Notable Calls

Auriga is downgrading Thoratec (NASDAQ:THOR) to Hold from Buy this morning while lowering their price target to $29 (prev. $52).

The firm ntoes they continually hear from large implant centers worldwide that VADs offer impressive, if not life saving, outcomes for end-stage heart failure patients. However, they have seen an “enthusiasm gap” between implant centers and community cardiologists, as noted in their last note published on October 29, “No Surprises; It’s All About DT!” Transplant centers across the board have embraced VADs, but referrals from community cardiologists have not materialized for a number of reasons, the foremost being lack of uniform referral guidelines. As such, very few of the potential VAD patients are ever considered for VAD implantation. Until Thoratec (THOR, Hold) can address these referral challenges, the firm prefers to sit on the sidelines as growth and guidance for 2011 will likely disappoint.

Potentially large patient population, but where are the implants? VADs offer a potentially large addressable market – the end stage heart failure patient population (Class IV) has almost 250,000 patients, with upwards of one-third (80,000+) likely candidates for mechanical circulatory support. However, Auriga notes they have seen a disconnect between the potential pool of patients and number of VAD transplants done. This trend has become more apparent as growth in the DT setting has been relatively anemic (beyond the initial patient bolus) versus the potential.

Transplant centers love VADs. They continually hear from large implant centers and KoLs across the country and world that VAD implant outcomes are impressive across a range of measures - survival, quality of life, improvement in functional class, and cost effectiveness. Hence, in their view, tens of thousands of Class IV and earlier patients ought to receive an implant. Currently, 96% of DT implants and certifications are with these transplant centers. Growth will require broadening into the open-heart surgery centers. However, the DT certification process requires time (~1.5 years) and a massive support structure (VAD coordinators, team of surgeons, admin support and post-op follow ups).

Community cardiologists – not so much. As the majority of class IV patients are still cared for by the community cardiologists, the firm decided to check in with a handful of large community centers. The overwhelming response they received to their queries was that VAD transplants were “not at top of our mind” given the number of other options available for treating these patients. Community cardiologists had two chief complaints. First, they do not know which patients (and when) to refer for VAD implants since there are NO society (e.g., HFSA, AHA) referral guidelines in place. Second, when they did refer patients they often did not get an implant since the patient was either a younger, healthier patient (and thus more likely to be a transplant/BTT candidate) or a very late-stage patient who is either too old or had too many co-morbidities to undergo VAD implantation.

Outreach will take time, money, and resources. Auriga suspects significant growth in patient referrals will only be realized once the above-cited issues are resolved (namely, guidelines on which patients to refer and when)

Patience will be required. As a result, the firm perceives that the potential VAD market remains large, but growth could be challenged in the near term. Growth in 2011 could be less than half the 40% growth of 2010. And 2012 could see additional headwinds as Heartware (HTWR, Buy) could be approved for BTT use in the U.S. Overall, their checks still indicate that, in experienced hands, outcomes between the two devices are similar.

Given the hurdles, they are cutting their 2011 numbers. Firm is cutting 2011 estimates to $438MM/$1.16 from $473MM/$1.38. Their new $29 price target is based on 25x P/E of 2011 EPS.

Notablecalls: I've never been a fan of Auriga, but reading the call they have really done some excellent research on the VAD's space. Looks like general market expectations may be too high in THOR's case. Should THOR guidance disappoint at current valuation...look out below.

The stock is certainly down from its recent highs but given Auriga's comments I suspect we may see some additional downside in the n-t. I'm looking at $30 level to be tested today.