10-QPeriod: Q3 FY2006

Edwards Lifesciences Corp Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 9, 2006For Securities:EW

Summary

Edwards Lifesciences Corporation reported solid financial results for the nine months ended September 30, 2006, with net sales increasing by 3.1% to $771.4 million compared to the same period in 2005. Net income also saw a significant rise to $109.8 million from $40.7 million in the prior year, largely driven by a substantial gain from a patent litigation settlement with Medtronic in January 2006. The company's core business segments, particularly Heart Valve Therapy and Critical Care, showed positive sales growth, with the new 'FloTrac' system and 'PERIMOUNT Magna' valve contributing significantly. While the adoption of SFAS 123R (Share-Based Payment) has increased reported expenses and reduced net income compared to prior accounting methods, the underlying operational performance remains robust. The company's financial position remains strong, supported by healthy operating cash flows and a revolving credit facility. Management is focused on strategic product launches and continued development in key areas like transcatheter valve programs, positioning the company for future growth.

Key Highlights

  • 1Net sales for the nine months ended September 30, 2006, increased by 3.1% to $771.4 million.
  • 2Net income for the nine months ended September 30, 2006, significantly increased to $109.8 million, up from $40.7 million in the prior year.
  • 3A major contributing factor to the net income increase was a $20.2 million gain from the settlement of patent litigation with Medtronic in January 2006.
  • 4The Heart Valve Therapy segment reported a 4.2% increase in net sales ($370.2 million), driven by higher-priced valves like the 'PERIMOUNT Magna'.
  • 5The Critical Care segment saw an 6.7% increase in net sales ($255.6 million), boosted by the new 'FloTrac' system.
  • 6Adoption of SFAS 123R for stock-based compensation resulted in an increase in reported expenses and a reduction in net income compared to previous accounting methods, impacting earnings per share.
  • 7The company continues to invest in R&D, particularly in its transcatheter valve programs, with a pivot towards anticipated product launches in 2007.

Frequently Asked Questions

The primary driver for the significant increase in net income to $109.8 million was a $20.2 million gain recognized in January 2006 from the settlement of patent litigation with Medtronic, Inc. This one-time event boosted the quarter's earnings substantially.

The adoption of SFAS 123R (Share-Based Payment) on January 1, 2006, requires the company to recognize compensation expense for stock-based awards at fair value. This has led to higher reported expenses and a reduction in net income and earnings per share compared to the previous accounting method (APB 25). For the nine months ended September 30, 2006, net income was $10.1 million lower, and diluted EPS was $0.16 lower due to this change.

For Heart Valve Therapy, growth is driven by higher-priced pericardial tissue valves like the 'Carpentier-Edwards PERIMOUNT Magna' valve, and the continuing adoption of new heart valve repair products. In Critical Care, the recently launched 'FloTrac' system and core advanced technology catheter products are key growth contributors. The Vascular segment is seeing growth from 'LifeStent' products.

Edwards Lifesciences is actively pursuing clinical trials for its transcatheter valve programs. The company expects to begin a pivotal trial for its percutaneous aortic valve program in the US in early 2007, and aims for CE mark approval in Europe and Canada by the end of 2007. They also anticipate simultaneous approval for their 'Ascendra' transapical program.