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Thoratec Corporation (NASDAQ:THOR)

Q4 2008 Earnings Call Transcript

February 05, 2009 at 4:30 pm ET

Executives

David Smith - Executive Vice President and Chief Financial Officer

Gary Burbach - President and Chief Executive Officer

Larry Cohen - President, ITC Division

Analysts

Taylor Harris - JPMorgan

Mimi Pham - JMP Securities

Bob Hopkins - Banc of America

Timothy Lee - Piper Jaffray

Jason Mills - Canaccord Adams

Suraj Kalia - Sanders Morris Harris

Spencer Nam - Summer Street Research Partners

Duane Nash - Pacific Growth Equities

Jayson Bedford - Raymond James

Operator

Good day, everyone and welcome to the Thoratec Corporation earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Smith. Please go ahead, sir.

David Smith

Thank you. Good afternoon and thank you for joining us today. With me are Gary Burbach, President and Chief Executive Officer; and Larry Cohen, President of our ITC Division. We ended the year continuing the highly positive trends of the second and third quarters including strong revenue growth in our Cardiovascular Division, ongoing positive outcomes with the HeartMate II as a commercial device and a continue penetrations of new centers with the HeartMate II.

We also achieved a significant milestone in our destination therapy pivotal trial and continue to lay the ground work for addressing that market opportunity once we have HeartMate II approval for that indication. Gary will discuss this and other key events during the quarter as well as our operational outlook for 2009 and I will follow with a review of our financial performance and financial guidance for this year. We will then open the call to your questions.

Before we begin, during the course of today’s conference call and the question-and-answer session that follows, we may make projections or other forward looking statements that are subject to the Safe Harbor provisions of the securities laws regarding future events or the financial performance of the Company.

We caution you that these statements are only predictions and the actual results may differ materially. We also alert you the risks contained in the documents we filed with the Securities and Exchange Commission such as our annual and quarterly reports on Forms 10-K and 10-Q. We do not undertake any obligation to update or correct any forward looking statements. Gary?

Gary Burbach

Thank you, David and hello everyone. As David mentioned at the opening of the call, we concluded 2008 in a very solid manner. Beginning with our financial performance we ended the year with revenues of $314 million, a 34% increase over revenues of $235 million in 2007. Revenues in the fourth quarter of 2008 were $85.7 million, a 34% increase over revenues of $64.1 million in the fourth quarter a year ago. Cardiovascular division revenues in 2008 were $215 million versus the $144 million a year ago or an increase of 49%. Our Cardiovascular Division revenues were $60.2 million in the fourth quarter, an increase of 48% over revenues of $40.5 million in the fourth quarter a year ago. The results for the fourth quarter of 2008 include approximately $1.4 million in HeartMate II stocking orders.

Excluding CentriMag, we sold 604 pumps in the quarter versus 470 pumps in the fourth quarter a year ago. For the full year, we sold 2,231 pumps versus 1,712 a year ago, again excluding CentriMag. As we did for our first half results, we will provide additional detail on product sales for the full year. In 2008 the HeartMate product line which includes the HeartMate II and XVE accounted for $161 million in sale, a 75% increase over sales of $91.8 million in 2007 while our PVAD and IVAD sales were $41.7 million, a 4% decline from sales of $43.3 million a year ago. CentriMag sales in 2009 were $9.9 million, a 50% increase over sales of $6.6 million a year ago. For the year, Cardiovascular Division revenues in North America were $173 million, a 57% increase over North America revenues of $110 million a year ago. International Cardiovascular Division revenues were $41.8 million, a 22% increase over $34.2 million in 2007. Finally of our total Cardiovascular Division revenues $165 million resulted from pump sales with $47.4 million generated by sales of equipment and accessories.

This compared to pump revenues of $109 million and equipment and accessory revenues of $32.5 million in 2007. The balance of our Cardiovascular Division revenues reflects contributions from our graft business. In the next few minutes, I would like to address some key events during the quarter and then provide you our perspectives on the Company’s operational outlook for 2009. We continue to add new HeartMate II centers during the quarter although as I am sure you would expect at rate lower than in the second and third quarters. We added twelve new centers ending the year with 55 new centers significantly exceeding our initial goal of 40 new centers. At yearend, we had a total of 101 HeartMate II centers in North America. This total includes 87 transplant and 8 open heart centers in the US and 6 centers in Canada.

It is particularly encouraging to see the level of ongoing utilization as 100% of the trial centers and 64 % of the new HeartMate II centers have reordered the device during 2008. The patient experience in the commercial setting continues to be highly positive. Reinforcing the value of our strategy to add new centers in a measured way and ensuring that the centers would have the training and clinical support necessary to achieve successful patient outcomes.

The value of our strategy is also being borne out by the early data reported in the InterMax registry in which the 169 HeartMate II patients required for the post market study were enrolled during the second and third quarters. The initial data showed that 30 day mortality was only 4% which compared favorably with the bridge trial experience. We continue to see favorable data from the HeartMate II bridge trial presented at major medical meetings. At the American Heart Association meeting in November there were a number of ad presentations including several involving the HeartMate II.

Two of the most significant included a presentation by Dr. [Salvi Pamboukjian] from the University of Alabama Birmingham, covering the result with 67 female patients versus 214 male patient implanted with the HeartMate II at 33 centers. At 18 month positive primary outcomes which included successful transplant, ongoing HeartMate II support and recovery of the natural heart, comparable at 78% for males and 81% for females. If you noticed that the average support for females of 339 days was considerably longer than 247 days for males.

