We upgrade our recommendation for Thoratec Corp. (THOR) to Outperform. HeartMate II unit sales rose 22% in the six months ending June 30, 2012 wrapping up a robust half year.
Heart failure is a terminal degenerative condition afflicting more than 20 million victims globally. More than five million Americans are survivors of the condition and over half a million more cases are identified each year.
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.
Thoratec’s competitor HeartWare International (HTWR) has filed a Pre-Market Approval (PMA) for a similar device, which will end Thoratec’s dominance in the BTT segment later in the fourth quarter of 2012, leaving it more dependent on the DT market. 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. It expects regulatory approval in Japan later in the fourth quarter of 2012. After the reimbursement approval in Japan, the company will be able to serve one of the largest focus markets for its products.
The stock retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.
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