We initiate our coverage on Thoratec Corp. (THOR) with a Neutral rating. The company’s second-quarter fiscal 2010 earnings beat the Zacks Consensus Estimate, aided by continued robust adoption of its Venricular Assist Devices (VAD), used to support heart failure patients.
 
Thoratec provides mechanical circulatory support with a product portfolio designed to meet a range of clinical requirements of advanced heart failure victims. The company’s latest product, HeartMate II, is an electrically powered, implantable, left ventricular assist device (LVAD), which was first launched in Europe in late 2005.
 
Thoratec enjoys first mover advantage with HeartMate II receiving FDA approval for the Bridge-to-Transplantation indication in April 2008 and later for the Destination Therapy indication (for heart failure patients who are not eligible for heart transplant) in January 2010. The company derives the majority of its revenue from sales of HeartMate II.
 
Venricular Assist Devices represent a substantial market opportunity with a significant number of eligible heart failure patients worldwide.  While Thoratec enjoys a monopoly in the U.S. market with the only device of its kind for Destination Therapy, Australian heart pump maker HeartWare International Inc. (HTWR) is expected to close the technology gap by the time next generation VADs come into play.   
 
Thoratec has often surpassed earnings guidance in the past. However, its upside potential in the future will partially be driven by the coverage policies of the Centers for Medicare and Medicaid Services (CMS). This is one factor, amongst others, that makes it difficult to forecast VAD utilization in future.  
 
Thoratec’s small size and attractive prospects could make it an ideal takeover candidate, in our view.  At the same time, we are cognizant of its single product line, and concomitant lack of diversification in the business model. Since HeartMate II concerns the heart, a critical organ, any product defect may be a significant negative for the company’s shares.
 
HEARTWARE INTL (HTWR): Free Stock Analysis Report
 
THORATEC CORP (THOR): Free Stock Analysis Report
 
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