She concluded that the HeartMate II cannot only provide effective hemodynamic support for both male and female patient but also that a smaller, more durable device such as the HeartMate II can be especially advantageous to females with advance heart failure given the smaller body size and significantly longer average wait time for heart transplantation among female patients. She also indicated that she believe the device is currently underutilized in the female patient population. The other presentation of note was from Dr. Jay Powell of Duke who looked at operative mortality for patients implanted with the HeartMate II and the impact of concurrent cardiac procedures.

In those patients who underwent implantation without additional cardiac procedures who represented approximately 60% of the 281 patient cohorts, he found that the 30 day mortality for HeartMate II patients was approximately 6%. This is comparable to published studies on mortality rates for other types of cardiac surgery involving advance stage heart failure patients. With respect to our destination therapy trial, at the end of the year we received approval from the FDA for our IVE supplement to end randomization for patients enrolled in our pivotal destination therapy trial. We had announced in early December that a pre-specified interim analysis of data from the study showed that patients implanted with the HeartMate II achieved statistically superior outcome versus those in the control group who were implanted with the HeartMate XVE. As a result, the studied DSMB concurred with our proposal to eliminate randomization for additional patients enrolled in the study under continued access protocols. The destination therapy trial centers are now on the process of receiving IRB approval to end randomization. While this is a positive development, we do need to note that more recently the FDA has indicated that they expect to control the number of patients who will receive the HeartMate II under this protocol.

In terms of the trial enrollment as of January 23rd, enrollment in the DT arm was 648 patients including 395 in the randomized portion of the trial. The pace of enrollment is continued to be fairly steady despite ongoing center focus on the commercial launch of the HeartMate II for bridge to transplantation. In the meantime, we have completed the work plan for our destination therapy PMA submission and had our pre-submission meeting with the FDA at the end of January.

We expect to file the PMA in late May leading to unexpected approval in the first half of 2010. The timeline is driven by he FDA's communication that they expect our submission to include a full two-year follow up on the primary endpoints for the pivotal cohort of 200 randomized patient which will be achieved in May.

Turning to ITC, we had full-year revenues of $98.6 million, an increase of 9% over revenues of $90.6 million a year ago. The quarter revenues of ITC were $25.5 million representing growth of 8% versus a year ago. Activity in the quarter reflected strong growth domestically including sales of hospital point of care coagulation offering and our Avox product line as we continue to increase system placement.

In addition, our alternate site business was up 16% versus a year ago due to pharmaceutical clinical trial sale and increased patient sale testing as a result of the recently expanded CMS reimbursement. Our international activity in the quarter slowed a bit due to timing of orders from our distributors and our US skin incision business continued to be soft although we expect some stabilization in this product line during 2009. With respect to the revenue breakout for the full year, revenues at ITC included $53.3 million for hospital point of care including HEMACRON, Avox, and IRMA an increase of 13% over revenues of $47.2 million a year ago.

Revenues for our alternate site business which is primarily ProTime were $30 million, a 16% increase over revenues of $25.8 million a year ago. Skin incision revenues were $15.3 million, a 13% decrease from revenues of $17.5 million in 2007. As we have noted previously, this business has been impacted by lower price competitive pressure. The geographic breakout of revenues at ITC was $64.2 million domestically, a 3% increase over revenues of $62.6 million last year and $34.3 million internationally, a 28% increase over revenues of $28 million in 2007.

Before turning the call over David, I want to outline what we see is the important elements in the next phase of our growth strategy during 2009. We believe that this will also provide you a context for the financial guidance that David will discuss shortly.

First, in the Cardiovascular Division we will continue our multipronged market development strategy focused on center and referral development including program designed to generate increase implant activity at existing centers while ensuring continued positive clinical and economic outcomes. For example, we will be hosting a North America Users Meeting in March with representatives from most of our HeartMate II centers. We will be providing them the most current information on clinical and economic best practices in the field of advanced heart failure therapies and mechanical circulatory support.

In terms of new centers, we expect to add approximately 10 to 15 new HeartMate II centers in North America during 2009 with roughly an equal split between transplant centers and open heart centers. As a reminder there is slightly more that 100 transplant centers, 87 of which are now HeartMate II customers and just over 1,000 open heart centers in North America. Over the course of the next four to five years we believe that our efforts directed toward these open-heart centers could result in doubling the number of centers utilizing that therapy for bridge to transplantation or destination therapy in the United States.

As part of our efforts to cultivate non-transplant centers, we will continue to utilize the CentriMag which provides us a simpler and lower cost entry point into a new center. Having centers achieved certification from CMS for destination therapy reimbursement is key to both building Thoratec's base of VAD centers and to an effective launch of HeartMate II for destination therapy next year. The deadline for joint commission recertification of existing destination therapy centers, all of which were transplant centers, is next month. Generally, these centers are progressing well and we do not anticipate issues with this process.

We now expect that 70 to 80 centers will have received certification by the end of 2009. This reflects re-certification of 58 of the current 62 destination therapy centers and the addition of 10 to 20 new centers. We will also continue to focus on the favorable economics of a VAD program. There has been much discussion about hospital capital equipment expenditures in the current economic environment. However, we have seen little impact from this issue to date. It is important to note that launching a HeartMate II program typically costs the center in the range of $300,000 to $350, 000 of which only about 15% of that amount involved capital equipment. The balance is the pumps and accessories which are covered by current reimbursements. Given these economics and the positive spillover effect of a VAD program on a centers overall heart failure practice, we continue to experience positive receptivity regarding the initiation of VAD programs on the part of potential new centers.

