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EW > SEC Filings for EW > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for EDWARDS LIFESCIENCES CORP

Form 10-Q for EDWARDS LIFESCIENCES CORP


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company (as defined below in "Overview") intends the forward-looking statements contained in this report to be covered by the safe harbor provisions of such Acts. All statements other than statements of historical fact in this report or referred to or incorporated by reference into this report are "forward-looking statements" for purposes of these sections. These statements include, among other things, any predictions of earnings, revenues, expenses or other financial items, plans or expectations with respect to development activities, clinical trials or regulatory approvals, any statements of plans, strategies and objectives of management for future operations, any statements concerning the Company's future operations, financial conditions and prospects, and any statements of assumptions underlying any of the foregoing. These statements can sometimes be identified by the use of the forward-looking words such as "may," "believe," "will," "expect," "project," "estimate," "should," "anticipate," "plan," "goal," "continue," "seek," "pro forma," "forecast," "intend," "guidance," "optimistic," "aspire," "confident," other forms of these words or similar words or expressions or the negative thereof. Investors are cautioned not to unduly rely on such forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause the Company's results or future business, financial condition, results of operations or performance to differ materially from the Company's historical results or experiences or those expressed or implied in any forward-looking statements contained in this report. Investors should carefully review the information contained in, or incorporated by reference into, the Company's annual report on Form 10-K for the year ended December 31, 2011 and subsequent reports on Forms 10-Q and 8-K for a description of certain of these risks and uncertainties. These forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement. If the Company does update or correct one or more of these statements, investors and others should not conclude that the Company will make additional updates or corrections.

Overview

Edwards Lifesciences Corporation ("Edwards Lifesciences" or the "Company") is focused on technologies that treat structural heart disease and critically ill patients. A pioneer in the development and commercialization of heart valve products, Edwards Lifesciences is the world's leading manufacturer of tissue heart valves and repair products used to replace or repair a patient's diseased or defective heart valve. The Company is also a global leader in hemodynamic monitoring systems used to measure a patient's cardiovascular function in the hospital setting.

During the first quarter of 2012, the Company began reporting its products and technologies in three new product groups: Surgical Heart Valve Therapy, which combines surgical heart valves and Cardiac Surgery Systems; Transcatheter Heart Valves; and Critical Care, which includes Vascular. Sales amounts for the prior year periods have been recast to conform with the new product classifications.

Edwards Lifesciences' Surgical Heart Valve Therapy portfolio is comprised primarily of tissue heart valves and heart valve repair products for the surgical repair or replacement of a patient's heart valve. The portfolio also includes a diverse line of products used during minimally invasive surgical procedures, and cannulae, embolic protection devices and other products used during cardiopulmonary bypass. The Company's Transcatheter Heart Valves portfolio includes technologies designed to treat heart valve disease using catheter-based approaches as opposed to open surgical techniques. In the Critical Care portfolio, Edwards Lifesciences' products include pulmonary artery catheters, disposable pressure transducers and advanced monitoring systems. The portfolio also includes a line of balloon catheter-based products, surgical clips and inserts.

The healthcare marketplace continues to be competitive with strong global and local competitors. The Company competes with many companies, ranging from small start-up enterprises to companies


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that are larger and more established than Edwards Lifesciences with access to significant financial resources. Furthermore, rapid product development and technological change characterize the market in which the Company competes. Global demand for healthcare is increasing as the population ages. There is mounting pressure to contain healthcare costs in the face of this increasing demand, which has resulted in pricing and market share pressures. The cardiovascular segment of the medical device industry is dynamic, and technology, cost-of-care considerations, regulatory reform, industry and customer consolidation, and evolving patient needs are expected to continue to drive change.

New Accounting Standards Not Yet Adopted

In July 2012, the Financial Accounting Standards Board issued an amendment to the accounting guidance on intangible assets to permit an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived asset is impaired as a basis for determining whether it is necessary to calculate the fair value of the indefinite-lived asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

Results of Operations

     Net Sales Trends
     (dollars in millions)


                    Three Months                                  Nine Months
                        Ended                                        Ended
                    September 30,                Percent         September 30,                  Percent
                   2012      2011     Change     Change        2012        2011      Change     Change
United States     $ 193.6   $ 150.5    $ 43.1        28.5 %  $   587.2   $   450.9   $ 136.3        30.2 %
International       254.3     262.2      (7.9 )      (3.0 )%     801.9       797.5       4.4         0.6 %

Total net sales   $ 447.9   $ 412.7    $ 35.2         8.5 %  $ 1,389.1   $ 1,248.4   $ 140.7        11.3 %

In the United States, the $43.1 million and $136.3 million increases in net sales for the three and nine months ended September 30, 2012, respectively, were due primarily to:


Transcatheter Heart Valves, which increased net sales by $47.4 million and $139.9 million, respectively, driven primarily by sales of the Edwards SAPIEN transcatheter heart valve which was launched in the United States in the fourth quarter of 2011.

