competition

Article from Bloomberg.com

Thoratec Heart May Stop Pumping Stock as Rivals Near (Update2)

By Lisa Rapaport and Alex Nussbaum

May 8 (Bloomberg) -- Thoratec Corp.'s pint-sized mechanical heart has pumped up shares by 22 percent since winning U.S. approval in April. The gain may be short-lived as three medical manufacturers plan to unveil similar cardiac devices.

Thoratec's HeartMate II, smaller than a D-cell battery, is the first in a new generation of products that circulate blood using a small spinning blade. Doctors say its petite dimensions will help it dominate the $3 billion U.S. market for patients awaiting life-saving transplants.

That is, until the arrival of devices from Ventracor Ltd., World Heart Corp. and HeartWare Ltd. All three are entering final clinical trials this year and are easier to use than Thoratec's model, doctors say.

HeartMate II may generate $130 million a year by 2010, analysts say, almost half of Thoratec's 2007 revenue. Twelve of 14 analysts surveyed by Bloomberg recommend owning shares and expect an average rise of 22 percent to $19.89. Thoratec may fall to $12 when competing devices become available, says Assaf Guterman, an analyst with Lazard Capital Markets in New York.

``Everybody has had a buy rating on this stock for so long because of HeartMate II, which everybody should understand will control the market for only a brief period before it loses out to competitors,'' said Guterman in an interview. ``What's odd is everybody is so enthusiastic about this stock and pretty much everybody is pretty pessimistic about the long-term revenue potential for HeartMate II.''

25 Percent Smaller

Transplant surgeons are switching to the new HeartMate model from an older one that is too bulky for children, most women and smaller men. Randall C. Starling, head of heart transplant medicine at Cleveland Clinic in Ohio, says HeartMate II, at 25 percent the size of Thoratec's older model, lasts longer and has lower infection rates.

Thoratec, based in Pleasanton, California, fell 10 cents to $16.22 at 4 p.m. in Nasdaq stock market composite trading. Shares dropped 10.7 percent in the previous 12 months.

Competing devices now entering human trials may render HeartMate II obsolete, if approved for sale in the next three to four years.

The mechanical hearts now being tested are smaller still, easier to implant, and may extend patients' lives by decades because they don't contain parts, such as ball bearings, that wear out over time, doctors and analysts say. Instead, the next- generation pumps use rotors suspended in a magnetic field, not ball bearings, to keep blood flowing.

``That's the cutting edge,'' Starling said.

Human Trials

Ventracor, based in Brisbane, Australia, and Sydney-based HeartWare have started human trials, the companies said. World Heart, of Oakland, California, will begin human tests in the third quarter, said spokesman David Pellone.

Thoratec is redesigning its own next-generation device, called HeartMate III, to make it smaller, said Chief Executive Officer Gary Burbach in an interview. Burbach didn't say when it might be ready for human trials. Thoratec may supplement its pipeline by licensing or purchasing a new device, and rivals won't hurt Thoratec's revenue potential, he said.

``It's not a zero sum game,'' Burbach said. ``There is a tremendous opportunity for growth for ourselves as well as for successful competitive devices.''

About 5 million Americans suffer from severe heart failure, a condition that contributes to about 300,000 deaths a year. The first permanent artificial heart, used after the failing organ was removed, was implanted in a human in 1969. Such devices received worldwide attention in 1982 when a model designed by Robert Jarvik was implanted in Seattle dentist Barney Clark. Surgeons shifted from replacement hearts to assistive pumps such as HeartMate as safety problems emerged with the older devices.

Bypass Surgery

HeartMate is in a family of products known as left ventricular assist devices that are connected to the patient's heart during bypass surgery. These devices are generally used to help patients survive until a transplant organ becomes available. HeartMate II is powered by batteries patients wear on a belt, enabling them to leave the hospital. Ball bearings in the device maintain consistent blood flow and prevent clots.

Thoratec is still studying HeartMate II to find out how many years it may add to patients lives. The device may extend life by as much as seven years on average, not as long as the ten years offered by a transplant but much better than older heart pumps, said Spencer Nam, an analyst with Summer Street Research Partners in Boston, in an interview.

``There's no question that the newer devices from Ventracor and other companies could be virtually permanent, giving patients decades to live if they work,'' Nam said.

Unproven Technology

Because the emerging technology is unproven, Nam said Thoratec is undervalued, and he recommends buying the stock with a target price of $30.

``I don't think the street appreciates how much of a premium Thoratec should get relative to its peers based on the potential for HeartMate to be the go-to option for the next three years or so,'' Nam said.

It will take several more quarters for investors to realize Thoratec can't generate enough revenue from HeartMate II to justify its current stock price, or the lofty targets set by other analysts, said Lazard's Guterman. Thoratec, with a market capitalization of $883 million, has a price to earnings ratio of 81.60, higher than other small device makers.

``Thoratec will trade largely based on the outlook for HeartMate II, and now that approval has passed, the story could get boring,'' said Ryan Bachman, an analyst with RBC Capital Markets in San Francisco, in a note to clients. He has a $17 target price for the stock, which he labels a ``speculative risk'' due to the potential for competitors to emerge by 2010.

To contact the reporters on this story: Lisa Rapaport in New York at [email protected]; Alex Nussbaum at [email protected]

Last Updated: May 8, 2008 16:08 EDT