We are also expanding our clinical education program as part of our new center development efforts. During the fourth quarter, we hosted our First Annual Fellows Conference, which was attended by 20 Cardiothoracic Surgical Fellows and Heart Failure Cardiology Fellows and during 2009 we will expand our sponsorship of cardiac surgery and heart failure fellowships.

Additionally, we will be implementing formulized VAD coordinator training programs including an upcoming three-day course in June being held in conjunction with the University of Louisville, that we believe will be a value for not only a new centers but also for our current centers. We are very pleased with the respond to our efforts from the clinical community and believe that these types of programs will play an important role in further developing the field of advance stage heart failure therapy.

We will be building upon our successful efforts directed to the referring cardiologist community as well. We currently have 14 market development managers (NYSEMKT:MDM) and expect to add one or two more during the year. A key area of focus will continue to be on high volume heart failure clinics and strengthening our relationship with cardiologists in those practices. For example during the fourth quarter, we held the first of a quarterly series of VIP summit for high volume community-based cardiologist.

Generating increased exposure via web based initiatives in consumer media and professional publications and a professional meeting will continue to be an important part of our strategy for 2009. For example we will continue to utilize the Web MD program as we find it to be an effective channel for reaching the referring community. As we ramp to HeartMate II destination therapy approval, we will focus our PR efforts on local media to support our implanting centers and cardiologists. With respect to professional publications and presentations, several papers on the HeartMate II bridge files have been submitted and we anticipate a number of publications later this year.

These papers include an update on the New England Journal of Medicine Article from Doctor Pagani and Miller that examines competing outcome data on 281 patients at 18 months including positive primary outcomes of 79%. Subject of the other proposed papers include a review of low I&R requirements, affective renal and hepatic functions, positive neural cognitive performance and excellent quality of life in HeartMate II patients.

Relative to presentations, several important abstracts detailing new data had been accepted for the International Society for Heart and Lung Transplantation meeting in Paris in late April. This include a review of the experience of HeartMate II patients who are not treated with heparin post implant and the positive impact on bleeding and thromboembolic events, data on pump durability as well as post transplant survival. Looking ahead, we have the expected initial presentation of data from our destination therapy PMA submission. Given the anticipated timing of that submission in late May the presentation of that data would occur at one of the subsequent major Cardiology Conferences which would likely be the be the AHA or HFSA in the fall. Simultaneously, we would look to achieve publication of the data in a major cardiology journal before the end of the year.

Additional growth from our Cardiovascular Division will also come from the increased activity in international markets. In Europe, we are looking to achieve increased utilization in existing market where we have had favorable reimbursement decisions recently particularly in France and Belgium. There are currently 77 centers utilizing the HeartMate II in Europe and we expect to see the addition of five to ten new centers there in 2009 including several and new Eastern European markets.

Also during 2009, we will begin laying the ground work for the introduction of the HeartMate II in Japan. Based on our determination that it can achieve a meaningful presence there because of the devices performances and its small size, we are in the process of finalizing a distribution agreement for that market and expect to conduct a small confirmatory clinical trial in Japan during 2009.

Another important area of focus for Thoratec during 2009 will be our ongoing program to enhance the HeartMate II in its peripherals. These are particularly critical as we moved toward approval for destination therapy. Objectives with these efforts include improving system durability, patient mobility and quality of life as well as facilitating ease of implant and mitigating adverse events. Areas of focus in this regard include durability improvements to both the external and implanted portion of the percutaneous lead. We remain on track to make regulatory submissions on the first of these by mid-year with a submission for a modular percutaneous lead expected in the second half of 2009.

The modular percutaneous lead will enable replacement of the more vulnerable external portion of the lead without re-operation. During the second half of the year, we will rollout our new portable peripheral system that includes lighter and longer lasting battery technology and a lighter portable power module. We anticipate a positive response to these exciting new accessories and anticipate incremental revenue contribution as centers replace their existing equipment with these new offerings.

Also I want to note that we have a several longer term initiatives in the product development area including a new controller which we believe will be ready for launch in 2010. The new controller will be smaller and lighter and feature an LCD display that provides new levels of information for patients, care providers and clinicians. The new controller will also feature a backup battery for added safety in the event of inadvertent loss of power.

Also launching in 2010 should be in field inflow and outflow graft to continue to make the implant procedure easier. Further reaching product initiatives include tools to support a less invasive implant, technology to mitigate the infection risk, a fully implanted VAD system and the next generation pump. To support the anticipated growth and demand for the HeartMate II both in the near and long term as well as the production of these new peripherals we are expanding our manufacturing capacity.

The initial phase of this program is nearing completion and when our second phase is completed later this year, we expect our capacity will be able to support triple of the demand we saw in 2008. As David will discuss, we are anticipating fairly modest growth at ITC in 2009 as we establish a platform for a more robust growth in 2010 and beyond. The most important milestone at ITC will be the introduction of our new ProTime offering which is designed to help us to continue our growth in the anti-coagulation point of care testing in the professional market and capitalize on the growing patient self testing market.

We are in the process of completing the clinical trial and expect to file the 510(k) prior to the end of the quarter with the commercial launch in the second half of the year. In addition, we continue to make good progress with our new offering for the hospital market that is a consolidated platform to perform coagulation, blood gas, electrolyte, and chemistry test on one instrument at the point of care. We expect to launch this offering in late 2010.