International net sales decreased $7.9 million for the three months ended September 30, 2012 and increased $4.4 million for the nine months ended September 30, 2012, due primarily to:


foreign currency exchange rate fluctuations, which decreased net sales by $19.8 million and $33.5 million, respectively, due primarily to the weakening of the Euro against the United States dollar;

partially offset by:


Transcatheter Heart Valves, which increased net sales by $3.4 million and $28.4 million, respectively, driven primarily by sales of the Edwards SAPIEN XT transcatheter heart valve; and


Surgical Heart Valve Therapy products, which increased net sales by $5.9 million and $12.1 million, respectively, driven primarily by sales of the Carpentier-Edwards PERIMOUNT Magna Aortic Ease valve.


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The impact of foreign currency exchange rate fluctuations on net sales is not necessarily indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs and the Company's hedging activities. For more information see Item 3, "Quantitative and Qualitative Disclosures About Market Risk."

     Net Sales by Product Line
     (dollars in millions)


                  Three Months                                  Nine Months
                      Ended                                        Ended
                  September 30,                Percent         September 30,                  Percent
                 2012      2011     Change     Change        2012        2011      Change     Change
Surgical
Heart Valve
Therapy         $ 185.7   $ 190.4    $ (4.7 )      (2.5 )% $   589.8   $   593.8   $  (4.0 )      (0.7 )%
Transcatheter
Heart Valves      123.8      82.6      41.2        49.9 %      391.1       240.6     150.5        62.5 %
Critical Care     138.4     139.7      (1.3 )      (1.0 )%     408.2       414.0      (5.8 )      (1.4 )%

Total net
sales           $ 447.9   $ 412.7    $ 35.2         8.5 %  $ 1,389.1   $ 1,248.4   $ 140.7        11.3 %

Surgical Heart Valve Therapy

Net sales of Surgical Heart Valve Therapy products decreased by $4.7 million and $4.0 million for the three and nine months ended September 30, 2012, respectively, due primarily to:


foreign currency exchange rate fluctuations, which decreased net sales by $7.6 million and $12.1 million, respectively, due primarily to the weakening of the Euro against the United States dollar;

partially offset by:


surgical heart valve products, which increased net sales by $2.8 million and $4.4 million, respectively, driven by sales of pericardial aortic tissue valves; and


cardiac surgery systems, which increased net sales by $3.7 million for the nine month period, driven by specialty cannula products and minimally invasive surgical products.

In Europe, the Company received CE Mark in February 2012 for EDWARDS INTUITY, its minimally invasive aortic valve surgery system. During the second quarter, the Company received conditional Investigational Device Exemption ("IDE") approval from the United States Food and Drug Administration ("FDA") to initiate the TRANSFORM Trial, which will evaluate the EDWARDS INTUITY valve system, and began enrollment in the third quarter. Also, during the second quarter, the Company received IDE approval to initiate a clinical trial to study its GLX next-generation tissue treatment platform applied to a surgical bovine pericardial heart valve.

During the second quarter, the Company received regulatory approval in the United States and Europe for its ProPlege retrograde cardioplegia device, designed to protect the heart during aortic and mitral valve procedures. The Company initiated a limited launch of ProPlege in Europe in June 2012 and in the United States in July 2012.


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Transcatheter Heart Valves

Net sales of Transcatheter Heart Valves for the three and nine months ended September 30, 2012 increased by $41.2 million and $150.5 million, respectively, due primarily to:


the Edwards SAPIEN transcatheter heart valve, which increased net sales by $45.2 million and $117.5 million, respectively, primarily due to the launch in the United States in the fourth quarter of 2011; and


the Edwards SAPIEN XT transcatheter heart valve, which increased net sales by $5.7 million and $52.2 million, respectively, primarily due to an increase in international sales;

partially offset by:


foreign currency exchange rate fluctuations, which decreased net sales by $7.7 million and $14.4 million, respectively, due primarily to the weakening of the Euro against the United States dollar.

The Company expects that its transcatheter heart valves will continue to be a strong contributor to 2012 sales. In November 2011, the Company received approval from the FDA for the transfemoral delivery of the Edwards SAPIEN transcatheter heart valve for treatment of certain inoperable patients with severe symptomatic aortic stenosis (Cohort B of The PARTNER Trial). In October 2012, the Company received approval from the FDA for the transfemoral and transapical delivery of the Edwards SAPIEN transcatheter heart valve for treatment of patients with severe, symptomatic aortic stenosis deemed at high risk for traditional open-heart surgery (Cohort A of The PARTNER Trial). The Company is continuing to conduct its PARTNER II trial, which is evaluating the Edwards SAPIEN XT transcatheter heart valve. In September 2012, the Company received FDA approval to add to the trial its larger 29 millimeter SAPIEN XT valve with the NovaFlex+ delivery system and the Ascendra+ delivery system for both the transapical and new transaortic approach.

