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Thoratec Corp. (THOR - Analyst Report), a leader in mechanical circulation support devices, recently revealed that it has taken over the DuraHeart II (DH-II) ventricular assist system from Terumo Corporation. The cash deal is worth $13 million with the possibility of milestone payments of up to $43.5 million. In addition, the two parties have a distribution agreement under which Terumo will launch DH-II in Japan and could reach other Asian countries as well.

DH-II is a small VAD which uses a novel expertise. The system is intended to create a pumping action with proven blood managing capability.

Thoratec plans to dedicate resources to further the DH-II program through clinical trials. THOR expects a first-in-man implant of the DH-II VAD in 2016 followed by clinical trials in overseas and domestic markets. 

Thoratec expects the takeover to add $6 million to $7 million of operating expenses, mainly R&D related, in the latter half of 2013. Other expenses include amortization of intangible assets.

Terumo Corporation, based in Tokyo, is a major provider of medical devices with revenues of $4 billion. It functions in over 160 countries.

Thoratec enjoys a first-mover advantage in the market it serves. With HeartMate II, Thoratec enjoys a monopoly in the U.S. market since it has developed the only device of its kind for the destination therapy indication (for heart failure patients who are not eligible for heart transplant). Favorable adoption of the device is expected to support revenue growth moving forward.

However, its dominance in the bridge-to-transplant (BTT) indication has ended following the FDA approval of HeartWare International’s (HTWR - Snapshot Report) Ventricular Assist System in Nov 2012. Competition with HeartWare has led to loss of market share and revenue shortfall for Thoratec.

Despite limited visibility and periodic setbacks, Thoratec has successfully expanded its sales on the back of its HeartMate II product line. The company continues to do well in overseas markets although the base is small.

The stock carries a Zacks Rank #5 (Strong Sell). We are more optimistic about Align Technology Inc. (ALGN - Analyst Report) and CONMED Corporation (CNMD - Analyst Report) each of which carries a Zacks Rank #2 (Buy) and are expected to do well.

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