Thoratec Corp’s (THOR) third-quarter fiscal 2011 adjusted (excluding one-time items other than stock-based compensation expenses) earnings per share of 34 cents beat the Zacks Consensus Estimate of 31 cents.
The stock suffered a loss of 12.7% to close at $30.46 as of November 2, 2011 due to lower sales outlook issued by the company for fiscal 2011.
Profit (as reported) from continuing operations rose 22.7% year over year to $19 million (or 31 cents per share) owing to double-digit expansion in the top line, buoyed by healthy sales of the company’s HeartMate II left ventricular assist device (“LVAD”). Net income moved up 25.6% to $18 million (or 29 cents per share).
Results in both quarters exclude the contributions of Thoratec’s former International Technidyne Corporation (“ITC”) unit, which it divested in November 2010.
Revenue Analysis
Revenues increased 13% year over year to $102.6 million, missing the Zacks Consensus Estimate of $104 million. Sales were boosted by growth in both the company’s U.S. and overseas operations. Foreign exchange fluctuation had a positive impact of $1.5 million. On a geographic basis, domestic sales climbed 9.8% year over year to $83.9 million, while international sales jumped 28% to $18.7 million.
Thoratec had 280 HeartMate II centers (including 141 in the U.S.) at the end of the quarter, an increase from 254 centers at the end of fiscal 2010. Pump sales rose 15.3% to $72.2 million while non-pump revenues increased 6.8% to $29.8 million. Unit sales of domestic pumps spiked 9.9% year over year to 665 units while overseas sales were up a sharp 16.8% to 188 units.
By product line, HeartMate sales were up 9% to $87.6 million, supported by sustained penetration of HeartMate II pumps. Revenues from the Thoratec product line, including the paracorporeal ventricular assist device (“PVAD”) and implantable ventricular assist device (“IVAD”), climbed 16.1% to $7.2 million while CentriMag blood pump sales jumped 94.6% to $7.2 million.
Margins and Expenses
Gross margin increased to 69.9% from 68.5% a year ago. On an adjusted basis, gross margin improved to 71.6% from 68.9% in the prior year quarter backed by favorable mix. Adjusted operating expenses were up 17.9% year over year to $36.3 million on account of higher spending on product and market development.
Balance Sheet
The company exited the quarter with cash and investments of $232.6 million, down 22.1% sequentially, reflecting cash used in the acquisition of Levitronix Medical. This outflow was partially offset by cash generated from operations. The company retired all outstanding senior subordinated convertible debt earlier in 2011.
Guidance Changed
Thoratec has altered its financial forecasts for fiscal 2011. The company now expects revenues between $418 million and $423 million, down from its earlier view of $422 million and $430 million.
The company has raised its adjusted earnings per share target to a band of $1.48 and $1.52 from $1.40 and $1.50 earlier. Earnings per share (on a reported basis) are now expected in the range of $1.08 to $1.12 versus the prior forecast of $1.05 to $1.15. The current Zacks Consensus Estimates for revenues and earnings per share for 2011 are $423 million and $1.37, respectively.
Gross margin (reported basis) target for fiscal 2011 has been revised to 69% from 68.5%-69.5% earlier. Gross margin is expected to be 70.5% on an adjusted basis. Operating expenses are forecast to rise 16% instead of its earlier range of 17%-19%. Operating margin is expected to be up 13% on an adjusted basis.
Thoratec enjoys a first-mover advantage and the growing number of HeartMate II centers indicates increasing acceptance. The company has shown expertise in product development. VAD represents a substantial market opportunity for Thoratec with a significant number of eligible heart failure patients globally.
With HeartMate II, Thoratec enjoys a monopoly in the U.S. market having the only device of its kind for the destination therapy indication (for heart failure patients who are not eligible for heart transplant). Favorable adoption trend of the device is expected to support revenue growth moving forward.
However, Australian heart pump maker HeartWare International (HTWR) is expected to close the technology gap with the launch of its next generation VAD product. Currently, we have a long-term Neutral rating on Thoratec.
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