The final primary focus at ITC relates to a 483 Notice of Observation report issued by the FDA in January as the result of a recent inspection of our ITC’s facilities in New Jersey. The report detailed a significant number of observations relating to ITC's quality system. We have commenced implementation of a comprehensive plan to address these issues and expect to meet with the FDA in the near future to present ITC’s plan.

Thank you again for joining us today and I will now turn the call over to David.

David Smith

Thank you, Gary. Before reviewing our results, I want to remind you that non-GAAP net income excludes amortization of intangibles and share base compensation expenses under FAS 123-R and in 2007 changes to the make-whole provision from our convertible notes. Non-GAAP net income also takes into account the tax effects of these adjustments. You can find the reconciliation between our GAAP and non-GAAP results in our earnings news release at thoratec.com.

As Gary mentioned, total revenues for 2008 were $314 million, a 34% increase over revenues of $235 million in 2007. Included in our 2008 results were $9 million in HeartMate II stocking orders and an FX benefit of approximately $2.2 million versus a year ago. Total revenues for the fourth quarter were $85.7 million; a 34% increase over revenues of $64.1 million in the fourth quarter of 2007. Non-GAAP gross margin for the year was 59.9% versus 58.7% a year ago. The increased in gross margin reflects higher ASP’s for the HeartMate II, offset in part by lower margins at ITC related primarily to geographic and product mix and unfavorable manufacturing variances. Non-GAAP operating expenses in 2008 were $138 million versus $116 million a year ago.

The year-over-year increase is due primarily to product and market development initiatives, HeartMate II commercialization programs, and higher compensation expense. On a non-GAAP basis, the Company's affective tax rate for the year was 32.6% versus 29% a year ago reflecting higher income before taxes in 2008.

Non-GAAP earnings per diluted share for the year were $0.61 versus $0.33 in 2007. Our earnings per share reflect a benefit of approximately $0.02 related to foreign exchange. Our weighted average diluted shares outstanding at the end of the year were 63.5 million versus 62.1 million shares a year ago. Our convertible debt continued to be dilutive increasing diluted shares outstanding by approximately 7.3 million.

Turning to the balance, we ended the year with $279 million in cash and investments, a 28% increase over the balance of $218 at the end of 2007 demonstrating the continued financial strength of the Company.

This balance includes net auctions rates securities of $30 million. As we have indicated previously, we have classified all auction rate securities that have not been called as long term assets due to the lack of activity in the market. As we indicated in our last call, the market price option for our senior subordinated convertible notes due in 2034 has been satisfied but we have not received any conversion request at this point in time.

With respect to guidance building of our success in 2008, we expect to see a solid growth for the Company in 2009 with revenues expected to be in the range of $345 million to $355 million. Growth in the Cardiovascular Division is expected to be in the low to mid-teens. On a comparable basis, 2009 is expected to be less favorably impacted by FX rates and HeartMate II stocking order activity which is a total of $11 million versus 2008.

Growth in 2009 will be driven by the continued positive adoption of the HeartMate II in North America and Europe as we expect the Thoratec product line to be flat or slightly down year-over-year. At ITC, we are looking for mid-single digit revenue growth based on increased revenues from the hospital point of care markets and our continued penetration of the alternate site market including patient self-testing. That will be enhanced for the launch for our next generation ProTime in the second half of the year.

We expect that our incision business will be flat to slightly down due to a moderating impact of low price competition. Gross margins on a non-GAAP basis are expected to be consistent with those in 2008. The continued positive impact of a HeartMate II market expansion on gross margin is expected to be offset primarily by foreign exchange rates as well as costs associated with the introduction of new peripherals for the HeartMate product line.

With respect to our operating expenses we will be making critical investments in several key areas during 2009. First, we will be continuing our VAD market development programs both initiating new VAD centers in those targeted to educating the referral community about the HeartMate II. In addition, we have a number of key product development programs ongoing to enhance the HeartMate II as well as driving forward next generation technologies such as the HeartMate III and a fully implantable system. We will also be investing in the development of international markets which includes laying the groundwork for the entry of the HeartMate II in Japan. Additionally at ITC, we have the launch of the new ProTime device later this year and the ongoing development of our new platform for the hospital point of care market.

As Gary mentioned previously, we will also be making investments in the quality system at ITC during 2009. At the same time, we are focused on increasing the amount of operating leverage in our business. We expect that non-GAAP operating income will increase 20% to 30% over the prior year demonstrating the growing power of our earnings model as we also continue to make appropriate investments in the future of the Company.

Finally, non-GAAP earnings per share will be in the range of $0.70 to $0.76 per share, a solid increase over the prior year. It is worth noting that for non-GAAP purposes, we have excluded the effect of FSP14-1 related to convertible instruments. The impact on our GAAP earnings per share is approximately $0.07 in 2009 and because of retro-application requirements it will be approximately $0.08 for fiscal 2008.

In closing, I want to briefly reiterate our key priorities for 2009, achieving continued adoption of and successful outcomes with the HeartMate II. Increasing the impact of our market development, new center and clinician referral programs as well as facilitating the destination therapy process for new centers, hitting key milestones on our destination therapy approval process and generating data from the pivotal trial, growing our presence in key international markets with the HeartMate II and realizing product enhancements both in the near and long term to extend our technology leadership in the market.

