We recently downgraded our rating for Thoratec ( THOR - Analyst Report ) to Neutral. Its fourth quarter earnings beat the Zacks Consensus Estimate while profit increased year over year, helped by higher revenues.

Although Thoratec is a growing company, its single product line and small size make it a riskier proposition. HeartWare ( HTWR - Snapshot Report ) has filed a PMA for a similar device, which will end Thoratec’s dominance for the bridge to transplant (BTT) indication sometime in the third quarter of 2012, leaving it more dependent on the Destination Therapy (DT) indication.

However, there is no imminent competitive threat from HeartWare in the DT segment as its product is not expected to be launched till 2015. It appears that the hyper-growth phase enjoyed by Thoratec has stabilized to more normalized growth. Thoratec has demonstrated expertise in product development even as HeartWare is expected to close the technological gap.

The company has benefited from rapid acceptance of HeartMate II on a global basis. HeartMate II is clinically effective enough to provide favorable long-term survival outcomes for patients who do not have access to donor hearts. Medical practitioners believe that continued product development could bring to market advanced LVADs that may render heart transplant surgery superfluous. Thoratec ended fourth-quarter 2011 with 293 HeartMate II centers globally.

Thoratec has a proven track-record in R&D. The company is currently developing its next generation HeartMate III and a miniaturized HeartMate II. Next generation HeartMate devices under development will be less invasive and easier to implant.

Limited pipeline visibility and relative lack of milestones represent areas of concern. Thoratec’s third-generation pump (HeartMate III) is still in the early stages of development. This next generation device is not expected to be commercially available, in the U.S., till 2016 or 2017.

The small size of the company may restrict its ability to raise resources. The absence of strategic alliances may hinder its ability to develop new products. The single product line of the company, and its lack of product diversification, is a related area of concern.

Since HeartMate II concerns the heart, a critical organ, any product defect may be a significant negative for Thoratec shares. We would also be concerned about actions such as product recalls or safety warnings, which would hurt VAD sales and damage Thoratec's reputation in the market. The stock currently retains a Zacks #3 Rank, which translates into a short-term “Hold” recommendation.