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We have recently upgraded our long-term recommendation for Thoratec Corp. (THOR - Analyst Report), provider of mechanical circulatory support devices to Outperform from Neutral with a target price of $40.00. We believe that Thoratec through its attractive prospects and pipeline; is poised to enhance its global reach in the growing mechanical circulatory support devices market. Moreover, the company recently posted better-than-expected first-quarter 2012 results.

The company’s first quarter fiscal 2012 adjusted earnings per share of 48 cents easily beat the Zacks Consensus Estimate of 36 cents per share. Revenues improved 27.4% year over year to $126.8 million in the reported quarter, surpassing the Zacks Consensus Estimate of $112 million.

The company enjoys the first-mover advantage in the market it serves. Following the FDA’s approval for HeartMate II (for DT) in January 2010, Thoratec to date enjoys a monopoly in the U.S. market with the only device of its kind. In the U.S. DT market, Thoratec faces no near-term competitive threat even though Australian heart pump maker HeartWare International (HTWR - Snapshot Report) is closing in on the technology gap. The near-term advantage is that Heartware’s HVAD is not expected to be launched before 2015 or so.

Thoratec has continued with its solid performance in the international market. The contagion of economic problems in Europe has not had any significant impact on the most recent quarter’s performance. Thoratec registered healthy growth in HeartMate II implants in Germany as well as in France. Additionally, the company expects regulatory approval in Japan later, in the second half of 2012. After the reimbursement approval in Japan, the company will be able to serve one of the largest focus markets for its products.

Thoratec has undertaken continuous efforts to achieve its strategy of margin expansion. The company’s gross margin improved in successive quarters on the back of favorable volume, mix and acquisitions. Management expects this trend to continue as it benefits from the growth momentum. It forecasts adjusted gross margin to be in the range of 71% to 71.5% for fiscal 2012.

However, 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 lack of product diversification are related areas of concern. Lack of pipeline visibility and relative lack of milestones represent another concern.

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