Thanks again for joining us today and we will now open up the call to your questions. Again, we ask that you limit yourselves to one question and a follow-up. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Taylor Harris - JPMorgan.

Taylor Harris - JPMorgan

Tell me as you think about 2009, how we should think about the progression off of what was a good quarter here in the fourth quarter if we simply take the $86 million that you guys did in sales multiplied by four, you kind of get to the bottom of the guidance range. So, why should we not expect much more sequential growth off of that? Is there a seasonality issues we should consider and maybe just as part of that, how do you see any off-label use of destination therapy working into the 2009 picture?

Gary Burbach

Sure. This is Gary. First of all, as you know Q4 is traditionally been our largest quarter. There is some seasonality Q4 typically being the largest. Q3 typically being the lowest quarter of the year so I would not just have do that kind of straight extrapolation. As you think about the growth drivers in 2009 relative to what we saw in 2008, the growth was predominantly driven by CV, if we look at the ITC division, we had some growth but we expect the growth there to be relatively moderate in 2009. In the Cardiovascular Division, we really had three core growth drivers all related to the HeartMate II launch in North America although I guess it is worth noting that we did also see some continued nice growth with HeartMate II internationally but really the lion’s share of the growth was based on HeartMate II here in North America and the three elements there were the increased ASP that we saw some nice pricing benefit that we realized. Second was stocking and then third was implant activity. So, as we look at 2009 stocking activity we expect to be substantially less than what we saw last year. We had 55 new centers typically 2 pumps per center in terms of stocking and we mentioned that we are looking at 10 to 15 new centers this year so reduction of 40 to 45 new centers.

So, on the order of 100 pumps reduction in terms of stocking activity versus what we saw last year. Similarly the price benefit we experienced for the large majority of last year so we have a little bit of a benefit here in the first part of the year in Q1 but in the other three quarters, we will not see that benefit in 2009. So, we would not expect to see an incremental growth driver there. So, really it becomes implant rates that are the fundamental driver of continued growth in 2009 based on the current bridge to transplant indication this year as we look towards destination therapy approval expected in the first half of 2010.

And just to put some very high level numbers on that, if you look at our number of VAD in 2008 relative to 2007 back out the stocking activity, the growth in implant activity on a worldwide basis with the vast majority being in North America was about 400 additional VAD implants in 2008 versus what we saw in 2007 then a guidance that we provided include implant growth of roughly 250 incremental to the growth of 400 that we saw in 2008.

So, it is not quite as aggressive rate of growth but it is still a significant level of additional implant growth in 2009 beyond the growth that we saw in 2008.

Taylor Harris - JPMorgan

Okay and a few follow-ups just on that I guess number one, are you assuming that that implant growth really is further penetration in the true bridge population and then talk to us about you have mentioned the FDA constraints on the further enrollment in the destination cap program. Are those more strict restraints than what you saw with the bridge? Cap programs, is there something different going on there or not?

Gary Burbach

Yes, Taylor can you repeat the first question?

Taylor Harris – JPMorgan

Yes, the first part was really the growth in implants for 2009, are you really just assuming pure penetration of the bridge market or to what extent, I mean you are going to have data out there that is going to be highly suggestive to the referral community that this is going to be a great device in the destination population and so to what extent do you think there is going to be off label use there?

Gary Burbach

Right. We talked many times about they are not being kind of sharp delineation between bridge patients and destination therapy patients and that there is many patients that fall into more of a gray area, and I think what we saw in 2008 with the HeartMate II having very strong demonstrated clinical outcomes as well as very positive demonstrated durability was in inclination of the physician to use that device with the bridge indication more broadly have pushed their definition of who could be a potential bridge patient. Maybe they do not ultimately wind up bridged into a transplant. There is maybe a kind of lower absolute probability but they are in that gray area with the implant. It is not completely clear.

So I think that is what we saw in 2008 and I think we will continue to see that continue to revolve in 2009 and that is where we expect to see that continued growth as well as bringing a smaller number of additional centers on board.

In terms of the destination therapy cap, it is unclear as to exactly how the FDA will manage or access to that cap. An ongoing series of cap patients there, they have indicated that the rates of enrolment there are not expected to increase and so we felt that it was important to note that given that with the removal of the randomization, there could be an expectation that within the DT trial that we would see an acceleration and greater implant activity going on within that trial. I think in terms of what the FDA is signaling to us, we would not have that expectation for 2009 that it will be fairly modest amount of patients that we are able to continue to enroll on that trial to maintain access and continue to grow the experience of patient from the DT trial.

Taylor Harris - JPMorgan

Great and one last quick one if I can, are you going to present the interim destination data sometime in the spring or not?

Gary Burbach

No, the destination therapy data will be presented in the fall and it will be the full 200 patients set because we really do not feel that any of that data can be presented and so we get the FDA PMA submission in late May.

Operator

Your next question comes from the line of Mimi Pham - JMP Securities

Mimi Pham - JMP Securities

In terms of the May submission, how come you can not submit the interim data initially and then follow-up with full data set. Is that not an option based on your discussions with the FDA? I guess we thought potentially that would an option when you stop the trial with randomization.

Gary Burbach

Yes, we thought that maybe an option as well Mimi but in the dialogue with the FDA here in late January, it is clear that the expectation is that the full 200-patient set will have the primary endpoint data included in the initial PMA submission. We will be able to give it in May with only the primary endpoint for the full 200 patients being included and then follow up after that with the analysis of all the secondary endpoints. So we still will be substantially in advance of the previous expectations. If you will look at the timeline as we expected it to rollout prior to that event at the beginning of December was that we would start that analysis submission process at the end of May and that that would probably be a four month or so process after that. So, it still puts us a solid four months ahead of the expected timeline before we have that interim analysis.

