Thoratec Buy Target Price $45 Heartware BUY

THOR : NASDAQ : US$39.35
Target: US$45

Thoratec manufactures medical devices used for circulatory support, vascular graft applications, and blood coagulation testing. Thoratec’s ventricular assist device (VAD) systems are currently marketed in the US and internationally for use as a bridge to heart transplant and for recovery of the heart after open-heart surgery. The company has the only VAD currently FDA-approved for the destination therapy indication.
All amounts in US$ unless otherwise noted.

Investment recommendation
After solid Q3 results, which included both upside and downside to various metrics in our model, we feel it’s time to formalize our previously published “call” to own both stocks within the global VAD duopoly.

We continue to see more upside potential in shares of Heartware (HTWR ;  NASDAQ : $73.35 | BUY) over time via share gain and faster growth, which relies on 1) improved stroke outcomes in future DT clinical data per revised BP management protocol to drive DT approval by H2:16, and 2) MVAD progressing to FIM followed by European and US trials in 2014/2015 timeframes. That said, we recognize there is risk inherent in these assumptions. What’s more, our survey work and other research support our bullish stance on the US TAVI market’s growth potential near and long term. Lastly, we are optimistic about THOR’s growth prospects near term in Japan, and longer term in the acute HF market with HM-PHP (not in our estimates).

Thus, we upgrade THOR to BUY and increase our target from $38 to $45 (4.5x EV to 2015E sales; HTWR target uses 5.5x,
via faster expected growth).
Investment highlights
 Sales ($126M; +7%) beat us/consensus ($123/$121M) on higher non pump revenue (US Pocket Controller upgrades) and Japan stocking. EPS of $0.49 beat $0.39/$0.40E on higher revenue, lower OpEx and lower effective tax rate (worth $0.05).
 US VAD units (737) declined 6% Y/Y – in line with consensus, slightly lower than our estimate (759). OUS units (250) grew 20% (in line).
 CMS issued its final VAD NCD, which was as expected. It removed Status 7 option for BTT listing, which our research suggests won’t materially alter the way VAD patients broadly are managed


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