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Thoratec Corp’s (THOR - Analyst Report) second quarter 2012 adjusted (excluding one-time items other than stock-based compensation expenses) earnings per share of 36 cents missed the Zacks Consensus Estimate of 42 cents and fell short of the year-ago earnings of 41 cents per share.

Profit (as reported) declined 4.5% year over year to $20.8 million (or 35 cents per share) in the quarter.

Revenue Analysis

Revenues increased 6.7% year over year to $118.6 million in the second quarter, trailing the Zacks Consensus Estimate of $122 million. Revenues improved on the back of growth in HeartMate II product line as well as the development of the Destination Therapy (DT) in which Thoratec enjoys market monopoly.

Geographically, domestic sales edged up 4.4% year over year to $97.1 million, while overseas sales climbed 18.1% to $21.5 million.

By product line, HeartMate sales were up 8.8% to $106.2 million. Sales of the paracorporeal ventricular assist device (PVAD) and implantable ventricular assist device (IVAD), fell 50% to $3.8 million while CentriMag blood pump sales increased almost 51% to $8 million.

Pump sales were up 10.2% year over year to $85.7 million while non-pump revenues declined 1.2% to $32.3 million. Unit sales of pumps in the U.S. increased 2.7% year over year to 773 units while overseas sales were up 9.8% to 212 units.

Margins and Expenses

On an adjusted basis, gross margin improved to 72.1% from 71.2% in the prior-year quarter on account of gains from volume-oriented benefit and the Levitronix takeover, slightly negated by volatile fluctuation of foreign currency. Operating margin came in at about 26% in the quarter, compared with 30.8% in the year-ago quarter.

Adjusted operating expenses were up 22.9% year over year to $46.1 million partly on account of increased expenditure on product and market development, as well as higher operating expenses associated with the Levitronix acquisition.

Balance Sheet

The company ended the quarter with cash and investments of $279.8 million, down 6.3% year over year.

Guidance

Thoratec has revised its financial forecast for 2012. The company expects revenues between $460 million and $470 million compared with the prior guidance of $452 million and $467 million.

The updated guidance includes higher sales estimates for the HeartMate product line, in the range of $10 million to $15 million, partially offset by lower sales estimates for the PVAD product line and foreign exchange impact of $7 million.

Thoratec forecasts adjusted gross margin of 71.5% for 2012. This resonates the improvement in utilization on the back of growth of the HeartMate II product line.

For 2012, earnings per share (on a reported basis) are projected in the range of $1.28 to $1.34 compared with $1.24 to $1.34 earlier, while adjusted earnings are expected to be between $1.67 and $1.73, compared with the prior guidance of $1.62 and $1.72. 

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 has developed the only devices of its kind for 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, the company is awaiting approval from the U.S. Food and Drug Association (FDA) for its Ventricular Assist System for a Bridge-to-Transplant indication.

We currently have a long-term Outperform recommendation on Thoratec. The stock retains a Zacks #2 Rank, which translates into a short-term Buy rating.

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