Mimi Pham - JMP Securities

And this is something where you expect to go and have an official panel to review the HeartMate II for DT?

Gary Burbach

We are working under that assumption, Mimi. We have not gotten the definitive word from the FDA that there will be a panel. We are working under the assumption that that will occur and is trying to drive the process and the timeline to be inclusive of a panel and if that is determined to be necessary and get to an approval and launch in the first half of 2010.

Mimi Pham - JMP Securities

And the last follow up, I know you would not be presenting the interim data but can some of the centers on the single center basis present their data at meetings like IHLP?

David Smith

They are not supposed to Mimi. We do not have obviously absolute control over what some individual centers do but they are not supposed to present their data independently.

Operator

Your next question comes from the line of Bob Hopkins - Banc of America

Bob Hopkins - Banc of America

Just following on that last point at the Heartland transplant meeting, will there be any long term data from any HeartMate II trial like the longer term versus transplant data longer term follow-up or anything like that?

Gary Burbach

There will be certainly be some additional data presented; at least the 18 month data will be presented in a fuller form. There will be durability data that I mentioned that will go out beyond 18 months. There is the potential for some longer term broader set of outcome data. It really depends on whether there is adequate patient experience going out to a longer time period, like 24 months or beyond. Obviously those patients continue to get transplanted and so you have a diminishing population in terms of the experience. So that is really I think the key determiner as to whether there is a useful data set in that time period.

Bob Hopkins - Banc of America

Okay and then I just want to ask about some of the assumptions for 2009. First of all, the 10 to 15 centers, I would have thought that perhaps you could have brought on a few more centers. Is there a gating item that maybe we are not aware about that would limit the number of centers that you can bring on line in 2009?

Gary Burbach

Well, I think that if you look at those two populations of centers that are very distinct that make that up. One of the transplant centers, there is a little over 100 of those, 87 have the HeartMate II. So, there is a population of 15 or 20 remaining there that we have the opportunity to access. In our numbers, we are talking about kind of close to half of those coming on board this year with HeartMate II and the balance are predominantly very low volume centers where it is questionable out to whether they will remain in transplant for an extended time period. So, it just becomes a matter of very diminishing pool of possibilities on that side.

On the open heart centers side, there is a much larger population of opportunities and we are expanding our efforts there and going to be targeting a larger population of potential centers. There, the timeline tends to be longer because you are talking about a much more involved buying decision, senior administration clearly involved because you are talking about getting into a new line of service. So that tends to have a 12 to 24 months sales cycle in terms of a site working through that process and deciding to come on board and at this point with HeartMate II not yet having DT approval, it is still a little more challenging sales cycle, I think in 2010 when we get to HeartMate II DT approval that opportunity really opens up in a more aggressive way. So, those are really kind of a two gating pieces that determine that expectation.

Bob Hopkins - Banc of America

Then, one other thing about 2009 when you thought about formulating your guidance, I am just wondering what kind of rough assumptions you are making in terms of enrollment from competitive implants. In other words, just a couple of other clinic trials going on, do you have a sense for how many implants you are assuming that go to the competition as a results of these trials in 2009?

Gary Burbach

Yes, we are expecting that there will be some increase in the number of implants that are going to competitors here in the US in trials versus 2008. We expect Ventracor will continue to enroll in their trial. We expect that HeartWare and DuraHeart will both ramp up their trials which are still a pretty early through to the end of 2008. So, we do expect to see some additional impact there.

Bob Hopkins - Banc of America

Okay but do you have a sense for specific numbers or not right here?

Gary Burbach

I would not offer specific numbers other than to say some of those companies have provided their expectations for enrollment and so those kinds of numbers are probably reasonable to think about.

Bob Hopkins - Banc of America

Okay and then lastly for me is just, you mentioned the next generation pump and I am wondering if at this point you can give us any sense for a timeline for getting a next generation pump into a clinic?

Gary Burbach

Not yet Bob. This year, we are going to continue to drive that forward. I said the key milestone really I think focus on relative to ourselves this year that we will have a meaningful impact as you look 2010 and 2011 are the improvements to HeartMate II that I think will have a substantive impact on the success of our destination therapy launch. So, clearly improving the durability of the percutaneous lead is critical there as you look to much more extended time period of support, lighter, more portable external peripherals. A lighter, more user-friendly controller that mitigates some of the risks associated with losing both sources of power. So those are the things that I think really can make the system more user friendly and really tie in very strongly to that DT approval that we see in 2010 and help us drive that launch in aggressive way.

Operator

Your next question comes from the line of Timothy Lee - Piper Jaffray

Timothy Lee - Piper Jaffray

I just got to follow-up on the new center add, as we look at some of the productivity or the throughput in both on heart transplant center versus a transplant center, is there a difference as we get more and more of these open heart centers coming on line, should we think of the incremental growth provided by those centers to be a little slow than what we saw in the past?

Gary Burbach

The open heart centers that are not currently VAD centers, transplant centers are definitely going to have slower rates of implant in the first couple of years. They are really just going to be ramping up, getting their initial experience under their belt. Thinking about those centers getting 10 implants which is the target for destination therapy certification in the first 18 to 24 months, I think is a quite positive outcome for one of those new centers.

