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Thoratec (NASDAQ:THOR)

Q1 2013 Earnings Call

May 02, 2013 4:30 pm ET

Executives

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

Gerhard F. Burbach - Chief Executive Officer, President and Executive Director

Analysts

Danielle Antalffy - Leerink Swann LLC, Research Division

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Jason R. Mills - Canaccord Genuity, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Matthew Taylor - Barclays Capital, Research Division

Michael Rich

Suraj Kalia - Northland Capital Markets, Research Division

Narendra Nayak - Crédit Suisse AG, Research Division

Mimi Pham

Charles Croson - Sidoti & Company, LLC

Operator

Good day, and welcome to the Thoratec Corporation Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Taylor Harris. Please go ahead, Sir.

Taylor C. Harris

Thanks, Nancy. Good afternoon, and thank you for joining us today. With me is Gary Burbach, President and Chief Executive Officer. Gary will discuss financial and operational highlights from the first quarter of 2013, and I will then review the financial results for the quarter, as well as our outlook for the remainder of the year. We will then open the call to your questions.

Before turning the call over to Gary, I want to remind you that 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 that actual results may differ materially.

We also alert you to the risks contained in the documents we file 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?

Gerhard F. Burbach

Thank you, Taylor. And good afternoon, everyone. There are a number of important highlights on both the market development and product development fronts, which I look forward to reviewing on today's call.

As expected, Thoratec faced a challenging landscape in the first quarter of 2013, given our strong finish to 2012 in all key geographies and the advent of increased competition in the U.S. And as such, revenues declined on a year-over-year basis. That said, I believe that our team is responding well to these near-term challenges, while at the same time, we are staying focused on the long-term growth drivers that are key to success in the LVAD market.

During the first quarter, we absorbed the early competitive inroads that we had contemplated as part of our original guidance for 2013. However, we continued to support our full range of market growth initiatives; we delivered a record performance from the emerging group of open heart centers; and over the past few months, we have sharpened our competitive messaging regarding the proven clinical performance of HeartMate II.

Looking ahead to the balance of 2013, we are pleased to have begun our commercial entry into the Japanese LVAD market, and we are eagerly awaiting FDA approval of the Pocket Controller. Meanwhile, we are forging ahead with exciting product development activity, and we remain on track to begin pivotal clinical trials with both HeartMate III and PHP later this year.

All in all, Thoratec is as energized and dedicated as ever to the mission of advancing mechanical circulatory support therapies, and we continued to make progress towards that goal during the first quarter of 2013.

With respect to our financial results for the first quarter, Thoratec generated revenues of $117.7 million, a 7% decrease compared to revenues of $126.8 million in the first quarter of 2012. As a reminder, we faced a difficult comparison this quarter as Q1 was our strongest quarter last year for both the HeartMate II and PVAD franchises. For Q1 2013, HeartMate II revenues declined 8% year-over-year and PVAD revenues declined 34%, offset by strong growth in our CentriMag product family of 20%.

In terms of geographic breakdown, we recorded revenues of $92.3 million in the U.S. versus $103.9 million in the prior year, a decline of 11%; while international revenues were $25.4 million versus $22.9 million a year ago, representing an increase of 11%.

The year-over-year impact of foreign exchange was roughly neutral. Earnings for the quarter on a non-GAAP basis were $0.41 per share.

We sold 935 chronic pumps in the quarter compared to 1,057 pumps in the first quarter a year ago. Domestically, we sold 716 pumps, a decrease of 15% versus 838 in the first quarter a year ago. And internationally, we sold 219 pumps, flat versus the prior year.

PVAD and IVAD declined by approximately 30 units on a worldwide basis, with HeartMate II accounting for the balance of the decline. In the U.S. market, this decline in HeartMate II units came primarily from the larger group 1 and group 2 transplant centers, where in 2012, we saw our strongest performance of the year during the first quarter, creating a challenging comparison for Q1 of 2013. However, we achieved excellent performance from the open heart centers, which drove an upper teens increase in HeartMate II volume.

