Edwards Lifesciences: Earnings Preview

Jul.20.11 | About: Edwards Lifesciences (EW)

Edwards Lifesciences Corporation (NYSE:EW) is scheduled to release its second quarter fiscal 2011 results on Thursday, July 21, 2011 after the market closes.

The company is expected to earn 50 cents during the quarter on $424 million in revenues, according to the Zacks Consensus Estimate. As per Edwards’ guidance (provided along with the first quarter results), adjusted EPS is expected in the range of 49−51 cents.

Previous Quarter Highlights

Edwards Lifesciences reported an adjusted EPS of 51 cents (excluding 2 cents per share of transaction gains) in the first quarter of fiscal 2011, way above the Zacks Consensus Estimate of 42 cents and the year-ago quarter’s earnings of 40 cents. The company reported revenues of $404.5 million, up 18.8% from the year-ago period and higher than the Zacks Consensus Estimate of $385 million.

Heart Valve Therapy remained the strongest segment at Edwards with an annualized growth of 24.5% to $244.9 million. Sales of surgical heart valves grew 9.2% to $172.2 million and transcatheter heart valves (THV) recorded an 85.7% growth to reach $72.7 million. Other segments of the company, Critical Care, Cardiac Surgery Systems and Vascular recorded sales of $120.6 million (annualized growth of 14.8%), $26.1 million (up 5.5%) and $12.9 million (down 7.5%), respectively.

Agreement of Analysts

No revisions in estimates have taken place over the last 30 days. Investor attention is currently focused on the advisory panel meeting of the US Food and Drug Administration (FDA), scheduled for July 20, 2011. The panel will review the pre-market approval application (NYSEARCA:PMA) of Sapien transcatheter heart valve (THV) for patients with severe aortic stenosis and those deemed unfit for surgery. A favorable recommendation from the panel could provide easy access to the final approval from the agency.

The FDA issued briefing documents for the meeting earlier this week. The agency found that the PARTNER trial met the pre-specified criteria for the study and demonstrated superiority of the Sapien THV compared to the Control group. However, patients treated with Sapien THV experienced higher neurological risk. According to the document, adverse neurological events remain an important safety consideration for this device and impact the overall risk-benefit profile of the Sapien THV.

The company is confident of receiving FDA approval and anticipates launching Sapien THV (for the treatment of inoperable patients) in the US during the fourth quarter of 2011. Edwards expects sales of approximately $20–$25 million from Sapien. We await updates from the company regarding this.

The success of the Sapien portfolio in Europe is significant for the company. The competitive landscape is also quite tough with the presence of Medtronic’s (MDT - Analyst Report) CoreValve.

Within the Critical Care segment, Edwards recently received FDA approval for its EV1000 clinical monitoring platform. The device is meant to help physicians make prompt and judicious decisions in the operating room. However, this product had been launched in Europe and Australia in late 2010. Although sales from these products were not significant, they have the potential to drive share gains going forward. Following the recent US approval of EV1000, we expect the company to share its future plans for this segment.

Magnitude of Estimate Revisions

Given a complete dearth of estimate revisions from the analyst community over the past 7 and 30-day periods, the consensus estimate for the current quarter has remained static at 50 cents.

Surprise

Over the past four quarters, Edwards has consistently exceeded estimates with a positive four-quarter average of 9.22%. This indicates that, on an average, the company has exceeded the Zacks Consensus Estimate by this magnitude over the last four quarters.

Our Recommendation

Edwards recorded strong revenue growth during the previous quarter banking on robust performance by its Heart Valve Therapy products. Since investors are mounting their hopes on the development of the Sapien portfolio in the US, which is expected to be approved in 2011, any hiccup in the process will be a major dampener for the stock. Moreover, the company operates in a highly competitive environment with many big players targeting the THV segment.

We currently have a Neutral recommendation on Edwards which is also supported by the Zacks #3 Rank (Hold).