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Thoratec Corporation (NASDAQ:THOR)

Barclays Global Healthcare Conference

March 14, 2013 8:00 am ET

Executives

Taylor C. Harris - Chief Financial Officer, Principal Accounting Officer and Vice President

Analysts

Matthew Taylor - Barclays Capital, Research Division

Matthew Taylor - Barclays Capital, Research Division

Thanks for joining us for the morning session of Day 3 of the Barclays Conference. We're really pleased to have Thoratec with us this morning and Taylor Harris, the CFO. As I'm sure you know, Thoratec is the market leader in the VAD space and it's a market that we're really excited about. We think there's a lot of room for increases in penetration and technology innovation to drive growth in this market. And I want to hear a lot about that and Thoratec's pipeline. So with that, let me turn it over to Taylor to give you an update and then we'll do some Q&A.

Taylor C. Harris

Thanks, Matt, and thanks, everyone, for joining us here and on the webcast. Before I start, just to remind you that I will be making some forward-looking statements, which are subject to uncertainty and risks. You can find out more about those risks in our SEC filings.

So we would agree with some of the comments of that Matt made in terms of the market opportunity for LVADs. Our mission at Thoratec is to lead the use of the MCS, mechanical circulatory support, which is a device-based therapy, in order to serve the needs of advanced-stage heart failure patients. We have 2 lines of business: one in chronic circulatory support, the other in acute.

On the chronic side, our lead product is HeartMate II. We believe there's roughly a -- approaching a $600 million market right now for chronic circulatory support devices. Over the 5-year time period 2010 to 2015, we've said we think that the market will expand in the mid- to upper-teens range, 15% or more. And really, the underlying reason behind that is that there's this large pool of patients in Class IV heart failure, 50,000 to 100,000 or so whose needs are not being met right now by current therapies. They're not able to get a heart transplant. They're not optimally served by drug therapy. That's the opportunity for chronic MCS devices.

On the acute side, our product line is the CentriMag and PediMag. And there's a market opportunity currently of about $150 million. We think that is also a double-digit growth market for the -- for our core product line, like CentriMag. What we have in development, though, is a novel product called the PHP for percutaneous support that we think could unlock an even larger opportunity for us.

If you look just over the last 5, 6 years, our revenues and earnings have grown well at a strong rate. We were approaching $500 million of revenue in 2012, non-GAAP EPS of $1.83. So strong historical performance. And then looking ahead to 2013, we have 3 main goals. The first is to continue driving growth in the overall market on a worldwide basis, both for chronic and acute support.

Secondly, would be to solidify our competitive position and there are handful of ways that we're planning on doing that but really focused on clinical differentiation. There's a fair amount of clinical data that we can bring to bear, as well as the level of support and service that we provide to the field, which we think is a competitive advantage.

And then lastly, moving our next-generation pump platforms into pivotal clinical trials. I'll talk more about that later. We think it's going to be a very interesting year in terms of pipeline progress at Thoratec.

So the 2 main thrusts of the company's efforts right now are in market development and product development and I'll just spend a minute on each of those. In terms of market development, I would focus you on the 2 top left boxes on this slide, referral generation and center capacity development. As I mentioned, there's a large number of patients who aren't currently being treated by VAD therapy. They are not being treated at the implant centers. They're out in the community, being served by community cardiologists. And so a big effort, in fact, the main effort that we face in developing the market is really spreading education, awareness of this therapy option more broadly through the community. And we do that through a dedicated team of people, through outreach events where we partner with implanting centers to get out into the community and by a number of other programmatic efforts. But then at the same time, we have to continue to work with the implanting centers to build their capacity to support increasing numbers of VAD patients. And so we have a number of initiatives aimed at that. That's the core of our market development efforts. We're doing that on a global basis but it's all, obviously, supported by an ongoing, continued, sharp focus on the clinical outcomes, the benefit to patient and on generating data to support the utilization.

Then lastly, our product development pipeline. In terms of the HeartMate II platform, we're still evolving that platform. This year, you should see the launch of the Pocket Controller, our next-generation controller, which we're excited about. That's still on track on a worldwide basis for launch in the first half of the year. The U.S., we're still waiting on FDA regulatory approval and anticipate a second quarter launch in the U.S. So we think that will be a very nice -- the controller is obviously -- that and the batteries or what the patient interacts with the most. So having the latest and greatest of those devices, we think, is very important.