In total, group 3 centers, which include open heart centers and smaller transplant center programs, contributed approximately 23% of overall HeartMate II unit sales during the first quarter.

As for our acute product line, CentriMag and PediMag, we saw encouraging strength on a global basis during the first quarter. In the U.S. market, pump volume expanded 18%, driven by broad activity across our customer base, and we added 10 new accounts. In international markets, pump volume growth was 11%, but revenues grew over 25%, as we're realizing the pricing benefit of transitioning a large distributor territory to our direct sales force. We also added 7 new centers outside the U.S. during the first quarter.

On the regulatory front, after discussions with the FDA, we are planning to move ahead with a regulatory submission for the indication of up to 30-day use in patients who are unable to be weaned from cardiopulmonary bypass. A 30-day use approval would provide a strong point of competitive differentiation for CentriMag in the U.S. marketplace, and we look forward to that, as well as ongoing product and market development, to support future growth prospects for the acute product platform.

I'll turn now to operational highlights from the quarter, which included some particularly important and exciting developments with respect to our market development and product development initiatives. On the new center development front, we added 3 HeartMate II centers in the U.S. and 5 internationally during the first quarter, bringing the total number of HeartMate II centers to 167 domestically and 164 internationally. In the U.S., there are currently 122 centers that have received Destination Therapy certification from the Joint Commission.

With respect to reimbursement, CMS has proposed a slight decline in payment for DRG1, the most commonly used code for chronic implantable VAD procedures for fiscal year 2014. However, healthy increases were proposed for both DRG2 and DRG215. If this proposal is made final in the fall, the volume weighted average payment for DRG1 and DRG2 would be roughly unchanged.

We were also quite active with clinician outreach during the first quarter, with events designed to foster our market development and clinical outcomes improvement initiatives. In January, at the Society of Thoracic Surgeons Annual Meeting we hosted a dinner symposium attended by over 25 surgeons in practice either at new VAD implanting centers or at centers considering opening a program. Additionally, we hosted several events as part of our surgical and heart failure cardiology fellows program, including a national event for 40 fellows during the first week of April. As part of our broader cardiology outreach effort, we hosted another highly successful Advanced Heart Failure Therapies Forum in March attended by over 140 clinicians. These programs have received excellent feedback, and we believe they are a critical supplement to the education and outreach efforts conducted on a more regular basis by our market development field team.

We surveyed approximately 2/3 of the community cardiology attendees at this most recent meeting, 100% of whom indicated that they would be more inclined to refer additional patients for evaluation for a VAD as a result of the forum.

Lastly, we hosted our annual Thoratec MCS Users Conference for the Americas in March, attended by over 350 clinicians from more than 150 HeartMate II centers. This conference provides, perhaps, the best opportunity each year for clinicians to interact with their peers, review the latest data and share best practices. And we received significant positive feedback for the transparent, scientific and data-driven manner in which information was presented and discussed.

The third element of our market development strategy is the continued generation and dissemination of data demonstrating the positive clinical and economic outcomes with HeartMate II. At the ISHLT Annual Meeting last week, there were a number of important data presentations regarding HeartMate II.

Most notable of these was an overview of full 2-year results from the Destination Therapy post-approval study delivered by Dr. Ulrich Jorde from Columbia University. The DT post-approval study enrolled 247 patients between January and September of 2010, with similar baseline characteristics to the patients enrolled in the HeartMate II pivotal clinical trial. Survival in the commercial environment continued to be impressive, with 74 patients alive on the therapy at 1 year and 61% at 2 years.

Perhaps more impressive, though, was the trend toward reduced adverse events relative to the pivotal clinical trial experience in categories such as bleeding, infection and stroke. Of note, the combined ischemic and hemorrhagic stroke rate was 0.08 events per patient year, a similar rate to what has been reported in the DT CAP, the Bridge post-market study and the broader commercial experience.

