Australia | Nov 12 2010
By Chris Shaw
Somewhere between 2-4% of the Western world's adult population suffers from heart failure, which implies a large potential market for companies offering treatment options in this area. Given treatment options beyond drugs are limited at present, alternative treatments have the chance to be successful.
In the view of Southern Cross Equities this makes HeartWare International ((HIN)) an interesting play, as the Australian-listed US company commercialises HVAD, its ventricular assist system for treating late-stage heart failure.
HeartWare is attempting to bring to market what would be the world's smallest Left Ventricular Assist Device (LVAD). A ventricular assist device assists the heart in its normal pumping action and so counters heart failure, which is essentially the inability of the heart to pump out the needed five or more litres of blood per minute.
Southern Cross rates HeartWare as a Speculative Buy, one reason for its positive view being the company has to date posted solid clinical data in tests of its HVAD technology. Southern Cross also notes the company is well positioned to establish itself in what is a large and under-penetrated market at present.
With respect to clinical data, Southern Cross notes HeartWare's LVAD device has recorded high survival rates and this is allowing the group to build sales in the European market. Good results are also expected in the US market where HeartWare is currently conducting a Bridge to Transplant trial of its device. Results from this trial should be available shortly and Southern Cross expects FDA approval by 2012.
At present the only HeartWare and Thoratec have HVAD devices in commercial use and Southern Cross gives HeartWare the advantage in this market given its device is smaller and lighter. This suggests it should be well received in the market once it is approved as a destination therapy in the US, likely in 2015.
The other positive in Southern Cross's view is LVAD devices in general are gaining greater market acceptance from the cardiology community. What is helping in this regard is drug therapy continues to be relatively ineffective and heart transplants remain rare.
For HeartWare specifically, Southern Cross sees scope for gross margins to improve over time from around 57% at present to as much as 65-70% by 2013. This would come on top of a growing market base, as the broker estimates there are around 50,000 patients annually who could most benefit from such devices.
Southern Cross's forecasts call for HeartWare's earnings per share (EPS) to grow from a loss of US7.2c per share in 2010 to minus US5.5c in 2011, before positive EPS in 2012 of US13c. Based on these forecasts Southern Cross has set a price target for the company of $3.40 per share.
Despite a market capitalisation of about $985 million, HeartWare receives little coverage in the Australian market as evidenced by no research on the stock by any of the broker's in the FNArena database.
HeartWare shares today are stronger and as at 12.05pm the stock was up 7c at $2.10. This implies upside of about a little more than 60% to the price target of Southern Cross. Over the past year HeartWare shares have traded in a range of $0.96 to $2.50.