Share price of HeartWare International Inc. HTWR rallied 7.8% ($6.39) to close at $88.73 on Jul 30, 2015, after the company reported an impressive second-quarter that witnessed growing adoption of its ventricular assist devices (VAD).
However, the company reported loss of 47 cents per share, which was wider than the Zacks Consensus Estimate of a loss of 46 cents and year-ago quarter loss of 29 cents per share.
Quarter Details
Revenues increased almost 5% on a year-over-year basis to $73.6 million, which was slightly better than the Zacks Consensus Estimate of $73 million. At constant currency (cc), sales improved 13.4% from the year-ago quarter. U.S. revenues rose 16.2% to almost $43 million, while International revenues increased 10.4% at cc to $30.6 million.
The year-over-year growth in revenues was driven by higher adoption of HeartWare’s VAD. The company sold 773 devices as compared with 674 units in the year-ago quarter. In the U.S., HeartWare sold 391 units, while 382 units were sold in international markets.
Gross margin contracted 160 basis points (bps) on a year-over-year basis to 65.7%, primarily due to the impact of foreign exchange volatility, partially offset by volume and efficiency improvement.
Research & development (R&D) expenses increased 17.8% year over year to $31.7 million, primarily due to an increase in clinical and regulatory expenses as well as quality improvement costs.
Selling, general & administrative (SG&A) expenses rose 6.2% year over year to $22.2 million, primarily attributed to increased employee headcount and other administrative expenses.
HeartWare reported operating loss of $7.8 million as compared with a profit of $13 million in the year-ago quarter, owing to higher operating expenses.
Product/Customer/Clinical Trial Update
HeartWare added 14 new sites globally and has more than 300 customers across 46 countries. During the reported quarter, the company added four new commercial sites in the U.S. and 10 new international centers.
During the quarter, HeartWare received approval from Health Canada to market its HVAD as a bridge to heart transplantation in patients with end-stage heart failure conditions.
Guidance
HeartWare expects revenue loss of nearly $20 million in 2015 ($8 million to $10 million in the second half of 2015), owing to unfavorable foreign exchange rate. Moreover, increased investments in MVAD production and further improvements in quality systems are expected to have a modest impact on gross margin growth rate.
Our Take
We believe HeartWare is poised to gain significant market traction on the back of miniaturized VAD products and higher level of clinical trial activity. MVAD is based on the same technology platform as HVAD but adopts an axial flow, rather than a centrifugal flow configuration and is being developed in multiple designs.
However, we are apprehensive about international sales that are expected to be volatile, mainly due to distributor issues. Notably, the company has significant operations in Europe. Hence, a strong U.S. dollar against a weak euro is expected to pose a near-term headwind.
Stocks to Consider
Currently, HeartWare carries a Zacks Rank #4 (Sell).
Better-ranked stocks in the medical sector include LDR Holdings LDRH, Mazor Robotics MZOR and RTI Surgical RTIX. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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