Additionally, HeartMate II therapy allowed for dramatic improvements in functional status and quality of life in the post-approval study.

In conclusion, Dr. Jorde remarked that the data continued to support the original findings regarding the safety and efficacy of the device and that the dissemination of HeartMate II in the commercial environment has been associated with continued excellent results. We're certainly pleased by the consistency of results HeartMate II has generated in large multicenter experiences and by the attention received by the DT post-approval study at ISHLT.

Another key component of our data generation effort is the aggressive suite of post-market studies that we are conducting. We ended the quarter with 139 out of 200 patients enrolled in ROADMAP, which, as a reminder, is a post-market study involving ambulatory advanced heart failure patients, whose drug therapy regimen does not yet include continuous intravenous inotropes. These patients meet HeartMate II's existing FDA approved indication for Destination Therapy, but are not being referred for LVAD therapy in meaningful numbers.

Additionally, we have enrolled 148 out of 200 patients in the TRACE study, which is evaluating reduced anti-coagulation and/or reduced anti-platelet therapy for HeartMate II patients, and 299 out of 400 patients in the SSI registry, which is studying new driveline implantation techniques to reduce driveline infection.

We remain on track to complete enrollment for all 3 of these studies during 2013.

Meanwhile, we recently initiated enrollment in C [ph] heart failure, a European study that aims to involve cardiologists and implant centers in evaluating and implanting HeartMate II in a slightly less sick patient population, similar to the goal of ROADMAP in the United States.

In addition to these post-market studies of HeartMate II for earlier stage patients, we remain enthusiastic about our participation in REVIVE-IT, a prospective randomized control trial designed to enroll up to 100 non-transplant eligible patients in Class III heart failure, predominantly outside the current approved indication for HeartMate II support. Patients in REVIVE-IT will receive either HeartMate II or optimal medical management and will be followed for 2 years.

The final element of our commercial expansion strategy is development of new market opportunities outside the U.S., and I'm pleased to announce that on April 1, we received full reimbursement approval in Japan for HeartMate II. The launch to date has proceeded to plan, as we and our distribution partner had already trained 15 implanting centers, some of which have already begun implanting patients.

As we have mentioned in previous calls, clinical performance of HeartMate II in Japan has been excellent in the confirmatory clinical trial. As we initiate the broader product launch, we will continue to focus on maintaining these excellent outcomes in the commercial environment.

Turning now to our product pipeline. We were quite pleased with the progress we made during the first quarter in both the chronic and acute categories. As a quick snapshot, we launched the Pocket Controller in Europe; continued to track toward our development timeline for HeartMate III, with encouraging late-stage testing results; and conducted a first-in-human series with our novel percutaneous support device, HeartMate PHP.

With respect to the Pocket Controller, we completed a limited launch of 15 sites in Europe in early 2013, and then initiated a staged commercial launch beginning in March. To-date, approximately 20 additional sites have adopted the Pocket Controller, with more being added each week. Patients continue to provide encouraging feedback regarding the size and ease-of-use of the device, as well as the enhanced information content and the onboard backup battery has also been well received.

As for the U.S., we believe we have addressed all questions as part of the FDA approval process, and we continue to expect approval during the second quarter. We're looking forward to the U.S. launch of the Pocket Controller for a number of reasons: We expect the Pocket Controller to set a new standard for safety and patient quality-of-life, and we believe that external components will become a more important aspect of the decision-making process when patients are given choices with respect to their LVAD system.

As for HeartMate III, we are nearing the end of the final qualification testing phase, having completed our GLP animal series. Outside the U.S., we plan to begin seeking regulatory and ethics committee clearances in the midyear timeframe to allow us to initiate a CE Mark study shortly thereafter. As for the U.S. market, we will be meeting with the FDA later in May to finalize the protocol for our pivotal clinical trial, which we plan to begin around the end of this year.

