Thoratec Target Price $40

THOR : NASDAQ : US$34.37
Target: US$40.00

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.

Life Sciences — Biomedical Devices and Services
Investment recommendation
We remain bullish about the near- and long-term growth profile of the LVAD
market, which grew 15% globally in 2013. We estimate this duopoly – THOR and
HTWR – now represents a $670M WW market, which is on track to approach
our $1 billion 2017E (+12% CAGR, which could prove conservative, in our view).
The low penetration level of the patient population (10%E in US/Europe; <5%E
in Japan), increasing referral patterns, new center development and nextgeneration
technology coming down the pipe form the basis of our bullish macro
perspective on VADs.
We continue to favour Heartware (HTWR : NASDAQ : $95.07 | BUY), but also
believe owning the “VAD ETF” (both) is a valid strategy to play the market
growth and potential for M&A, while mitigating risk associated with
uncertainties around each company’s upcoming clinical trials and pipeline. We
expect THOR to face another competitively challenging year in the US in 2014 as
HTWR enrolls its DT revised-protocol study and commences MVAD trials, but
we are optimistic about the potential for THOR’s HM3 (on track to begin trials in
Europe & US in ’14) and longer term in the acute HF market with HM-PHP (not
in our estimates). We adjust our target from $45 to $40 on a lower target
multiple (4x EV) applied to a virtually unchanged 2015 revenue target.
Investment highlights
Q4 WW sales ($128M; +7%) were in line (CGe: $130M; consensus:
$128M) as US VAD revenue beat our estimates, offset by OUS VAD
revenue, which missed. Reported pro forma EPS of $0.38 missed our
$0.41E, but excluding a one-time inventory adjustment (-8 cents), EPS
beat, as pro-forma GM (72%), OpEx control, and share buyback drove a
solid P&L in Q4.
2014 revenue guidance ($520-535M) bracketed our estimate/consensus
($529M/$535M), while EPS guidance ($1.72-$1.82) was slightly below
our estimate ($1.88) as the company plans to re-invest improving
GM (71%E) back into R&D


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