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Thoratec Downgraded to Neutral

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We downgrade our rating for Thoratec Corp. to Neutral. Its second quarter adjusted earnings per share of 36 cents missed the Zacks Consensus Estimate of 42 cents. Profit (as reported) declined 4.5% year over year to $20.8 million (or 35 cents per share) in the quarter.

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.

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.

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 (DT) 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 is expected to close the technology gap with the launch of its next-generation VAD product. Currently, the company is awaiting approval (expected later in the second half of 2012) from the U.S. Food and Drug Association (FDA) for its Ventricular Assist System for a Bridge-to-Transplant 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 or so.

The stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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