STJ ST. Jude Medical, Inc.

Edwards Lifesciences Corporation (EW) has 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 exceeded the Zacks Consensus Estimate of $385 million.

Robust International Growth

Edwards generated 37% of its revenues during the quarter from the domestic market, which recorded a growth of 7.8% to $149.1 million. In the international market, the highest growth was recorded by Europe (up 29.5% to $139.5 million), followed by Japan (up 23.7% to $69.3 million) and Rest of World (up 21.2% to $46.6 million).

Segments

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.

The robust growth in THV sales was primarily driven by expanding sales of the Sapien XT valve in Europe coupled with $2−$3 million of incremental stocking orders of the new 29 mm Sapien XT valve. Moreover, increased adoption of the Magna family of valves led to the growth of surgical valves. Strong sales of the company’s advanced monitoring products, led by FloTrac, as well as pressure monitoring products continued to drive growth of the Critical Care segment.

Expenses

During the quarter, Edwards’ gross margin improved marginally by 10 basis points to 71.1% driven by improved product mix, offset by investments in the expansion of the company’s heart valve manufacturing capacity. Higher sales and marketing expenses of THV and its anticipated launch in the US led to a 12.2% rise in selling, general and administrative (SG&A) expenses to $150.3 million. However, as a percentage of sales, SG&A expenses declined by 220 basis points to 37.2%.

The company continues investing in the THV program, which led to a 30.5% rise in research and development (R&D) expenses to $59 million. Moreover, R&D expenses as a percentage of sales increased to 14.6% from 13.3% in the year-ago quarter.

Balance Sheet

Edwards exited the quarter with cash and cash equivalents of $433.8 million, up 9.5% from $396.1 million at the end of December 2010. Free cash flow remained at $1 million and the company repurchased 885,000 shares for $75.8 million during the quarter.

Raises Guidance

Following strong first quarter results, Edwards raised its outlook for fiscal 2011. The company expects to generate revenue of $1.66−$1.74 billion (previous guidance of $1.59−$1.67 billion) with a gross margin at the bottom of the 71%-73% range. It also raised its adjusted EPS guidance by 10 cents to $2.01−$2.07. The company’s outlook is higher than the Zacks Consensus Estimate of revenues of $1.6 billion and EPS of $1.95.

Edwards is also confident of generating $190−$200 million of free cash flow during the year. This guidance assumes the US launch of Sapien in October thereby resulting in $20−$25 million of US Sapien sales and $40 million of associated launch expenses during the year.

In addition, the company expects to report adjusted EPS of 49−51 cents in the second quarter of fiscal 2011. The Zacks Consensus Estimate of 48 cents is lower than the company’s guidance.

Recommendation

Edwards recorded a strong quarter based on robust performance by its Heart Valve Therapy products. Although the Sapien portfolio of products is not yet approved in the US, the company is quite confident of receiving approval. Data presented in the recent past has been favorable. However, the company faces tough competition from Medtronic (MDT) and St. Jude Medical (STJ).

We are currently ‘Neutral’ on the stock, which also corresponds to the Zacks #3 Rank (hold) in the short term.

 
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