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Why Did Edwards Lifesciences’ Gross Margin Decline in 1Q16?

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1Q16 profit margins

Edwards Lifesciences (EW) reported strong growth in revenue and earnings in 1Q16. However, the company’s gross profit margin declined to ~74.1% of total revenue as compared to ~77% in 1Q15. Consequently, the company has updated its gross profit margin guidance for 2016 from 74%–75% to 73%–74%. However, the adjusted operating margin improved on a YoY (year-over-year) basis by 100 basis points. Also, the adjusted income from continued operations was reported to be stable at ~20.5% of total revenue.

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Factors impacting margins

In 1Q16, Edwards Lifesciences’ gross profit margin declined due to the negative foreign exchange impact from international sales of inventory and higher investment in manufacturing operations worldwide. Notably, SG&A (selling, general, and administrative) expenses increased by 5%, and R&D (research and development) expenses increased by ~19% on a YoY basis, driven by investments in marketing and sales, innovation in the Transcatheter Heart Valve Therapy segment, and employee expenses. However, the company maintained SG&A and R&D guidance for 2016. Also, the investments to expand the company’s manufacturing capacity will improve growth and profitability going forward. Thus, the factors weighing on the company’s 1Q16 margins will subside in the medium term.

Investors can consider investing in ETFs such as the iShares U.S. Healthcare ETF (IYH), which has ~18% exposure to the US medical device and diagnostics industry. IYH holds 0.82%, 4%, 1.1%, and 0.78% of its portfolio in Edwards Lifesciences and its peers Medtronic (MDT), Boston Scientific (BSX), and St. Jude Medical (STJ), respectively.

In the next part of this series, we’ll look at EW’s Surgical Heart Valve Therapy segment.

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