01-31-2014 A Heartier Ventricular-Assist Market
Raymond James sees growth for the duopoly of Thoratec and Heartware.
Raymond James & Associates
We believe the ventricular-assist-device market remains one of the more exciting subsectors in our medical-device universe.
Ventricular-assist-device (VAD) is a duopoly market with high barriers to entry and established reimbursement, and has generated consistent midteens market growth over the last three years (well above the low-/mid-single-digit growth profiles of most other segments of the medical device industry). We expect this growth to continue, and for interest in the space to expand over the next few years as both Thoratec (ticker: THOR) and Heartware International (HTWR) [both rated at Outperform] advance the therapy with smaller next-generation devices that should improve clinical outcomes and could lower the overall cost of the therapy.
While Heartware has outperformed year-to-date (up 6% year-to-date versus S&P 500 down 3% year-to-date), Thoratec is down 5% on concerns around initial 2014 guidance and a lingering impact from the higher thrombosis rates highlighted by the media in late November. Our view is that sentiment has turned overly negative on Thoratec and, despite lowering estimates, we believe the risk/reward at this level is favorable. We believe the thrombosis concerns are manageable and are optimistic that 2014 guidance could act as a clearing event for the stock.
We attended two trade shows [Society of Thoracic Surgeons (STS) and the American Association of Heart Failure Nurses (AAHFN)] over the last 10 days and came away comfortable with our positive industry thesis. A few takeaways: 1) We got confirmation from a handful of constituents that November market-share dynamics were impacted partially by confusion associated with the implementation of the Centers for Medicare and Medicaid Services' (CMS) new NCD (national coverage decision), which is consistent with Heartware's recent comments; 2) Our sense was that the HeartMate II (HM2) thrombosis headlines in November were not having much of an impact on overall volumes or market share; 3) Similar to sentiment that we have picked up at previous industry meetings, surgeons appear to favor the size of the Heartware VAD (HVAD), while VAD coordinators remain more comfortable with the safety record of the HM2. Interestingly, one surgeon mentioned to us that he splits his bridge-to-transplant (BTT) volume evenly between the two devices in order to maintain a favorable rapport with both manufacturers; 4) While still a small proportion of U.S. implants (relative to Europe), interest in using a thoracotomy technique with the HVAD seems to be growing; 5) We felt that there were similar levels of "buzz" for both mechanical VAD (MVAD) and HM3 and believe the industry is genuinely excited about next-generation, potentially better, VADs; 6) Increasing awareness among community cardiologists/heart-failure specialists remains an important driver of longer-term VAD growth.
Based on Heartware's preliminary fourth-quarter results, we estimate that the worldwide VAD market (excluding Centrimag [Thoratec]) generated sales of $663 million in 2013, up 17.5% year-over-year (up 15% on a unit basis). By our math, this represents the sixth straight year of 15%-plus unit growth. We estimate that Heartware exited the year with about 25% share of the
U.S. market (40% of BTT), although normalizing for a soft month of November, market share was likely a little higher. We are comfortable with our fourth-quarter estimates for Thoratec ($127 million revenue, 41 cents adjusted earnings per share), but given Heartware's reported implant softness in November, we would be not be surprised to see some modest upside to Thoratec's top line.
We expect the trend of midteens market growth to continue in 2014, but we lower our estimates modestly. We model world-wide market growth of 13% year-over-year (in units). Our underlying market-segment assumptions are: 4% growth in BTT; 23% destination therapy (DT) growth; and 15% international growth. We lowered our BTT growth assumption to more closely match the market's low-/mid-single-digit growth profile from 2010-2012 (versus 8% in 2013). As such, we lowered our 2014 Thoratec revenue and EPS estimates to reflect slower BTT market growth and modest share losses, somewhat offset by higher growth in Japan and DT. We leave our Heartware estimates largely unchanged as lower BTT market growth is offset by higher DT pricing for the HVAD.
While we can certainly point to sources of conservatism in these estimates, we are nonetheless below consensus. In terms of potential upside, 2014 DT market growth could be faster as Heartware has effectively been out of this segment for six quarters and the presence of a second player (even if it's only a clinical trial) may accelerate growth. We note that Heartware's BTT approval in late 2012 drove faster market growth in 2013 (up 8% BTT market growth in 2013 versus about 5% in 2012).
-- Jayson Bedford
-- Michael Rich