Timothy Lee - Piper Jaffray

In terms of your cash balance and your cash used, you talked about expanding your manufacturing facility. What kind of CapEx outlay we will expect to hear in the second half of 2009 and just any general thoughts on your cash balance in terms use?

David Smith

Tim, this is David. Our CapEx has been pretty consistent for the last year or two and these adjustments we are making to the manufacturing capacity are not significant cash outlay adjustments so it is not a major drag on the cash generation.

Timothy Lee - Piper Jaffray

In terms of your use of cash, do you have any plans to do it with that $280 million in the balance sheet? And then just last one, in terms of your hedging, in your comments you talked about gross margin ticking down a little bit because of FX. Are you hedged on the FX both from top and bottom line?

David Smith

Well, from a hedging perspective, we hedge the balance sheet related activities. We do not hedge transactions, and you can see the exposure from 2008 over 2007. It has been relatively modest. I mean couple of million on the top line, couple of cents on the bottom line while it does have an effect on the margins. It is not the most substantive effect that you can see on the bottom line, obviously. It is obviously growth based. We do not have any plans to change our hedging strategies at this point.

Operator

Your next question comes from the line of Jason Mills - Canaccord Adams.

Jason Mills - Canaccord Adams

Gary, your guidance nailed in the interim, the stock pulled back a little bit before the quarter. Was that guidance going to be perhaps somewhat conservative and in light of the fact that you are not able to present data, it does not seem until the end of the year. It seems to me like it is fairly decent guidance, given the open heart centers that need to see that data will not be able to see it now until some time September through November. . So, with all of that said, my question is why would the FDA agree for the randomization to end in late December and then turn around and expect the full cohort to be filed which delays you until May and then for the secondary endpoints until latter such that clearly a prudent company such as Thoratec is not going to front run the FDA. Essentially, it seems like FDA is in someway limiting the access to this device to patients who clearly need it and I do not understand why.

Gary Burbach

Yes, and I do not know that I can really answer that question Jason.

Jason Mills - Canaccord Adams

Maybe go to the first part, why agree to allow you to stop the trial and then turn around and say, okay, you got to give us all everything anyway.

Gary Burbach

Yes. Well, I guess in terms of stopping the randomization, they view that interim dataset, as we talked about, there is statistically significant evidence of superiority and remember it was a non-inferiority trial. So, an extremely positive outcome and I think they looked at that data and they said, “Yes. It does not make sense to continue randomization in this trial.”

Jason Mills - Canaccord Adams

But yet, they are going to prevent approval until seven and perhaps 13 to 15 months later? Was that assessment agreed on?

Gary Burbach

I guess you can look at it, yes, I mean I think that their view is they are not going to review the submission for approval until the full 200 patients dataset is completed and submitted. So, now, hopefully, we can drive a more expeditious review and approval process with the full datasets submitted in May. That is certainly going to be our objective to make that process run as quickly as possible and certainly more quickly than what we saw in the bridge to transplant review and approval process.

Jason Mills - Canaccord Adams

I am wondering. So, to a previous question again, and to my comment about it being prudent, but throwing the word prudent out the window for a second, maybe it is imprudent, not to provide or allow presentation of some interim analysis of the data, given the conclusion was I think in your press release in December overwhelming superiority because we do know at least our research suggests that the open heart centers would react to the data before they reacted or not necessarily all of them wait until they see an FDA approval in light of the fact that you already have one for bridge and transplant. Many people will believe that there is such a huge overlap as to be one homogenous market.

So, my question to you is, is it possibly somewhat imprudent not to allow data to get out into the hands of physicians who are managing these patients?

Gary Burbach

Yes, and I do not think so Jason and I got two points that I would make there. One, the centers that have access to the HeartMate II for destination therapy, they are in the trial. They have access, not as broad an access as we would like, but under the cap they continue to have access. And two, you have to put this data out there before completing the PMA submission. I think would really go very much against what the FDA would expect and make the process more difficult for ourselves in terms of working through the review and approval process. So, I think it would be very short sighted and counter to our interest in getting HeartMate II approved as quickly as possible for DT to do that.

Jason Mills - Canaccord Adams

Okay. One final question, I will get back in queue. I am in an airport, so I may have missed it, but I thought you said that we have a dataset that was recently presented showing 78%, 18 months survival, is that right?

Gary Burbach

That is 78% or 79% positive outcome so the combination of transplant recovery or ongoing support at 18 months. That is correct. That was a very positive data point.

Operator

Your next question comes from the line of Suraj Kalia - Sanders Morris Harris.

Suraj Kalia - Sanders Morris Harris

Gary, have you seen any or have you ever been asked to step into any centers because of financial distress at one of your competitors?

Gary Burbach

No.

Suraj Kalia - Sanders Morris Harris

What is the anecdotal evidence that you all have collected in terms of profitability per procedure with respect to HeartMate II for the centers that are well experienced and if you share that number, how will you be using that for the open heart centers?

Gary Burbach

Yes. I do not have a number, but we have much more than anecdotal evidence Suraj. We have a reimbursement team that during 2008, actually worked with the majority of our HeartMate II centers reviewing in detail their reimbursement practices and economics of their practice and generally, it is a very positive picture. So, I think there is a quite a strong story to tell there in terms of approaching new open heart centers.

Suraj Kalia - Sanders Morris Harris

One final question Gary and let us see if you can answer this. When you talk about the next gen pump, I mean we know the different things you have highlighted earlier as you all are working on developing, but let us say a third gen pump comes along, maybe one of the existing players, would that depending on the pump? Would that pique Thoratec’s curiosity?