In terms of next-generation pumps. This year, as I mentioned, we are looking to bring both HeartMate III on the chronic side and the PHP on the acute side into pivotal clinical studies. Starting in Europe, around midyear is the expected timeline for both of those and then moving towards the United States. So those will be important to watch for. And then lastly, we're also working on cross-platform technologies, which are pump agnostic, like our fully implantable system effort. In other words, a system that would be capable of transmitting energy wirelessly to an implanted battery to charge and power and run a pump so that you can then eliminate the driveline, which currently goes through the skin, is a source of infection and also diminished quality of life. So the fully implantable system would be a big step forward in terms of patient quality of life, as well as clinical outcomes. Our goal with that program is, by the end of the year, to have brought together the component technologies, which we've been working on, into an integrated system that we can then start moving through the development process.

So that's a quick overview of Thoratec. Appreciate your time, and I'll turn it over to Matt for questions.

Question-and-Answer Session

Matthew Taylor - Barclays Capital, Research Division

Okay. Taylor, do you want to join me?

Taylor C. Harris

Sure.

Matthew Taylor - Barclays Capital, Research Division

Maybe just to start off. Can we talk about market growth? That's always a key element of your guidance and you continue to assume double-digit growth this year. Do you think we may see any increase in the growth from the entry of a new competitor? And how should we think about growth by geography?

Taylor C. Harris

Sure. So the -- if you look over the last couple of years, we have achieved, for the overall market on a worldwide basis, mid- to -- mid-teens or better growth both of the last couple of years. We've assumed over the 5-year time horizon through 2015 that, that would be the average. It doesn't mean that you're going to get it year in, year out. But so far, so good. We haven't seen any fundamental changes in the market that would give us a different view on what the market is capable of growing at. And we're still obviously making the same level of investment or greater in terms of market development efforts, specifically on the referral generation side. Last year, we saw really robust growth outside the U.S., well above that trend line that we stated. So last year, you did have a divergence in growth rates between the U.S. and international markets. We're not expecting that same level of divergence. So I think it's fair to assume roughly similar rates of growth, at least in 2013. That was the thought process that went into our guidance at the beginning of the year with, really, the reason for the international market growth difference 2012, 2013, being that we had some phenomenal opportunities last year to enter some new markets in Eastern Europe that became large VAD markets in a very short period of time. We think those are sustainable opportunities but we're just not counting on that excess level of growth going forward. So the key drivers are still the market development efforts that we're making, particularly in Destination Therapy in the U.S. To the question of can a second participant influence market growth, we certainly hope that, that's the case. And we could paint a scenario longer-term for that being the case, particularly if there's a similar level of investment being put into the shaping, the referral generation process of the market. We're not counting on that in the near term just because we don't see that level of resource commitment from HeartWare yet. They're focused on -- they have a bridge indication so they're not focused on DT market development right now. Hopefully, that could change over time and -- but there could be some degree of market expansion just because it may be that their product applies to -- that there may be some patients that clinicians view their product as being suitable for that they wouldn't have used the HeartMate II in. We don't think that's a large -- we really don't think that's a large population and that's a bit theoretical right now. So we'll just have to wait and see if that does play out.

Matthew Taylor - Barclays Capital, Research Division

And just on geography. This year, you're moving into Japan so that could be a new market for you, as well. Are there other geographies that you've targeted that you haven't moved into, like Eastern Europe last year, that we could see additional growth in?

Taylor C. Harris

Yes. There are definitely new markets and that's a big focus. Japan I would put at the top of the list but we're also planning to move into Latin America this year. We're not expecting much in terms of revenue contribution there. But that -- those are new markets that we're looking at. There are still some opportunities in Eastern Europe. So I do think you'll see a continued flow of new markets for VAD therapy. The -- and Japan, in particular, has significant opportunity long term. Of course, if you look at other major developed medical device therapies, Japan is probably the #2 or #3 market. We think it has similar potential long term. But there's going to be a fair amount of market development activity that has to go into place before that can happen.

Matthew Taylor - Barclays Capital, Research Division

Can you talk about your market development? Because I think maybe that's not well understood in terms of the -- all the programs that you put in place in the U.S. to help support clinicians and support the folks that are helping to look after VAD patients and also fill the referral network. So you've been doing a lot there. Can you just give us kind of an overview on how that may be a competitive advantage for you?

