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Thoratec Retained at Outperform

Zacks Equity Research

We maintain our recommendation for Thoratec Corp. (THOR) at Outperform. Thoratec reported third quarter 2012 adjusted earnings per share of 44 cents. It easily surpassed the Zacks Consensus Estimate of 33 cents.

Net income from continuing operations soared 27.7% year over year to $24.3 million (or 41 cents per share).

Revenues improved 15% year over year to $117.8 million in the third quarter, beating the Zacks Consensus Estimate of $112 million. Sales picked up on the back of higher volume of HeartMate II product line (up 27% year over year) as well as the development of Destination Therapy (:DT) in the domestic market in which Thoratec enjoys market monopoly. Geographically, domestic sales surged 16% year over year to $97.5 million, while overseas sales increased 9% to $20.3 million.

By product, HeartMate sales jumped 21% to $105.9 million. Thoratec pump sales were up 17.7% year over year to $85 million while non-pump revenues ascended 8.1% to $32.2 million. Unit sales of pumps in the U.S. increased 17.4% year over year to 781 units while overseas sales were up 10.6% to 208 units.

Ventricular Assist Devices represent a multi-billion dollar market opportunity. It is estimated that, in addition to the bridge-to-transplant (BTT) market, the Destination Therapy (:DT) market in the U.S. may eventually attain a significant size. Until HeartMate II came up as a viable option, the only treatment was heart transplant surgery.

HeartWare International Inc. (HTWR), a global provider of miniaturized ventricular assist devices (:VAD) for diagnosis of advanced heart failure, disclosed on November 20, 2012, that the U.S. Food and Drug Administration (:FDA) has granted clearance for its HeartWare Ventricular Assist System as a bridge to heart transplantation device for patients with end-stage heart failure. The FDA approval was eagerly awaited ever since HeartWare submitted its Premarket Approval (PMA) application in December 2010. The company obtained European CE Mark for the HeartWare system in 2009 and Australian Therapeutic Goods Administration (TGA) approval in 2011.

However, there is no imminent competitive threat from HeartWare in the DT segment, as its product is not expected to be launched till 2015. We believe that DT will account for the major part of growth in the Ventricular Assist Device (:VAD) market.

Despite less visibility, Thoratec has expertise in product development. The company is currently developing its next generation HeartMate III. At the same time, HeartWare is expected to close the technological gap. The company continues to do well in overseas markets despite economic turmoil in Europe.

The stock currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.

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