, adjustments for discontinued and acquired products, and the transcatheter heart valves sales return reserve). In the U.S., Edwards’ sales amounted to $283.5 million, up 27.5% year over year. In the international market, sales reached $306.8 million, up 2.3% year over year.
Revenues by Product Groups
In the first quarter, the surgical heart valve therapy product group reported sales of $196.9 million, down 2.8% year over year (up 4.8% on an underlying basis). The quarter's performance was primarily driven by solid growth observed in heart valve units across most regions coupled with slightly higher overall average selling price (ASP) driven by a favorable product mix.
The transcatheter heart valves (THV) product group reported sales of $268.5 million, up 41.9% year over year (up 50.8%) primarily driven by continuing strong procedure growth in all major geographies and sale of new innovative products. Outside the U.S., THV sales grew 38% on an underlying basis, buoyed by strong procedural growth in Europe and the ongoing launch in Japan. In the U.S., THV sales grew 67.3% on an underlying basis.
Critical Care product group sales were $124.9 million, down 4.4% year over year (up 3.1%). Critical Care sales in the international market were boosted by continued adoption in China.
For full year 2015, Edwards Lifesciences expects sales from THV products to lie within the company’s original guidance of $1.0–$1.1 billion. Given the foreign exchange currency drag, management continues to expect sales for Surgical Heart Valves at the lower end of $780–$820 million range, and for Critical Care, at the lower end of the $520–$570 million band.
Margins
In the first quarter, gross margin expanded a massive 490 basis points (bps) to 77%. This increase was driven primarily by a positive impact from foreign exchange. THV product exchange from 2014 and a more profitable product mix in 2015 also contributed to the increase.
Selling, general and administrative expense spiked 2.7% year over year to $202.5 million, primarily driven by personnel-related expenses, which was largely offset by the favorable foreign exchange impact that Edwards experienced on its expenses outside the U.S.
Research and development expenditure rose 0.7% year over year to $86.4 million. The higher expenses were incurred due to continued investments in the company’s transcatheter heart valve programs. Adjusted operating margin in the quarter expanded 1010 bps to 28%.
Cash Position
Edwards Lifesciences exited the quarter with cash, cash equivalents and short-term investments of $1.37 billion, compared to $1.44 billion as of Dec 31, 2014. Long-term debt was $602.7 million compared with $598.1 million at the end of 2014.
Cash flow from operating activities for the first quarter was $73.3 million. Excluding capital spending of $20.8 million, free cash flow was $52.5 million. Edwards Lifesciences repurchased roughly 700,000 shares for $100 million in the quarter. Management now estimates diluted shares outstanding for full year 2015 at the high end of the company’s previous expectation of 109–111 million shares.
Guidance
Edwards Lifesciences has increased the lower end of its full year 2015 earnings guidance. Management now expects adjusted earnings per share (excluding special items) in the range of $4.10–$4.30 (as against the earlier guided $4.00–$4.30). The current Zacks Consensus Estimate of $4.20 lies within the company-guided range.
However, for revenues, the company continues to expect total sales for 2015 in the $2.3–$2.5 billion guidance range. The current Zacks Consensus Estimate for revenues is pegged at $2.39 billion, well within the projected range.
Additionally, management continues to expect 2015 free cash flow (excluding special items) between $375 million and $425 million.
For the second quarter of 2015, at current foreign exchange rates, adjusted EPS is expected to be within $1.00–$1.10 on revenues of $580–$620 million. The Zacks Consensus Estimate for EPS of $1.04 and revenues of $602 million lie within the respective guidance ranges.
Our Take
We are impressed with Edwards Lifesciences' promising first-quarter financial results, which comfortably topped both the top and bottom-line estimates. On the guidance front, while the company has kept its original revenue expectation intact, the upward revision in expected EPS for the full year raises optimism. Incidentally, the raised view takes into account the solid sales performance delivered by transcatheter heart valves in the first quarter.
Interestingly, management had signed foreign exchange hedging contracts, anticipating that a stronger U.S. dollar will significantly affect Edwards’ financial results in 2015. Evidently, Edwards’ gross profit margin was significantly boosted by these contracts. Also, the company’s reported expenses from outside the U.S. were handily reduced by these exchange rates.
In Japan, the company received regulatory approval for its 20 mm and 29 mm valve sizes, and reimbursement is expected to come into effect in the near future. This, in turn, is expected to expand the company’s customer base in Japan. Despite competition intensifying in the medical technology innovation market, we believe Edwards' successful product launches and pipeline updates strongly position it to drive sales growth in the coming quarters.
Zacks Rank
Edwards Lifesciences currently carries a Zacks Rank #3 (Hold). Some other well-ranked medical instruments stocks are Cepheid CPHD, Inogen, Inc. INGN and RTI Surgical Inc. RTIX. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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