Gary Burbach

It certainly could. As we think about next potential pumps, we keep a very open mind and a close eye to those external developments, as well as aggressively driving our internal programs.

Suraj Kalia - Sanders Morris Harris

One last question, guys. Gary, your comments for 2009 implants of 250 additional implants and somewhere in your commentary it came across that you are viewing Ventracor as a going entity. Is that just a conservative assumption on your implants for ’09? Let us just assume Ventracor is a going entity or is there any insight into potential offers and as a result, you are appropriately planning for your own marketing and selling efforts?

Gary Burbach

Yes. I have no insights as of today. They are ongoing status. I assume that they will raise money in one form or another and continue forward.

Operator

Your next question comes from the line of Spencer Nam - Summer Street Research Partners

Spencer Nam - Summer Street Research Partners

I just have one quick follow up question. On the follow-up side, could you guys give the number of pumps that were distributed in Q4?

Gary Burbach

In Q4, we did, it was 604 excluding CentriMag.

Spencer Nam - Summer Street Research Partners

Okay great. Thank you. The question I have is my understanding of the thought the HeartMate II labeling for BTT is that it is transplant eligible and not transplant listed. If that is the case, are you assuming right now, based on your guidance, that essentially additional 250 plus pumps what you are going to attract amongst those transplant eligible patients who are supposedly will be out there in a much larger quantity than the transplant listed patients?

Gary Burbach

Yes. I think that is the reasonable expectation. I would not expect that the transplant list itself. We grow substantially, and your understanding of the labeling is correct. So, it is a kind of more aggressive view on who are the potential transplant candidates.

Spencer Nam - Summer Street Research Partners

I see. Do you have, internally, an estimate of what the population size of the transplant eligible patients is in the United States right now?

Gary Burbach

No, no, we do not.

Operator

Your next question comes from the line of Duane Nash - Pacific Growth Equities.

Duane Nash - Pacific Growth Equities

First question, are you guys cutting in a little bit short to plan on following the PMA in May when the last or the 200 patients’ data comes out May? How comfortable are you that it will not get postponed until June?

Gary Burbach

Yes. We are comfortable. We will have all the analysis done other than the primary end point for those last few patients. So, dropping that data in and crunching that last little bit of data is you can have a small amount of work relative to everything else that needs to be done to complete the PMA.

Duane Nash - Pacific Growth Equities

I understand. And a second question, at the Society for Thoracic Surgeons Meeting in San Francisco, the other week, I heard a few grumblings about reimbursement for VAD and in particular not that they do not cover the device. Their feeling was that they more than covered the device, but the procedure itself, when you consider all the expenditures for hospital may not be as profitable as other procedures and that there was some effort undergoing by certain specialist societies to potentially increase the reimbursement for that. Is that anything you can comment on?

Gary Burbach

Are you talking about for the hospital or for the physician?

Duane Nash - Pacific Growth Equities

For both.

Gary Burbach

Okay. I mean I think for the hospital, as you look at the whole procedure that the economics are quite reasonable inclusive of all the various elements of expenditure. For the surgeons and the cardiologists, we would certainly like to see some increases in reimbursement and that is something that we do have some efforts but we were working with those societies, so that maybe a fair bit of what you were hearing and that is something that we have had underway here during 2008 and continue to work on this year.

Duane Nash - Pacific Growth Equities

Can you give any projections on when those changes might occur or is it just too unpredictable?

Gary Burbach

Yes. I would say it is too early at this point to say.

Operator

Your next question comes from the line of Jayson Bedford - Raymond James.

Jayson Bedford - Raymond James

Just a couple of quick ones on the gross margin guidance for ’09 being flat, is that dragged down by the manufacturing expansion? I would have thought with the HeartMate II contribution that would have lifted or expanded margins a little bit.

Gary Burbach

Yes. It is not really the manufacturing expansion. It is really that HeartMate II continues to be a positive impact on gross margin. This year, it is counter balanced by an expectation that there will be a less favorable FX environment versus what we saw last year given our sales in Europe and then also we do have a number of expenditures, one-time expenditure as related to the launch of the new external peripherals. So, there, we have kind of a one time negative hit that affects us during 2009.

Jayson Bedford - Raymond James

That is helpful. And then just, I guess bigger picture with the availability of HeartMate II in ’08 here. Have you noticed anything different about your customer base, meaning as they bulked up their VAD programs, dedicated more resources, clearly with the growth here? Your customer seemed to do something differently and I am just wondering if you could determine that.

Gary Burbach

Yes. Both at the center that had HeartMate II during the trial, as well as the newer centers, we have seen substantial increase in their overall implant activity. If you just leave HeartMate II in isolation, but if you look at the universe of pumps that they are implanting, both of those groups really became more aggressive in terms of their use of VAD therapy. Many of them are adding resources particularly in terms of nursing resources to accommodate that growing volume. So, we saw a very broad based movement, which was the really encouraging sign and what led to such a large growth that we saw in 2008.

Operator

And that is all the time we have for questions today. I would like to turn the conference back over to our presenters for any additional and closing remarks.

Gary Burbach

Okay. Thanks everyone for joining us today and we look forward to keeping you apprised over the course of 2009.

Operator

Thank you. This does conclude today’s presentation. Thank you for your participation and have a wonderful day.

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Source: Thoratec Corporation Q4 2008 Earnings Call Transcript
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