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Thoratec Corp’s (THOR - Analyst Report) fourth-quarter and fiscal 2011 adjusted (excluding one-time items other than stock-based compensation expenses) earnings per share of 31 cents and $1.38, respectively, beat the corresponding Zacks Consensus Estimates of 30 cents and $1.37.

Profit (as reported) from continuing operations rose 21.6% year over year to $15.3 million (or 25 cents per share) aided by better utilization at pre-existing ventricular assist device (VAD) programs as well as growth of the treatment at new centers. 

Results in both periods exclude the contributions of Thoratec’s former International Technidyne Corporation (“ITC”) unit, which it divested in November 2010. The stock gained of 6.3% to close at $32.75 in after hours trading on February 8.

Revenue Analysis

Revenues rose 12% year over year to $109.4 million in the fourth quarter, beating the Zacks Consensus Estimate of $108 million. For the fiscal year, revenues were $422.7 million, up 10.4%, surpassing the Zacks Consensus Estimate of $421 million. Sales were boosted by growth in both the company’s U.S. and overseas operations. On a geographic basis, domestic sales rose 11.9% year over year to $88.2 million, while international sales were up 12.8% to $21.2 million.

Thoratec had 293 HeartMate II centers (including 149 in the U.S.) at the end of the reported quarter, an increase from 280 centers at the end of the sequentially prior quarter. Pump sales were up 14.2% to $77.4 million while non-pump revenues increased 7.9% to $31.3 million. Unit sales of domestic pumps increased 14.8% year over year to 704 units while overseas sales were down 4.5% to 213 units.

By product line, HeartMate sales were up 11.8% to $93.8 million. Revenues from the Thoratec product line, including the paracorporeal ventricular assist device (“PVAD”) and implantable ventricular assist device (“IVAD”), fell 15.3% to $6.1 million while CentriMag blood pump sales jumped 54.4% to $8.8 million.

HeartMate II enjoyed mid-teens volume growth in both U.S. and Europe. The company estimates that, in the U.S., Destination Therapy indication accounted for over 40% of HeartMate II implants.

Margins and Expenses

Gross margin moved up to 67.1% from 64% a year ago. On an adjusted basis, gross margin picked up to 71.4% from 66.6% in the prior-year quarter backed by a favorable mix. Adjusted operating expenses were up 15.5% year over year to $43 million partly on account of higher spending on product and market development.

Balance Sheet

The company exited the quarter with cash and investments of $209.5 million, down 55.4% from the year-ago quarter, reflecting cash used in the acquisition of Levitronix Medical, share repurchase activity and retirement of convertible debt. This outflow was partially offset by cash generated from operations.

Guidance Changed

Thoratec has issued its financial forecast for fiscal 2012. The company expects revenues between $445 million and $460 million driven by growth in CentriMag and HeartMate product lines partly offset by a drop in the Thoratec line.

The company expects gross margin (on a reported basis) of 68% to 68.5% and adjusted gross margin of 70.5% to 71% for 2012. Due to investments in technology and sales force, operating expenses are expected to grow 13% to 14% while adjusted operating expenses are forecast to rise 14% to 15%.   

Earnings per share (on a reported basis) are forecast in the range of $1.21 to $1.31 for fiscal 2012 while adjusted earnings is expected to be in a band of $1.58 to $1.68.  The current Zacks Consensus Estimates for revenues and earnings for 2012 are $457 million and $1.48, respectively.

Thoratec enjoys a first-mover advantage and the growing number of HeartMate II centers indicates increasing acceptance. The company has shown expertise in product development. VAD represents a substantial market opportunity for Thoratec with a significant number of eligible heart failure patients globally.

With HeartMate II, Thoratec enjoys a monopoly in the U.S. market having the only device of its kind for the destination therapy indication (for heart failure patients who are not eligible for heart transplant). Favorable adoption trend of the device is expected to support revenue growth moving forward.

However, Australian heart pump maker HeartWare International (HTWR - Snapshot Report) is expected to close the technology gap with the launch of its next generation VAD product. Currently, we have a long-term Outperform rating on Thoratec.

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