Edwards Lifesciences Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with the three months ended March 31, 2019, unless noted. Edwards develops and sells products for structural heart disease and critical care, including TAVR, transcatheter mitral and tricuspid therapies, surgical structural heart products, and critical care products.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,128.7 million | $993.0 million | +13.7% |
| Gross profit / gross margin | $863.6 million / 76.5% | $761.2 million / 76.6% | Margin down about 0.1 percentage point |
| Operating income / operating margin | $358.1 million / 31.7% | $274.2 million / 27.6% | Operating income +30.6% |
| Net income | $310.6 million | $249.7 million | +24.4% |
| Diluted EPS | $1.47 | $1.18 | +24.6% |
| Operating cash flow | $207.0 million | $1.5 million | +$205.5 million |
- Sales drivers: TAVR sales rose 24.2% to $742.2 million, primarily on higher SAPIEN 3 Ultra and SAPIEN 3 sales. TMTT sales were $10.5 million versus $4.3 million. Surgical Structural Heart sales fell 9.9% to $193.4 million; Critical Care sales increased 3.6% to $182.6 million.
- Geography: U.S. sales increased 18.6% to $667.4 million; international sales increased 7.2% to $461.3 million.
- Expenses and taxes: SG&A was $307.8 million, R&D was $187.4 million (16.6% of sales), and intellectual property litigation expense was $12.5 million. The effective tax rate was 14.8%, versus 10.2% a year earlier.
- Cash and liquidity: Cash and cash equivalents were $662.9 million at quarter-end, down from $1,179.1 million at year-end 2019. Short-term investments were $368.2 million; current assets were $2,507.9 million and current liabilities $746.9 million. Management said available liquidity and operating cash flow were sufficient for requirements over the next 12 months.
- Debt: Long-term debt carrying value was $594.6 million, primarily the 4.300% senior notes due in 2028. No borrowings were outstanding under the $750 million revolving credit agreement.
- Capital allocation and investment: The company repurchased approximately 3.0 million shares for about $614.7 million during the quarter, leaving $625 million of authorization. Capital expenditures were $82.2 million.
Material changes and management commentary
- Reported sales growth reflected strong TAVR performance through early March. In the final weeks of the quarter, COVID-19-related disruption significantly reduced TAVR and surgical procedure volumes. Management said procedure patterns varied substantially by geography and hospital.
- Gross margin was affected by foreign exchange and hedging, higher inventory reserves, and European Medical Device Regulation costs; improved U.S. TAVR mix partly offset those pressures.
- Operating cash flow improved from the prior-year quarter, in part because Q1 2019 included a $180 million litigation settlement payment, and also due to improved operating performance. Higher working-capital needs partly offset the increase.
- The Q1 2019 comparison included a $24 million charge for acquired early-stage transcatheter intellectual property; there was no corresponding charge in Q1 2020.
Outlook, risks, and contingencies
- COVID-19: Management stated that the pandemic had adversely affected and was likely to further affect the company, its customers, suppliers, and partners. The duration and financial impact were highly uncertain; the filing provides no numerical full-year guidance. Risks include weaker or volatile product demand, operational and supply disruption, and delays to clinical trials, regulatory approvals, and product development.
- The company temporarily paused new enrollment in active pivotal TMTT trials and paused SAPIEN 3 Ultra proctoring at centers not already trained. It reported continued ability to supply products at the time of filing, while monitoring inventory, components, and logistics.
- COVID-19 reduced demand for enhanced surgical recovery products and delayed some U.S. HemoSphere orders as hospitals restricted capital spending. Edwards reported increased European demand for pressure-monitoring products.
- Patent litigation: Abbott litigation concerning Edwards’ PASCAL system is pending in several jurisdictions. A U.K. court ruled for Abbott in March 2020, and Edwards said it would appeal; a Swiss preliminary injunction concerning one patent remained in place. The company could not estimate the amount or range of potential losses. U.S. and German proceedings also remained pending, with dates subject to change.
- Other items to monitor include uncertain tax positions (gross liability of $211.9 million at March 31, 2020), contingent consideration liabilities of $170.3 million, and possible investment losses. The company reported no material change to its other risk factors and no material change in significant contractual obligations.
Important facts for investors to verify
- Subsequent quarterly disclosures on the depth and duration of COVID-19’s impact on procedures, demand, supply, and full-year results; this filing provides no numerical guidance.
- Whether TAVR and surgical procedure volumes recovered, and how that affected sales mix and gross margin.
- Developments and potential financial exposure in the PASCAL patent disputes, particularly the U.K. appeal and Swiss injunction.
- Cash and investment balances after the substantial Q1 share repurchases, and the pace of future buybacks and capital spending.
- Progress in paused TMTT clinical trials and the timing of regulatory or commercial milestones.