Earnings Pain Intensifies in the Medical-Device Industry

Earnings season hasn't been kind to medical-device makers so far. Leading firms in the industry produced mixed results last week, with cardiovascular products in particular crimping sales across the market, despite rising net income at numerous companies. Earnings struck again Wednesday, with net income falling at both orthopedics player Stryker (NYSE: SYK  ) and heart-product maker Edwards Lifesciences (NYSE: EW  ) .

While Stryker's earnings weren't bad, Edwards took a beating because of its disappointing outlook -- and its stock paid the price, falling cataclysmically on Wednesday. Let's look at what you need to know from this latest round of earnings reports.

Stryker won't strike out
Starting off with Stryker, the company reported earnings on Wednesday that fell 13% year over year for the first quarter. That loss was heavily affected by one-time items, however, particularly regarding recalls over the company's hip implants, among other items. Adjusted earnings actually rose slightly to $1.03 per share, edging out analyst expectations of $1.01 per share. Revenue also rose at Stryker, gaining slightly over 1% to $2.19 billion but still missing analyst projections by a hair.

Stryker's Rejuvenate and ABGIII hip implant recalls last year hit earnings hard, accounting for much of the annualized loss. Hip implant recalls have been the bane of the orthopedics industry recently: Johnson & Johnson (NYSE: JNJ  ) , another strong player in the orthopedics market, has suffered through a public-relations mess over its ASR hip implants, and while the company won a recent lawsuit over the fiasco, it's still facing complaints from thousands of plaintiffs.

Despite its recall woes, however, Stryker's reconstructive business still posted 2.8% growth at a constant currency, and the firm's neurotechnology and spine unit posted even stronger results. These two businesses should see solid growth in the long term, with aging and obesity trends on the orthopedics industry's side in particular.

All in all, while earnings took a major blow from one-time items, Stryker's results were a bright spot in what's been a down season for the industry so far. The company's revenue growth, despite pricing pressures and the impact of its recalls, bodes well for the future.

The same can't be said for another company that reported results on Wednesday -- Edwards Lifesciences.

Edwards takes a dive
Edwards started off on the wrong foot by falling short of analyst expectations. The company did grow adjusted earnings per share by more than 30% year over year, but the EPS result of $0.72 still missed projections of $0.76. Edwards' revenue of $497 million, which grew more than 8% for the quarter, also failed to impress analysts, who had expected sales of more than $518 million.

If that wasn't bad enough, Edwards' outlook for the rest of 2013 doomed this stock on Wednesday: Shares plunged nearly 22% during the day and another 14% after hours. The company lowered its earnings projections for the full year to between $3 and $3.10, after earlier expectations had called for $3.27.

The most damning note came from the company's Sapien heart valve, however. While sales of the valve, which is used to replace damaged heart valves in surgery, climbed 40% this quarter, Edwards lowered its projected sales range of the Sapien by $40 million for the full year. Revenue from the company's other businesses, such as critical-care products and surgical heart valve therapy products, also fell this quarter, and disappointing guidance for the Sapien casts doubts on this company's performance over the rest of the year.

Edwards' stock's massive plunge today was probably too much for the miss, but the cardiovascular market overall has been tough on medical-device companies recently. St. Jude Medical (NYSE: STJ  ) reported falling sales in its most recent quarterly report, primarily because of cardiovascular-related revenue on the decline, and Medtronic (NYSE: MDT  ) , a competitor of Edwards' in the heart valve market with its CoreValve device, could still threaten the Sapien's sales despite a court ruling recently that judged the CoreValve to have infringed on one of Edwards' patents.

Did all that justify a drop of more than 36% in just one day? Probably not, but Edwards' future is shaky at best. Stryker's in a better position after earnings -- indeed, its place atop the orthopedics market, an industry that should capitalize on demographic trends in the future, makes this one of the top medical-device stocks to keep an eye on. One thing has been clear throughout earnings season so far, however: The medical-device industry's problems aren't going away anytime soon.

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10/22/2014 4:01 PM
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