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Thoratec Corp’s (THOR - Analyst Report) reported third quarter 2012 adjusted (excluding one-time items other than stock-based compensation expenses) earnings per share of 44 cents. It easily surpassed the Zacks Consensus Estimate of 33 cents as well as the year ago earnings of 34 cents per share.

Net income from continuing operations soared 27.7% year over year to $24.3 million (or 41 cents per share) while net income climbed 35.1% year over year to $24.3 million (or 41 cents per share) in the quarter.

Revenue Analysis

Revenues improved 15% year over year to $117.8 million in the third quarter, beating the Zacks Consensus Estimate of $112 million. Revenues improved on the back of higher volume of HeartMate II product line (up 27% year over year) as well as the development of Destination Therapy (DT) in the domestic market in which Thoratec enjoys market monopoly. Geographically, domestic sales surged 16% year over year to $97.5 million, while overseas sales increased 9% to $20.3 million.

By product, HeartMate sales jumped 21% to $105.9 million. Sales of the paracorporeal ventricular assist device (PVAD) and implantable ventricular assist device (IVAD), dipped 47% to $3.8 million while CentriMag blood pump sales edged up 4% to $7.5 million (includes $0.9 million contribution from the Levitronix Medical buyout).

Thoratec pump sales were up 17.7% year over year to $85 million while non-pump revenues ascended 8.1% to $32.2 million. Unit sales of pumps in the U.S. increased 17.4% year over year to 781 units while overseas sales were up 10.6% to 208 units.

Margins and Expenses

On an adjusted basis, gross margin decreased to 71.4% from 71.6% in the prior-year quarter on account of foreign currency fluctuations. Operating margin was 27.8% in the quarter compared with about 27% in the year-ago quarter.

Adjusted operating expenses shot up 19% year over year to $43.2 million partly on account of increased expenditure on product and market development.

Balance Sheet

The company exited the quarter with cash and investments of $307.9 million, up 32.4% year over year.

Guidance

Thoratec has revised its financial forecast for 2012. The company expects revenues between $477 million and $483 million compared with the prior guidance of $460 million and $470 million. The updated guidance includes higher sales estimates for HeartMate II product line and solid expansion of the ventricular assist device (VAD) market.

For 2012, earnings per share (on a reported basis) are now projected in the range of $1.40 to $1.44 compared to the prior guidance of $1.28 to $1.34 while adjusted earnings are expected to be in a band of $1.79 and $1.83 compared with the prior guidance of $1.67 and $1.73.

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 trend of the device is expected to support revenue growth moving forward.

However, its dominance in the bridge-to-transplant (BTT) indication will be challenged following the prospective approval of HeartWare International’s (HTWR - Snapshot Report) Ventricular Assist System later this year. Australian heart pump maker HeartWare is expected to close the technology gap with the launch of its next generation VAD product.

Despite limited visibility, we are optimistic about Thoratec successfully expanding its sales on the back of its HeartMate product line. The company continues to do well in overseas markets despite economic turmoil in Europe. It expects regulatory approval in Japan later in the fourth quarter of 2012. After the reimbursement approval in Japan, the company will be able to serve one of the largest focus markets for its products.

We currently have a long-term ‘Outperform’ recommendation on Thoratec. The stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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