Taylor C. Harris

The key thing is that we have a pretty significant portion of our field team dedicated to market development activities. We call them our MDMs, our market development managers or market development specialists. It's a team of, I think, just over 35 right now. They are -- and they're aligned with implanting centers in a specific geographic territory. So their role is to get out into the community to provide the front-line education of the community cardiologists who are managing heart failure patients. So there's an interaction that they will have alone but then they'll also coordinate interactions between the referral base, as well as the implanting centers. So it's very important -- if someone is going to refer a patient for potential VAD evaluation, they want to know who they're referring that patient to. So it's important to get the surgeon at the implanting center, the cardiologist out seeking to the community. We also focus on bringing patients around into the community. Because one of the big barriers that -- in a patient's mind would be, "Wow, this sounds like a pretty complex therapy. I'm not sure I really want to go through the effort. Is it really going to make me feel that much better?" It is crucial for them to see someone on the therapy thriving, having had his or her symptoms of heart failure diminish or virtually go away through the use of a VAD and to see that it is a therapy that they can live with and maintain a good quality of life. So we have a patient ambassador program that's very active. We had well over 100 patients involved in that last year. We put on symposiums. This year, we're planning on having 3 national-level symposiums for community cardiologists. We do those on a local and regional basis, as well. So that's, I think, the majority of the effort. There's certainly a lot of work going on there.

Matthew Taylor - Barclays Capital, Research Division

And can you talk through some of your clinical messaging and how you're trying to differentiate your products with the long history that you've had clinically?

Taylor C. Harris

Yes. So I think that's the foundation of it. What you said there is that there is a long history. The clinical trial for HeartMate II in the U.S. enrolled over 1,000 patients between the pivotal portion and the CAP. There's been a post-market experience. We're now up to over 13,000 patients implanted with HeartMate II. So there's a very well-characterized profile, both on efficacy as well as safety for HeartMate II. And that's, I think, the foundation of the differentiation story. That includes follow-up, not just through the 6-month bridge endpoint but through the DT endpoints, which are 2 years for pivotal but we've obviously followed patients longer than that. So there's long-term follow-up on HeartMate II and that's important for a market, which -- for which there is an acknowledgment that there's a gray area of patients where, even if you're a bridge patient, you may wait well longer than 6 months before you either -- before you get a transplant. So I think that durability of data, the length of data is important. In terms of some of the actual clinical messages, I would point to perhaps 3, at least in the time we have right now. One would be that we've studied HeartMate II in extremely challenging patient population. So it's performed well. The results that you've seen HeartMate II produce are in very sick patient populations, that's number one. Number two, if you look at the thromboembolic profile of HeartMate II, it's been favorable. So relatively low rates of device replacement, relatively low rates of stroke. The stroke message, I think, has increasing stickiness right now just because there have been challenges historically with other VADs, and HVAD had some signals of increased or elevated levels of stroke as well through the bridge and also the DT, the endurance data, that was shown on their label. Stroke is an issue. It's a clinical complication that is fairly challenging to treat. You don't have too many treatment options when a patient has a stroke. Thirdly would be the functional improvement that we've seen with HeartMate II. So how do people -- how do patients feel at the 6-month mark? What can they do? How do they perform in the 6-minute walk test? In the HeartMate II clinical study, the full bridge study, I think it was 486 patients between the pivotal and the CAP. At baseline, only 16% of patients could perform the 6-minute walk test. At 6 months, it was 94%. So you saw dramatic recovery across the board in patients in terms of functional capability. So that's a pretty important message as well. And then lastly, I know I said 3, let me give you a fourth, would just be the patient management profile. Clinicians have found HeartMate II relatively easy to manage in terms of anti-coagulation profile, pump speed management, blood pressure management, kind of the gamut of the decisions you're making on a frequent basis in terms of how the patient should be interacting with the VAD and how the clinician is managing them through that process. HeartMate II has proven not to be that finicky of a device and provide a relatively easy management experience, which is certainly an advantage.

Matthew Taylor - Barclays Capital, Research Division

With that in mind, can you walk us through your '13 guidance and talk about the factors that get you to the low end versus the top end and how you're thinking about your competitor's launch in the U.S.?

Taylor C. Harris

Our 2013 guidance, on the top line was revenues of $490 million to $510 million. That's a $20 million range, which, in our business, is less than 200 implants and which I think just shows you, there's not -- it's not that wide of a range. So the difference between the low end and the high end isn't dramatic. And the 2 core assumptions are: what's the market growth rate and then what is our share position. Certainly in the U.S. there's more of a changing landscape than there is outside the U.S. So predominantly, that share position is going to be determined by what happens in the U.S. with HeartWare's launch. So there's no one specific driver that I could point to that would say, "Yes, this happens and we're at the top end versus the low end". I would just point to market growth and share.

Matthew Taylor - Barclays Capital, Research Division

I know you haven't committed to a number. I wanted to ask the audience a question about market share. So let me go to the first audience question. If you weren't in the room yesterday, you have a handheld device. You can punch in the number you think here. I can't see that far but the question is about how much market share do you think THOR will retain in the U.S. in the BTT market in 2013? And there's a range of choices there.

