It is no small measure of the short-term thinking of many market participants that these events are regarded as disasters.
Thoratec (NASDAQ:THOR), which produces several devices and systems to assist patients suffering from heart failure, saw its stock plunge 24% this morning as the company announced that it expected the number of patients receiving its pricey Destination Therapy implants would be 30 to 35, lower than what had been anticipated.
The device helps the heart's left ventricle pump blood in end-stage heart failure patients. Thoratec's pumps have only recently been promoted as permanent transplant alternatives; in the past they've been utilized as temporary solutions while patients awaited new hearts. Please note Tom Jacobs' discussion of this market from his 2001 article "Artificial Hearts for Investors." Needless to say, since these are life-and-death decisions, doctors are likely to be extraordinarily cautious before making a change in their adoption practices. Another limitation: the extraordinarily high cost of the devices.
Several Wall Street analysts responded by slashing their ratings on the firm. Just in time, too. Wouldn't want to anticipate the losses, or anything. Thoratec's stock now trades at a 15-month low.
That's right, I said 15-month low. Not decades, not even multiple years. Fifteen months ago, the stock was where it is today, and it's given up that amount of time-value based on a bad quarter. Now I ask you: Does it make any sense at all that this company is worth 75% of what it was yesterday based upon a bad quarterly performance? No, not really; nor are the lower expectations of the full year that germane. But the compressed expectations of the market create an interesting dichotomy: a loss of 15 months' worth of gains isn't that much of a disaster; just a mere quotational risk. However, a loss of a quarter of a company's entire market capitalization suggests permanent impairment with at least one of its products. It doesn't seem the latter is the case.
Medicine is an environment where "big ticket" really means something, where treatments like ImClone's (NASDAQ:IMCL) Erbitux are priced in excess of $100,000. In such cases, doctors' rate of adoption in using such devices or therapies can be extremely unpredictable. Thoratec noted that it expects the uptake for its Destination Therapy to improve following a change in the "reimbursement environment in the fourth quarter," when proposed Medicare changes will add 30% to the amount covered for the devices, from $96,000 to $125,000 apiece. This change is expected to take place in October, and the company anticipates that more hospitals will be more likely to approve use of the device when the economic conditions change.
The stock market doesn't have a long reputation for being patient with companies with propeller-head technology that disappoint over the short term. If later quarters show an uptrend in doctors' adoption of Thoratec devices as a destination therapy, we might look back on today as a pretty decent opportunity.
Bill Mann owns none of the companies mentioned in this story. Interested in breakthrough companies? Consider subscribing to The Motley Fool's Hidden Gems today!