Critical Care

Net sales of Critical Care products for the three and nine months ended September 30, 2012 decreased by $1.3 million and $5.8 million, respectively, due primarily to:


foreign currency exchange rate fluctuations, which decreased net sales by $4.5 million and $7.0 million, respectively, due primarily to the weakening of the Euro against the United States dollar; and


the discontinuation of distributed sales of certain oximetry products and reduced sales of the Company's Central Venous Access products, which decreased net sales by $0.8 million and $7.2 million, respectively;

partially offset by:


FloTrac systems, which increased net sales for the nine month period by $4.3 million; and


pressure monitoring products, which increased net sales by $1.8 million and $1.7 million, respectively.

     Gross Profit

                                        Three Months Ended               Nine Months Ended
                                          September 30,                    September 30,
                                   2012      2011      Change       2012     2011      Change
Gross profit as a percentage of
net sales                            75.1 %   69.6 %    5.5 pts.     73.5 %   70.3 %    3.2 pts.


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The 5.5 and 3.2 percentage point increases in gross profit as a percentage of net sales for the three and nine months ended September 30, 2012, respectively, were driven primarily by:


a 3.8 percentage point and 2.5 percentage point increase due to the impact of foreign currency exchange rate fluctuations, including the outcome of foreign currency hedging contracts; and


a 2.3 percentage point and a 1.6 percentage point increase in the United States due to a more profitable product mix, primarily higher sales of Transcatheter Heart Valves.

Selling, General and Administrative ("SG&A") Expenses

(dollars in millions)

                                    Three Months Ended                 Nine Months Ended
                                      September 30,                      September 30,
                              2012      2011        Change       2012      2011        Change
SG&A expenses                $ 167.8   $ 165.5   $        2.3   $ 527.4   $ 479.0   $       48.4
SG&A expenses as a
percentage of net sales         37.5 %    40.1 %   (2.6) pts.      38.0 %    38.4 %   (0.4) pts.

The increase in SG&A expenses for the three and nine months ended September 30, 2012 was due primarily to higher sales and marketing expenses in the United States, mainly to support the Transcatheter Heart Valve program, including the launch in the United States. The decrease in SG&A expenses as a percentage of net sales for the three months ended September 30, 2012 was due primarily to the impact of foreign currency. The impact of foreign currency reduced expenses by $8.2 million and $14.2 million, respectively, due to the weakening of various currencies against the United States dollar, primarily the Euro.

     Research and Development Expenses
     (dollars in millions)

                                      Three Months Ended                Nine Months Ended
                                        September 30,                     September 30,
                                 2012      2011      Change       2012      2011       Change
Research and development
expenses                         $ 73.8   $ 61.7    $     12.1   $ 216.4   $ 185.6    $     30.8
Research and development
expenses as a percentage of
net sales                          16.5 %   15.0 %    1.5 pts.      15.6 %    14.9 %    0.7 pts.

The increase in research and development expenses for the three and nine months ended September 30, 2012 was due primarily to additional investments in clinical studies and new product development efforts in the Transcatheter Heart Valve program.

Special Charges

Licensing of Intellectual Property

In April 2012, the Company obtained an exclusive license to a suturing device for minimally invasive surgery applications. The intellectual property is under development and there is uncertainty as to whether the product will ultimately be approved. The Company recorded a charge of $2.0 million related to the upfront licensing and royalty fees.

In June 2012, the Company obtained a co-exclusive sublicense to intellectual property related to processing tissue and implanting cardiovascular valves. The intellectual property is under development and there is uncertainty as to whether the product will ultimately be approved. The Company recorded a charge of $5.0 million related to the upfront licensing fee.


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     European Receivables

    In June 2011, the Company recorded a $4.0 million charge to reflect the
increased risk associated with its European receivables.

     Interest Income, net
     (in millions)

                                     Three Months Ended           Nine Months Ended
                                       September 30,                September 30,
                                  2012      2011    Change     2012     2011    Change
          Interest expense        $  0.9   $  1.0    $ (0.1 ) $  3.2   $  2.2    $  1.0
          Interest income           (1.2 )   (1.0 )    (0.2 )   (3.6 )   (2.5 )    (1.1 )

          Interest income, net    $ (0.3 ) $    -    $ (0.3 ) $ (0.4 ) $ (0.3 )  $ (0.1 )

The increase in interest expense for the nine months ended September 30, 2012 resulted primarily from higher average interest rates as compared to the prior year period. The increase in interest income resulted primarily from the recognition of interest income on discounted accounts receivables in southern Europe, partially offset by lower average interest rates.