[Voting]

Matthew Taylor - Barclays Capital, Research Division

Okay. So there's a bit of a wide range but it looks like you're getting a good amount of credit for retaining share. So hopefully, the clinical messaging and the market development will help you out there.

Taylor C. Harris

I like this audience. Very good.

Matthew Taylor - Barclays Capital, Research Division

Can you talk a little bit about the pipeline? You got a lot going on and we're getting closer to when some of that next-generation stuff will actually become a reality. So you got 2 big, first-in-man experiences happening this year with HeartMate III and PHP. Can you talk about the timelines from first-in-man to commercialization in the different markets?

Taylor C. Harris

So on the first-in-man with -- just to set the baseline, with PHP we -- our plan is to do a first -- a true first-in-man experience outside of the pivotal trial arena. That should be relatively soon. We had talked about a goal to do that by the end of the first quarter. The pivotal experience for both HeartMate III and the PHP is anticipated to begin outside the U.S. So we would start with OUS studies, CE Mark trials, beginning in the middle part of the year. So that was -- that's the plan in Europe. With the U.S. timeline, HeartMate III, our -- we've stated that we think we can be -- begin a U.S. pivotal study by the end of 2013. So not much of a gap between the European study and the U.S. study for HeartMate III, at least compared to historical experiences. And part of that is due to this knowledge that we've gained over the years and the preclinical data that we think we'll be able to provide the FDA to get them comfortable starting a study. With PHP, the U.S. timing is a bit more uncertain because, as you probably know, the regulatory landscape for that product category has been in flux. And so we are still in the discussion phase with FDA around what exactly are going to be the requirements for a trial. And part of that is up to the FDA, part of that is up to us in terms of what indication do we want to go after and how do you structure a trial. So for the U.S. timing for PHP, we're going to need to get back to you as we progress through the year and have more of a dialogue with the FDA. And so maybe we just start with HeartMate III in terms of getting to commercialization, which was your question. If you look in the -- well, outside the U.S., the trial will be a 50-patient study. Our -- we won't enroll all of those patients in the back half of this year. So there will be some continued enrollment in 2014. Then there's 6-month follow-up and then there's an approval process. So you could probably make some assumptions around that and get to a reasonable estimate of the commercialization date in Europe, assuming all goes well. We haven't given a specific time but those are the general boundaries. In the U.S., we're still anticipating that there will be a bridge endpoint and a DT endpoint. If you look at our HeartMate II study, it took us roughly 3 years from beginning of BTT study to approval; about 5 years on the DT side. I think those are good ballparks to start with, although we've stated that we do anticipate being able to shave a little bit of time off that with HeartMate III.

Matthew Taylor - Barclays Capital, Research Division

And maybe just touch on the clinical benefits, the theoretical clinical benefits, of HeartMate III and how you're thinking about that?

Taylor C. Harris

Yes. So with HeartMate III, HeartMate III is a fully magnetically levitated pump, and there have been other fully magnetically levitated designs in the past but none of the size profile of HeartMate III. So HeartMate III would be a dramatically reduced form factor implanted similarly to the HVAD in a pericardial position, so you avoid the abdominal surgery. But the key goal with HeartMate III is what Matt said, which is to improve the clinical profile. Specifically, we're targeting reduction of adverse events and we think the mechanism for getting there is the blood flow pathway, the hemo-compatibility that we're designing into HeartMate III. Having a fully magnetically levitated system enables us to optimize and establish the gap spaces in the pump through which the blood is going to be flowing. And we've designed those to be rather wide pump gaps, which just means that you're able to reduce the shear forces on the blood and improve the overall blood flow path. So the gap sizes in HeartMate III are, at a minimum, 10x the size of what you would find in hydrodynamic bearing pumps that have been on the market. So the Ventracor device was an example, the HVAD device is another example of a hydrodynamic pump, which -- what that means is that it uses blood as a bearing. It uses the flow of blood underneath the rotor to support the lift of the rotor itself. It's using that blood as a bearing. There's pressure being put on the blood as it passes through. With HeartMate III, you have full magnetic suspension, which means that, that you're not -- there is no bearing. So we think that's the mechanism by which we can continue to improve the thromboembolic profile, which should allow for lower levels of anti-coagulation, which can help on the bleeding front as well. Additionally, full MagLev enables us to control the rotor ramp speed and, I guess, the de-ramp speed, which allows us to induce pulsatility into the system. So we're planning on operating HeartMate III in a pulsatile mode during the clinical trial process.

Matthew Taylor - Barclays Capital, Research Division

Great. Well, I think we need to end there but thanks so much for your time.

Taylor C. Harris

Thank you, Matt.

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