Edwards Lifesciences Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Edwards develops and sells products for transcatheter and surgical heart valve therapy and critical care.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $841.8 | $759.3 | $1,725.3 | $1,456.6 |
| Gross profit | $630.7 | $556.8 | $1,298.6 | $1,073.8 |
| Gross margin | 74.9% | 73.3% | 75.3% | 73.7% |
| Income before taxes | $205.6 | $169.0 | $499.2 | $352.3 |
| Net income | $186.1 | $126.6 | $416.3 | $269.6 |
| Diluted EPS | $0.86 | $0.58 | $1.93 | $1.24 |
- Q2 sales increased 10.9% year over year; first-half sales rose 18.4%. Q2 net income increased 47.0%, and first-half net income increased 54.4%.
- Transcatheter Heart Valve Therapy (THVT) sales were $487.5 million in Q2, up 16.5%, and $1,026.7 million for the first half, up 30.6%. Surgical Heart Valve Therapy and Critical Care first-half sales grew 3.0% and 6.0%, respectively.
- Management attributed sales growth primarily to SAPIEN 3, including U.S. growth and international growth in Japan and Europe. German customers bought additional inventory in Q1 amid potential supply interruption concerns and consumed some, but not all, of it in Q2.
- Gross-margin improvement reflected product mix, particularly higher THVT sales. Q2 operating expenses included a $31.2 million impairment charge; 2016 included a $34.5 million in-process research and development charge. Q2 effective tax rate was 9.5%, versus 25.1% a year earlier; the new stock-compensation accounting standard provided a substantial tax benefit.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $326.0 million, compared with $297.4 million in 2016. Investing cash outflow was $487.0 million and financing cash outflow was $264.5 million. Cash and cash equivalents declined by $421.9 million to $508.2 million.
- At June 30, cash and cash equivalents were $508.2 million and short-term investments were $623.6 million; long-term investments were $551.5 million. Long-term debt carried at $1,016.8 million. The company had $418.4 million outstanding under its $750 million credit agreement and $600 million of 2.875% senior notes due October 2018.
- Management said available cash, investments, credit facilities and operating cash flow were sufficient for requirements over the next 12 months. It reported $129.1 million of cash and short-term investments in the U.S. and approximately $1.0 billion outside the U.S.; offshore funds may face restrictions and taxes if repatriated.
- First-half treasury-stock purchases were $511.2 million in cash flow reporting; management reported 5.3 million shares repurchased at an aggregate cost of $501.0 million during 2017, with $530.1 million remaining under repurchase authorization at June 30.
Material developments, outlook and risks
- Valtech Cardio acquisition closed January 23, 2017. Consideration included approximately 2.8 million Edwards shares and $86.1 million cash; the preliminary purchase-price allocation recorded $316.4 million of goodwill and $87.9 million of IPR&D. Additional milestone payments of up to $350 million may be payable over 10 years. A separate option relates to a spun-off mitral valve program and could cost approximately $200 million plus a possible $50 million regulatory milestone.
- In June, the FDA approved SAPIEN 3 for aortic and mitral valve-in-valve procedures in high-risk patients. The filing also reports April FDA clearance of the HemoSphere monitoring platform and July FDA approval of the INSPIRIS RESILIA aortic valve.
- No specific numerical revenue or earnings guidance is provided in the filing. Management highlighted continued investment in product development; R&D was 15.2% of first-half sales.
- Patent disputes with Boston Scientific pose a material risk to SAPIEN 3 sales. German and U.K. courts found infringement of certain patents and indicated injunctions could be enforced, subject to conditions; appeals are pending and the U.K. injunction was stayed pending appeal. The company states the litigation outcomes are uncertain and potential effects cannot be estimated.
- Transfer-pricing negotiations with U.S. and Swiss tax authorities remain significant and uncertain; certain agreed transactions are expected to require payments within 12 months. The company also reported that a separate IRS matter entered Fast-Track Appeals in July 2017.
- The $31.2 million impairment followed unfavorable clinical data and trial results for an investee, which did not support continuing its product-development effort. The fair value of Valtech contingent consideration is Level 3 and depends on milestone probabilities and other unobservable assumptions.
Important facts for investors to verify
- Whether SAPIEN 3 inventory normalization in Germany and the ongoing patent litigation affect subsequent-period sales, access or market share.
- Progress and commercial potential of Valtech programs, the final purchase-price allocation, and the timing and likelihood of contingent milestone payments.
- Cash availability by geography, debt maturities and financing needs, including the October 2018 senior-note maturity and potential tax costs of repatriating offshore funds.
- Resolution of transfer-pricing and other tax disputes, potential payments, and whether the unusually low 2017 effective tax rate is sustainable.