The Godlike Investment

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According to the National Heart, Lung, and Blood Institute, heart failure is no longer just a disease--it is becoming an epidemic. Today, it is the leading cause of hospitalization in the US and the leading source of health care spending. I happen to have found the right stock to wager on in this multi-billion dollar industry. 

Congestive Heart Failure (CHF) is classified into four classes. Class I and II are initial stages that are normally not fatal. Class III is when the symptoms become more obvious--fatigue, breathlessness, and shortening of life expectancy. However, the end stage, Class IV, is going to be our main focus here. The fatal stage of CHF is either treated with a heart transplant or with the assistance of Ventricular Assist Devices (VADs). The most common VAD is the Left Ventricular Assist Device (LVAD) which eases pumping via the left ventricle of the heart. Research has shown that the use of LVAD in patients classified in Class IV (end stage) may even reduce the need for heart transplant. LVAD's now make a $400 million dollar market in the U.S--and growing.

The pioneer of LVADs and the largest market share holder, Thoractec (NASDAQ: THOR), is today's pick for the long haul. For some reason, I just visioned a long-haired, bearded, red-robe cladded Chris Hemsworth figure. Who doesn't get the uncanny analogy here? THOR is a developer, manufacturer, and marketer of medical devices used for blood circulatory support in patients suffering from heart damage, malfunction, or failure. 

The Hammer

Thoratec owns a broad portfolio of circulation-assistance devices, but the most noteworthy are its line of LVADs--the HeartMate devices. Of these, the one product that guides THOR to quarter after quarter of positive earnings, maintains its leadership position, and hammers its rivals is its Heartmate II LVAD, which was approved by the FDA in 2010. During the latest quarter the Heartmate II achieved year-over-year unit growth of 27% of which 25% growth came from the U.S. and 36% growth was seen internationally. Year-to-date growth, for the nine months of 2012, stood at 23%, including 21% domestically and 33% internationally. 

Western Europe and the US are mostly its developed markets. However, there are many new undeveloped markets like Japan and some underdeveloped markets like Turkey that remain potential future growth stories for Thoratec. Heartmate II is likely to receive approval in Japan before year end. At the same time, the company is already making progress with a new generation of HeartMate III devices, and is in the final stages of product development. Clinical trials for HeartMate III are expected to start during 2013. In short, the coming year or two will further strengthen its market-hold. 

In order to raise brand awareness and acquire a wider VAD market, the company has developed its worldwide VAD centers. During the latest quarter, 2 HeartMate II-specific centers were added in the US and 5 were added internationally, bringing the total number of Heartmate II centers to 160 domestically, and 156 internationally. Unlike its competitors, THOR also uses a field team of trained specialists around the globe for developing and expanding its VAD market internationally.

Competition

Thoratec's most significant competitor is HeartWare (NASDAQ: HTWR) which Thoratec attempted to take over three years ago, but failed on antitrust grounds. HeartWare recently received FDA approval for its heart-assist device that will come in direct competition with Thoratec's Heatmate II. Unlike Thoratec, HeartWare's device is smaller and can be implanted in the chest, allowing it to be put inside patients who are unable to get an implant in the abdomen. There's just one problem, though. Clinical trials have shown that HeartWare's device has higher chances of causing stroke in its patients than Thoratec's. That puts Thoratec in a safe position against its biggest competitor. Furthermore, with over 200 peer-reviewed publications, the Heartmate II is the most extensively studied LVAD in the market and it may take HeartWare numerous quarters before it achieves a comparable status amongst surgeons.   

Another competitor of lesser magnitude is the Sunshine Heart (NASDAQ: SSH) C-Pulse heart assist system. Sunshine Heart basically specializes in early stage heart assistance devices and the C-Pulse device is mostly aimed at Class III heart failure but is also used on Class IV patients. Unlike HeartWare, Sunshine's device is placed around the aorta (the artery that pumps blood to and from heart) and doesn't come in direct contact with the bloodstream, hence the chances of stroke are potentially reduced. C-Pulse does pose a threat to Thoratec's HeartMate II, but is less significant than HeartWare's new device.

Financials

THOR's stellar financials support the worldwide popularity of its products. A stable revenue growth, positive financials against negative financials of rivals and its cheap fundamentals all make THOR a lucrative investment in this industry.

<img src="http://media.ycharts.com/charts/5e3fded500737728ae2cf73bfc364c91.png" />

THOR Revenue Quarterly YoY Growth data by YCharts

 

<table> <tbody> <tr> <td> </td> <td><strong>ROA</strong></td> <td><strong>ROE</strong></td> <td><strong>Gross Margin</strong></td> <td><strong>Profit Margin</strong></td> <td><strong>Debt to Equity</strong></td> <td><strong>FCF (ttm)</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>P/B</strong></td> <td><strong>P/S</strong></td> </tr> <tr> <td><strong>THOR</strong></td> <td>11.86%</td> <td>13.74%</td> <td>69.29%</td> <td>20.6%</td> <td>0</td> <td> <p>125.17M</p> </td> <td> <p>23.42</p> </td> <td>3.25</td> <td>4.63</td> </tr> <tr> <td><strong>HTWR</strong></td> <td>-38.05%</td> <td>-78.19%</td> <td>52.21%</td> <td>N/A</td> <td>1.17</td> <td>-75.14M</td> <td>N/A</td> <td>14.18</td> <td>11.8</td> </tr> <tr> <td><strong>SSH</strong></td> <td>-68.91%</td> <td>-118.49% </td> <td> N/A</td> <td>N/A </td> <td>0</td> <td> -8.54</td> <td>N/A</td> <td>3.57</td> <td>N/A</td> </tr> </tbody> </table>

For the full year, Thoratec's diluted EPS is expected to be in the range of $1.79 to $1.83 on a non-GAAP basis, and $1.40 to $1.44 on a GAAP basis. A forward P/E of 23.42 and average diluted EPS of $1.81 on non-GAAP basis gives the stock a fair price of $42.39. The company has beaten analyst earnings forecasts in 6 out of last 8 quarters.

In a nut shell

A sturdy line of LVADs, wide acceptance in the medical field, a strong brand name, cheap fundamentals, robust financials, and a history of performance deliverance all give THOR a competitive edge over its rivals. Needless to say, it's a buy! 



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