Lastly, we reached a significant milestone during the first quarter with HeartMate PHP, our acute percutaneous support product, as Dr. Adrian Ebner, Chief of the Cardiovascular Department at Sanatorio Italiano in Asuncion, Paraguay, performed the first 3 human procedures with this novel technology. In all 3 cases, PHP was safely inserted, operated and retrieved to support patients with highly compromised cardiac function during percutaneous coronary interventions.

While not the primary objective of the study, we are pleased to see the positive impact our device had on cardiac output, mean arterial pressure and pulmonary wedge pressure. The successful first-in-human series comes just 3 years after Thoratec's acquisition of the intellectual property rights to the PHP product concept, a testament to the dedication and excellence of our PHP team.

Looking ahead, Thoratec is planning to conduct a second phase of the pilot study in the coming months and anticipates initiating a CE Mark study targeting the high-risk PCI patient population in the second half of 2013.

As for our regulatory plans in the U.S. market, we will be meeting with the FDA next week to discuss our proposed PMA clinical trial design. Importantly, in addition to targeting elective procedures, such as high-risk PCI, we're also focused on investigating the potential benefits of HeartMate PHP for patients in cardiogenic shock. This population has persistently high mortality rates, and PHP's ability to generate 4 to 5 liters of flow should position the product well for application in this setting. I would also note that treatment of cardiogenic shock represents a natural extension of Thoratec's existing portfolio and a commercial channel. We look forward to reporting on continued progress with the PHP program in the quarters to come.

Before turning the call over to Taylor, I'd like to reiterate my confidence in Thoratec's competitive positioning, market development strategy and product pipeline. We have been preparing for the near-term challenges involved with a new competitor in the U.S. market for a while, and we had anticipated earliest enthusiasm for a new product option, but we are using -- utilizing every competitive interaction as an opportunity to remind customers of the proven performance of HeartMate II and the value of the Thoratec partnership.

The good news is that we have clear support for all of these claims. HeartMate II has been implanted in more than 14,000 patients, one of whom is now approaching 8 years of support, the longest period of support for any patient on a single VAD. And the body of data supporting HeartMate II continues to expand, as evidenced by the DT post-approval study, and continues to point to a strong survival benefit, reliably low rates of key adverse events, an impressive improvement in patient quality-of-life and functional outcomes.

In the quarters to come, we will redouble our focus on HeartMate II's competitive positioning, while continuing to invest in DT-focused market development initiatives, international expansion opportunities, as well as next-generation product development across the spectrum of mechanical circulatory support.

Thank you, again, for joining us today, and I look forward to speaking with you during the Q&A session. I'll now turn the call over to Taylor.

Taylor C. Harris

Thank you, Gary. Before reviewing our results, I want to remind you that non-GAAP net income excludes the tax-affected impact of amortization and impairment of intangible assets, share-based compensation expense and transaction costs and inventory fair-market adjustments related to acquisition activity. You can find a reconciliation between our GAAP and non-GAAP results in our earnings press release at www.thoratec.com.

Revenues for the first quarter of 2013 were $117.7 million compared to revenues of $126.8 million in the first quarter a year ago, a decrease of 7%.

Non-GAAP gross margin for the quarter was 72.1% versus 71.6% in the first quarter a year ago. Factors impacting gross margin versus the prior year were primarily manufacturing efficiencies and lower warranty expense, offset in part by the U.S. medical device excise tax, which we recorded for the first time in 2013.

Non-GAAP operating expenses for the quarter were $52.8 million versus $45.7 million in the prior-year period. The increase in non-GAAP operating expenses was due primarily to important next-generation product development initiatives, including HeartMate III, PHP and our fully implantable system, as well as increased market development activity and personnel-related expense in our sales and marketing organization.

Turning to our tax rate. The company's effective non-GAAP tax rate for the quarter was 27.9% versus 33.1% last year. This year-over-year decline was primarily attributable to the federal R&D tax credits from 2012, which we recognized in the first quarter of 2013, as well as the 2013 federal R&D credits.

