We upgrade our rating on Thoratec Corporation (THOR) to Outperform. Its third quarter earnings beat the Zacks Consensus Estimate while profit surged year over year, helped by higher revenues.
The overall market size for Ventricular Assist Devices(VADs) is varyingly estimated at well over a billion dollars. Thoratec enjoys first mover advantage and the growing number of HeartMate II centers indicates increasing acceptance. Moreover, we believe that leverage will raise earnings per share.
We do acknowledge that a similar device from HeartWare (HTWR) will end Thoratec’s dominance over the Bridge-to-Transplantation (BTT) indication, leaving it more dependent on the Destination Therapy (DT) indication whose growth rate is somewhat uncertain. However, there is no imminent competitive threat from HeartWare in the DT segment as its product is not expected to be launched till 2015 or so.
Thoratec has a proven track-record in R&D. The company is currently developing its next generation HeartMate III. Next generation HeartMate devices under development will be less invasive and easier to implant.
Thoratec competes as a relatively small standalone entity. Given its attractive prospects, and favorable growth profile, the company may be considered to be a potential acquisition candidate.
On the negative side, the small size of the company may restrict its ability to raise resources. The absence of strategic alliances may also impede the development of new products. The single product line of the company, with a lack of product diversification, is a related area of concern.
Since HeartMate II concerns the heart, a critical organ, any product defect may be a significant negative for Thoratec shares. We would also be concerned about actions such as product recalls or safety warnings, which would hurt VAD sales and damage Thoratec's reputation in the market.
We currently have a long-term Outperform rating on Thoratec supported by a short-term Zacks #2 Rank (Buy).
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