Shares of Thoratec Corp. ( THOR ) rallied 4.37% ($1.59) to $38.00 after the company reported impressive fourth-quarter financial numbers. Adjusted EPS of 20 cents comfortably surpassed the Zacks Consensus Estimate by 9 cents. However, EPS declined 33.3% on a year-over-year basis, owing to flat product sales growth.
Adjusted EPS included stock-based compensation (23 cents) but excluded amortization of purchased intangibles (3 cents), acquisition-related contingent consideration (25 cents), foreign currency re-measurement of contingent consideration (3 cents), impairment of intangible assets - Apica Structural Heart (8 cents), impairment of intangible assets - DuraHeart II (14 cents) and related income-tax effect (4 cents).
The flat revenue figure can be primarily attributed to the modest decline in HeartMate II sales, partially offset by continued double-digit revenue growth in the CentriMag business. However, fourth-quarter product sales of $128 million beat the Zacks Consensus Estimate of $106 million.
Revenues from the U.S. were almost flat on a year-over-year basis at $99.7 million while the same from international business also remained flat at $28.3 million. International results were driven by improved performance from Europe, partially offset by Japan, where the company did not realize any material HeartMate II unit sales in the quarter.
Revenues from the flagship HeartMate product line decreased 0.5% year over year to $112.4 million. During the quarter, the company sold 1034 HeartMate pumps worldwide, highlighting an increase of 6% from the year-ago quarter. In the U.S., HeartMate unit volume increased 1% year over year, while international volume grew a strong 21%.
Revenues from the CentriMag business increased 14.5% year over year to $12.6 million, driven by healthy double-digit worldwide unit growth, both in the U.S and Europe. The company continues to expand its CentriMag business, with 3 new U.S. centers and 7 international centers added during the fourth quarter.
However, revenues from PVAD and IVAD plunged 41.2% to $2 million in the quarter while revenues from Other business declined 25% to $1 million.
Adjusted gross margin expanded 420 basis points (bps) year over year to 69.7%. The expansion was primarily led by lower warranty-related expenses associated with the HeartMate II Pocket Controller.
Adjusted operating expenses surged almost 25% year over year to $73.8 million owing to higher operating and clinical trial expenses, and increased personnel costs. As a result, adjusted operating margin contracted to 12% from 19.4% in the year-ago quarter.
Thoratec had cash and investments of $230.5 million as of Jan 3, 2015, down from $253 million as of Sep 27, 2014.
Product Update/ Clinical Data
During the quarter, Thoratec completed the enrolment of 50 patients under the HeartMate III CE Mark trial at ten sites across Europe, Canada and Australia. The study will monitor these patients over the next six months (till May 2015). The company expects to submit the clinical data once this process is complete and expects CE Mark approval for HeartMate III by late 2015.
In Sep 2014, Thoratec began enrolling patients for the U.S. trial. Patient enrolment under the trial, which began in a safety phase under conditional approval from the FDA at five sites, is expected to cover up to sixty sites following full approval from the FDA. To date, the company has enrolled 26 patients. It expects to enter the broad enrolment phase of the HeartMate III trial in the U.S. during the second quarter.
For fiscal 2015, Thoratec expects revenues in the range of $450-$460 million. Unfavorable foreign exchange and a week lesser than in 2014 are likely to cost $18 million in revenues. Management assumes total worldwide market growth in the low single digits for 2015.
Adjusted gross margin is expected to stand at 70.5%. The company forecasts adjusted EPS in the range of $1.10-$1.20 for the full year. Owing to the possible HeartMate III launch in Europe and U.S. IDE trial enrolment, Thoratec expects EPS growth to be more back-end loaded in 2015.
2015 is anticipated to be a transition year for Thoratec as it seeks to reaccelerate market growth. A positive clinical data from the HeartMate III study and the eventual European launch are likely to do wonders for the company's overall results. We believe that management's guidance is cautious owing to the lack of near-term visibility.
However, unfavorable foreign exchange remains a headwind. Moreover, sluggish demand for HeartMate II in the U.S. and Japan (Thoratec's largest International market) remains is an added woe. Further, the lackluster development in HeartMate PHP study in the U.S. and holding of NIH-sponsored REVIVE-IT trial does not bode well for the stock.
Currently, Thoratec carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical instruments sector include Abiomed ( ABMD ), Inogen ( INGN ) and Luminex ( LMNX ). All the three stocks sport a Zacks Rank #1 (Strong Buy).
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