Non-GAAP earnings per diluted share in the quarter were $0.41 compared to $0.51 per share in the first quarter of 2012.

Weighted average diluted shares outstanding for the quarter were $58.5 million versus $59.4 million a year ago, reflecting the share repurchase activity conducted during the fourth quarter of 2012 and the first quarter of 2013. During the first quarter of 2013, the company completed the previously announced $75 million accelerated share repurchase program, in which we retired approximately 2.1 million shares at a discount of 3% to the volume weighted average share price over the duration of the program.

With respect to the balance sheet, we ended the quarter with $262.1 million in cash and investments.

Turning now to guidance for 2013, the company is reaffirming our previous guidance for full-year 2013 revenues and earnings per share. We continue to expect revenues to be in the range of $490 million to $510 million, GAAP earnings per diluted share in the range of $1.32 to $1.42 and non-GAAP earnings per diluted share in the range of $1.76 to $1.86.

Thank you, again, for joining us today. And we'll now open the call to your questions. [Operator Instructions]

Operator, we are now ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take the first question from Danielle Antalffy from Leerink Swann.

Danielle Antalffy - Leerink Swann LLC, Research Division

I was hoping you could talk a little bit about -- given the quarter, granted you don't give quarterly guidance, but you did come in under Street expectations, what gives you the confidence -- appreciating the first quarter had tough comps, but what gives you the confidence that trends will improve as we move through the year as your competitor continues to roll out in more U.S. centers?

Gerhard F. Burbach

Sure. Yes, one, the -- where we're at after the first quarter is consistent with the guidance that we did provide back in early Q1. A number of factors, certainly, we expect DT growth to continue to be robust and for us to be the predominant beneficiaries of that DT growth. We expect to see solid international growth through the year, including importantly Japan, which we just launched here at the beginning of the second quarter. We do -- with some additional visibility into kind of the situation in Japan, we think there's some upside to the guidance that we provided, relative to Japan, we'd mentioned $3 million expectation for the year. At this point, I think the range of expectation for Japan is $3 million to $6 million for the year, so there could be some nice upside there. Additionally, and we'd mentioned this in our call, our -- it was actually our Q4 call, but the call at the beginning of February, that the Pocket Controller, once launched in the United States, we expected that, that would result in a $2 million to $3 million per quarter upgrade cycle. We are, we believe, in the very late stages of the process with the FDA based on the communications that we've had with them. So we feel very confident about being able to launch that product in the U.S. and initiate that upgrade cycle here in the near-term. And I guess, the last thing I'd mention is as we look at Q1, January was a particularly weak month, and we saw much stronger performance in February and March. And we think that part of that in January was kind of maybe a bit of a hangover from a very strong end of Q4 and then maybe just a little bit of the lumpiness that we see periodically.

Danielle Antalffy - Leerink Swann LLC, Research Division

Okay, that's great. And can you talk a little bit about what you're seeing with your competitor in the centers where you're both competing now in the U.S.? Some people are talking about potentially trialing, are you seeing that happen? And if so, are you seeing some of the centers that started early with your competitor coming back in a bigger way towards Thoratec? Anything that gives you sort of increased confidence that market share losses in the first quarter could be regained, or going forward, do you think the market shares that you lost are gone?

Gerhard F. Burbach

So I think the most important trend that I can point to, one, so far, their -- we believe their penetration into Destination Therapy is quite limited at a relatively small number of centers and that the kind of broad population of centers is kind of viewing a distinction in terms of long-term support and continue to utilize the HeartMate II in that application. It is different than some of the surveys I know that came out back 2, 3 months ago. But that's certainly what we're seeing at this point and that we expect to continue to see going forward. Secondly, the -- kind of the pattern of their utilization has been more concentrated than we expected in terms of a relatively small number of centers that have been pretty aggressive in the adoption of the device, which has been atypical from the broad population of centers. And we're not hearing things from other centers that indicate that they're likely to follow that particular approach.

