Edwards Lifesciences Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Financial statements are unaudited. Amounts are in millions except per-share data. Share and per-share amounts reflect the May 2010 two-for-one stock split unless stated otherwise.
Business context and results
Edwards Lifesciences develops cardiovascular products, reported across Heart Valve Therapy, Critical Care, Cardiac Surgery Systems, and Vascular. Growth was led by Heart Valve Therapy, including the SAPIEN transcatheter heart valve. International sales grew substantially faster than U.S. sales.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $365.2 | $335.5 | $705.7 | $649.0 |
| Gross profit | $264.8 | $233.6 | $506.7 | $450.1 |
| Gross margin | 72.5% | 69.6% | 71.8% | 69.4% |
| Operating expenses: SG&A | $140.6 | $128.5 | $274.6 | $250.4 |
| Operating expenses: R&D | $50.6 | $42.6 | $95.8 | $82.5 |
| Net income | $57.5 | $47.5 | $105.2 | $108.0 |
| Diluted EPS | $0.48 | $0.41 | $0.88 | $0.92 |
- Q2 sales rose 8.9%; six-month sales rose 8.7%. Q2 U.S. sales increased 0.8%, while international sales increased 14.8%.
- By product line, Q2 Heart Valve Therapy sales rose 18.0% to $214.8; Critical Care declined 2.2% to $110.5; Cardiac Surgery Systems rose 10.0% to $26.5; and Vascular declined 17.8% to $13.4.
- Q2 net income increased 21.1%, aided in part by a $9.8 tax benefit from partial settlement of a prior-year tax audit. Six-month net income fell 2.6%; the 2009 comparison included a $29.3 net special gain, chiefly related to the LifeStent milestone payment.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $61.0, versus $27.9 in 2009. Investing used $23.2, including $23.7 of capital expenditures; financing used $20.7.
- Cash and cash equivalents were $320.3 at June 30, 2010, down from $334.1 at December 31, 2009. The filing attributes a $30.9 adverse cash-flow effect to currency exchange-rate changes.
- Total assets were $1,641.9 and stockholders’ equity was $1,117.8. Long-term debt was $177.5, compared with $90.3 at year-end 2009. The debt was outstanding under a $500.0 revolving credit agreement maturing September 2011; the company reported compliance with its covenants.
- The company repurchased 4.1 million shares for $199.3 in the first half and had $398.7 of authorization remaining under its $500.0 February 2010 program. Management stated that cash, operating cash flow, and credit availability were sufficient for current needs.
Material changes, outlook, and risks
- Heart Valve Therapy growth reflected SAPIEN sales, which increased $28.5 in Q2 and $41.2 in the first half. Management expected SAPIEN to remain a significant 2010 sales contributor and anticipated further growth from newer valve products.
- Management expected a broader U.S. and European introduction of the Magna Mitral Ease valve in Q3 2010; anticipated possible FDA approval of the PARTNER II SAPIEN XT trial in Q3; and expected to submit PARTNER Cohort B for FDA approval in Q4 2010 and Cohort A in mid-2011. These are expectations, not assured outcomes.
- The company discontinued the MONARC transcatheter mitral valve program after slow EVOLUTION II trial enrollment and early analysis showed no significant efficacy advantage. It recorded an $8.3 charge, including a $7.6 intangible-asset impairment and $0.7 of continuing contractual trial costs.
- Hemofiltration sales fell following the September 2009 divestiture. The buyer-related earn-out contributed $3.0 of other income in the first half; up to $9.0 in total was potentially payable based on revenue objectives.
- A U.S. jury found CoreValve willfully infringed an Edwards patent and awarded $73.9 in damages. The amount could be increased by the judge up to three times, and Edwards was seeking a permanent injunction. Related patent disputes and other claims remain subject to uncertainty; management said pending lawsuits were not expected to materially affect financial position, results, or liquidity, but acknowledged charges could exceed reserves.
- Healthcare reform enacted in March 2010 provides for a 2.3% U.S. medical-device excise tax beginning in 2013. The company warned that reform or future legislation could affect procedure volumes, reimbursement, demand, pricing, and expenses. Other noted risks include currency and investment-value fluctuations, competition, regulatory approvals, and clinical-trial outcomes.
- No formal full-year revenue or earnings guidance is provided in the supplied filing text. Management’s product and trial expectations are described above. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether SAPIEN and other Heart Valve Therapy growth can continue, and how much reported growth reflects currency, product mix, or divested-product comparisons.
- Progress, regulatory decisions, and commercial uptake for PARTNER, SAPIEN XT, Magna Mitral Ease, and other clinical programs.
- Final outcome and collectability of the $73.9 CoreValve jury award, any potential enhancement or injunction, and remaining patent litigation.
- Cash conversion and working-capital trends, including receivables and inventory growth; debt refinancing and covenant terms; and the pace of share repurchases.
- Effects of the audit-settlement tax benefit on comparisons, uncertain tax positions, and the future impact of the 2013 medical-device excise tax.