Thoratec Downgraded to Underperform

We recently downgraded our rating for Thoratec Corporation (THOR), a leading provider of devices which address advanced-stage heart failure, to Underperform. Both revenues and earnings for fourth-quarter fiscal 2010 missed the Zacks Consensus Estimates.

We believe that the company’s HeartMate II faces an end to its monopoly, in the foreseeable future, in the Bridge-to-Transplantation (“BTT”) indication following HeartWare International’s (HTWR) filing of Premarket Approval (“PMA”) with the Food and Drug Administration (“FDA”). HeartWare is expected to receive FDA approval in late 2011 or 2012. It has already received CE Mark for the device in the European Union.

Thoratec will therefore be more reliant on the Destination Therapy (“DT”) segment (for heart failure patients who are not eligible for a transplant). However, the growth rate in the DT market is somewhat uncertain. In any case, reduced market share for the BTT indication will bring down Thoratec’s growth rate.

Thoratec’s guidance for fiscal 2011 duly reflects its lower growth prospects. It appears that the rapid growth rates formerly enjoyed by the company are being replaced with more normalized growth rates.

In the meantime, Thoratec’s next generation heart devices are still several years away. The company is expected to launch its third-generation pump (HeartMate III), in the U.S., in 2015 or 2016. Human trials are being scheduled for late 2012. In addition to lack of pipeline visibility, we are also constrained by a lack of adequate framework for milestones.

On the positive side, we are cognizant that the BTT and DT indications present a sizeable market opportunity. Furthermore, HeartMate II is clinically effective enough to provide favorable long-term survival outcomes for patients who do not have access to donor hearts. The positive factors are partly negated by the company’s small size and single product line. Thoratec currently retains a Zacks #5 Rank, which translates into a short-term “Strong Sell” recommendation.

THORATEC CORP (THOR): Free Stock Analysis Report

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