     Other Expense (Income), net
     (in millions)

                                                        Three Months         Nine Months
                                                            Ended               Ended
                                                        September 30,       September 30,
                                                       2012       2011      2012      2011
Foreign exchange losses, net                           $  0.6    $  3.1    $   1.7   $  1.7
Loss on sale of property                                  0.6         -        0.6        -
Loss (gain) on investments in unconsolidated
affiliates                                                0.3      (0.9 )     (0.7 )   (5.5 )
License agreement                                           -         -       (0.9 )      -
Earn-out payments                                           -         -          -     (1.0 )
Other                                                       -       0.1        0.3     (0.3 )

Other expense (income), net                            $  1.5    $  2.3    $   1.0   $ (5.1 )

The foreign exchange losses relate to the foreign currency fluctuations in the Company's global trade and intercompany receivable and payable balances offset by the gains and losses on derivative instruments intended to hedge those exposures. Foreign exchange fluctuations (primarily related to United States dollar payables in non-United States dollar functional currency locations) resulted in a net loss in 2012.

The loss on sale of property is due to the sale of one of the Company's buildings.

The loss (gain) on investments in unconsolidated affiliates primarily represents the Company's net share of gains and losses in investments accounted for under the equity method, and realized gains and losses on the Company's available-for-sale and cost method investments.

The license agreement gain relates to the collection of a previously fully reserved promissory note under a licensing arrangement.

In September 2009, the Company sold its hemofiltration product line. In connection with the transaction, the Company was entitled to earn-out payments up to $9.0 million based on certain revenue objectives to be achieved by the buyer over the two years following the sale. As of March 31, 2011, all earn-out payments had been earned.


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Provision for Income Taxes

The provision for income taxes consists of provisions for federal, state and foreign income taxes. The Company operates in an international environment with significant operations in various locations outside the United States, which have statutory tax rates lower than the United States tax rate. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates. The Company's effective income tax rates were 25.9% and 24.8% for the three and nine months ended September 30, 2012, respectively, and 10.4% and 19.3% for the three and nine months ended September 30, 2011, respectively. The effective income tax rate for the nine months ended September 30, 2012 included a $2.3 million benefit from the remeasurement of uncertain tax positions. The effective income tax rates for the three and nine months ended September 30, 2011 included a $6.9 and $9.4 million tax benefit, respectively, related to rulings made by the tax authorities in Switzerland.

The federal research credit expired on December 31, 2011 and has not been reinstated as of September 30, 2012. The effective income tax rates for the three and nine months ended September 30, 2012 have been calculated without an assumed benefit for the federal research credit, which if reinstated would have a favorable impact on the Company's full year effective tax rate. In 2011, the federal research credit favorably impacted the full year effective tax rate by approximately 2.4%.

The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for matters it believes are more likely than not to require settlement, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the consolidated condensed financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The uncertain tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues and issuance of new legislation, regulations or case law. Management believes that adequate amounts of tax and related penalty and interest have been provided in income tax expense for any adjustments that may result from these uncertain tax positions.

As of September 30, 2012 and December 31, 2011, the liability for income taxes associated with uncertain tax positions was $94.9 million and $78.0 million, respectively. The Company estimates that these liabilities would be reduced by $9.8 million and $6.8 million, respectively, from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments, state income taxes and timing adjustments. The net amounts of $85.1 million and $71.2 million, respectively, if not required, would favorably affect the Company's effective tax rate.

Liquidity and Capital Resources

The Company's sources of cash liquidity include cash on hand and cash equivalents, short-term investments (bank time deposits with original maturities over three months but less than one year), amounts available under credit facilities and cash from operations. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures and other financial commitments. The Company further believes that it has the financial flexibility to attract long-term capital to fund short-term and long-term growth objectives. However, no assurances can be given that such long-term capital will be available to the Company on favorable terms, or at all.

As of September 30, 2012, cash and cash equivalents and short-term investments held outside the United States were $573.7 million, and have historically been used to fund international operations. The Company believes that cash held in the United States, in addition to amounts available under credit facilities and cash from operations, are sufficient to fund its United States operating requirements. The majority of cash and cash equivalents and short-term investments held outside the


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United States relate to undistributed earnings of certain of the Company's foreign subsidiaries which are considered to be indefinitely reinvested by the Company. Repatriations of cash and cash equivalents and short-term investments held outside the United States are subject to restrictions in certain jurisdictions and may be subject to withholding and other taxes. The potential tax liability related to any repatriation would be dependent on the facts and circumstances that would exist at the time such repatriation is made and the complexities of the tax laws of the United States and the respective foreign jurisdictions.

The Company has a Four-Year Credit Agreement ("the Credit Facility") which matures on July 29, 2015. The Credit Facility provides up to an aggregate of $500.0 million in borrowings in multiple currencies. Borrowings generally bear . . .

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