Monday, August 4, 2008

One for the Radar - Thoratec (THOR)

There were some very interesting smaller cap earnings plays last week as I reviewed some of the largest movers in that space. Don't have time to get to them all via blog, but my watch list has been growing - "unfortunately" most of them had tremendous moves up post earnings so the question one always asks in these instance "to chase or not to the chase?". Indeed, that is the question. One such name is Thoratec (THOR) which is in the newest sexy sector of the market: healthcare. Specifically, it's in one of the few subsectors in healthcare I'll dip my toes in - equipment makers. Company website here.

Brief company description
Thoratec is a world leader in therapies to address advanced stage heart failure. The company's product lines include the Thoratec® VAD and HeartMate LVAS with nearly 12,000 devices implanted in patients suffering from heart failure. Additionally, its International Technidyne Corporation (ITC) Division supplies point-of-care blood testing and skin incision products.

As you can see from the chart below, the company has made quite a (round) trip over the past year
While the chart was perking up over the past 2 weeks, you could say the same for most every healthcare company so there was no indication technically of this sort of explosion as we saw post earnings.

The company was strolling along - ho hum 10% revenue growth two quarters ago, and then 12% revenue growth last quarter... nothing to get excited about. But this quarter? Try 44% on for size. And the star of the show is Heartmate II

The HeartMate II is Thoratec's first-line intermediate-to-chronic left ventricular assist device. Designed to dramatically improve survival and quality of life, the HeartMate II was developed with the goal of providing up to 10 years of circulatory support for a broad range of advanced heart failure patients.

Let's take a closer look at the financial data
  • Thoratec Corporation (Nasdaq: THOR), a world leader in device-based mechanical circulatory support therapies to save, support and restore failing hearts, today said that revenues for the second quarter of 2008 increased 44 percent over revenues in the same period a year ago. Thoratec reported revenues of $82.6 million in the second quarter of 2008 compared with revenues of $57.3 million in the second quarter of 2007. Cardiovascular Division revenues were $57.5 million versus $34.2 million in the same period a year ago. Revenues at ITC were $25.1 million versus $23.1 million a year ago.
  • Net income on a GAAP basis in the second quarter of fiscal 2008 was $8.7 million, or $0.15 per diluted share, compared with net income on a GAAP basis of $1.3 million, or $0.02 per diluted share, in the second quarter of 2007. Non-GAAP net income, which is described later in this press release, was $12.1 million, or $0.20 per diluted share, in the second quarter of 2008, compared with non-GAAP net income of $5.3 million, or $0.09 per diluted share, in the same period a year ago.
  • "We were extremely pleased with our performance for the quarter, which was driven by a 68 percent increase in sales at our Cardiovascular Division year- over-year," said Gary F. Burbach, president and chief executive officer.
  • "The key contributor to this growth was our successful launch of the HeartMate II LVAS (Left Ventricular Assist System) for bridge-to- transplantation (BTT) following its approval by the FDA in April. Our program to bring on new centers is ahead of expectations, as we added 26 during the quarter. We have also seen increased activity at existing centers and benefited from favorable pricing for the HeartMate II. In addition, we are seeing continued strong adoption of the HeartMate II in Europe," he added.
  • GAAP gross margin for the second quarter of 2008 was 61.5 percent versus 58.8 percent a year ago. The improvement in gross margin reflects primarily the increase in average selling prices associated with U.S. commercial approval of the HeartMate II and favorable pump mix at the Cardiovascular Division combined with favorable manufacturing variances. This was offset by lower margins at ITC primarily related to geographic and product mix and competitive pricing pressure in our skin incision business.
  • Revenues are projected to be between $285 million and $295 million. GAAP gross margins are expected to be between 58% and 59%, with non-GAAP gross margins between 59% and 60%. GAAP EPS is expected to be between $0.20 and $0.26, while non-GAAP EPS is expected to be in a range of $0.47 to $0.52.

AP Report on Friday
  • Shares of heart device maker Thoratec Corp. climbed to a two-year high Friday after the company blew past earnings expectations in the second quarter, and raised its 2008 forecasts. In February, the company projected 36 to 40 cents per share, excluding one-time charges, and $255 million to $265 million in revenue. Analysts expected 38 cents per share on $265.1 million in sales.
  • Analysts had lower expectations, forecasting a profit of 9 cents per share on $64.2 million in revenue on average, according to Thomson Financial.
  • The HeartMate II is designed for patients awaiting heart transplants, and is approved only as a temporary treatment. But RBC Capital Markets analyst Ryan Bachman said the larger market for the product is in "destination therapy," or patients with end-stage heart failure who are too ill for a transplant. He said the HeartMate II could be approved as a destination treatment in mid-2010.
This is quite a widely followed stock with 9 analysts covering - and they've quickly moved consensus up from 38 cents to 46 cents (it's a non GAAP world). Even at the high end of guidance of 52 cents Thoratec, post the 22% gain Friday, has become a quite expensive stock at 44x 2008 estimates. But as we know, healthcare is the new fertilizer so there is no price too high to pay for these companies. [Jul 25: NuVasive - At What Price Growth? It Seems "Any" Price] I say that a bit tongue in cheek watching companies we own growing twice as fast as Thoratec trading at 20-35% of the valuation. :)

We'll keep a name like this on the radar - since this new device was FDA approved in April it will be interesting to see how the company does next quarter. Will revenue show similar year over year growth or could they even accelerate (or decelerate for that matter?) The chart now has a big fat "gap" just north of $19 so it might be a candidate to purchase if this "hole" gets filled.

No position

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