CAPScall of the Week: Heartware International

For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Heartware International (NAS: HTWR)

What Heartware International does
As its name implies, Heartware manufactures small implantable circulatory pumps and the ventricular assist devices that are focused on treating patients at the end stage of heart failure.

Heartware currently has its lead product, the ventricular assist system, approved in Europe, and it's in the process of having the Food and Drug Administration review its application for the product in the U.S. Based on a ruling from the FDA's Circulatory System Device Panel of the Medical Devices Advisory Committee, Heartware's VAD appears to have a decent shot of approval after a 9-2 vote in favor of the device.

Whom it competes against
The upside to creating cutting-edge products focused on the heart is that there's an enormous amount of revenue potential if a company can get its device approved. According to the Centers for Disease Control and Prevention's website, there are 2 million heart attacks and strokes each year in the U.S., and cardiovascular disease ranks as the No. 1 killer in the country. While not all victims are necessarily potential patients for Heartware's VAD, the company is fishing in a big pond.

However, there's also a downside that includes fierce competition and a stringent FDA that isn't going to allow just any new device to walk onto the market without rigorous safety testing.

Abiomed (NAS: ABMD) and its Impella implantable heart pump, which aids patients recovering from surgery or major trauma, is one company that has an FDA-approved device already on the market. Sales in the latest quarter grew by 43% for this device, and the company cruised past Wall Street's forecast loss of $0.02. However, this marked Abiomed's first annual profit since 1997!

Thoratec's (NAS: THOR) primary product, Heartmate II, is a VAD that's approved for worldwide sale. The company currently boasts 68% of worldwide market share, according to Bloomberg. In its recently ended quarter, sales of its Heartmate II device grew by 32% worldwide. Unlike its peers, Thoratec has turned a full-year profit in nine of the past 10 years.

The call
After reviewing Heartware's prospects, I've decided that while the technology and apparent uses seem great, the expenses and history of losses are too much to ignore in the meantime. As such, I'm making a CAPScall of underperform on Heartware International.

Heartware doesn't have the long company history that you see with Abiomed or Thoratec, so it's a bit unfair to compare its six annual losses to its peers. Nonetheless, despite a good chunk of cash on its balance sheet ($144.5 million), it's going to continue to burn through this cash launching its VAD and developing other products in its pipeline. Realistically, it could be years before Heartware comes even close to turning a profit, and $1 billion-plus is a steep price to pay for a company that's many years away from profitability. I'm willing to re-examine this in a year or two, but not even approval of Heartware's VAD -- which seems likely -- can support this valuation.

Just as I'm scouring the market for the next great stock, so is our team of analysts at Motley Fool Rule Breakers. See what stock they feel has the potential to be the next multibagger in the health care sector. Simply click here for your free report.

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He's proud that he managed to avoid the phrase "pump you up" in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's better for your health than double cheeseburger.

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