Danielle Antalffy - Leerink Swann LLC, Research Division

Okay, that's helpful. I'm sorry, one last question. I'm not sure -- sorry if I missed it. Did you give the split between DTT and DT VAD in the quarter, are you still sort of in that high-40% range of DT?

Taylor C. Harris

Got it, Danielle. [Operator Instructions] DT -- we've got good enough clarity to say that DT climbed above 50% of our unit mix in the quarter, but there is a lag in reporting. So we should probably wait for another quarter or 2 to give you a more precise percentage, but certainly, a positive trend with DT; it's now north of 50%.

Operator

We'll take the next question from Steven Lichtman with Oppenheimer & Co.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Just, I guess, another way to ask the question, obviously, with you guys coming in a little bit lighter than the Street in the first quarter, but reaffirming for the year, did the overall first quarter kind of look about in line with what you guys were expecting going in?

Gerhard F. Burbach

It was definitely in line with the guidance that we provided in terms of kind of as you looked across the year and how the various quarters fit into the guidance that we provided; it was absolutely consistent with that.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Okay. And then in terms of the centers, when you look at the difference between the advanced centers -- advanced trial centers and the non-advanced trial centers, any difference in terms of how your market share is holding up early on in those 2 groups?

Gerhard F. Burbach

So the -- as I mentioned it's, the kind of use -- they've had a pretty concentrated profile, and the bulk of those centers have been advanced centers as you'd expect. I think there's just maybe a couple of exceptions to that. But generally, as you'd expect, those were centers that had previous experience.

Operator

The next question comes from Rajeev Jashnani with UBS.

Rajeev Jashnani - UBS Investment Bank, Research Division

I hope this doesn't count as one of my questions, but could you give the U.S., x U.S. HeartMate II numbers like you used to provide or the growth rates?

Taylor C. Harris

Sure. So are you talking about unit growth rates, Rajeev?

Rajeev Jashnani - UBS Investment Bank, Research Division

That's right.

Taylor C. Harris

Okay, yes. So -- and one thing that Gary mentioned on the call was that PVAD accounted for 30 units of the year-over-year decline. So the balance would've come from HeartMate II, so hopefully that will help you with your models. But if you just look at unit rates year-over-year, HeartMate II was down in the U.S. in the 12% to 13% range. Internationally, it was up in the mid-single digits.

Rajeev Jashnani - UBS Investment Bank, Research Division

And I guess, the next question is just regarding Destination Therapy and Bridge-to-Transplant uses, and I know you don't have perfect visibility into this, but maybe in the accounts where HeartWare is being used, do you feel that -- I mean, what visibility and what gives you confidence that it's not being used in Destination Therapy, or maybe whatever data points you could good share with us might be helpful.

Gerhard F. Burbach

Sure. We do have very good -- we've discovered that we have very good visibility into the accounts and the implants that are occurring based on what our field team was reporting versus what HeartWare reported earlier this week. So we are confident that we have a kind of very high level of visibility to the utilization that's occurring at the accounts. And as I mentioned, there is a small number of accounts that are using the HVAD more aggressively and, no doubt, are using it on patients that historically would have been classified as Destination Therapy. So there is a moderate amount of utilization in that regard. But the broad base of centers are drawing a distinction and our viewing that, "Hey, HeartMate II is the proven long-term device." And so they're really limiting their HVAD utilization to Bridge-to-Transplant type patients.

Operator

We'll go next to Jason Mills with Canaccord Genuity.

Jason R. Mills - Canaccord Genuity, Research Division

My first question is outside the U.S. Looking at the results, I'm just curious if you can give us a little bit more color on the ASPs outside the U.S. Maybe it's a function of the mix looking like -- moving more towards HeartMate II, but to get -- the math suggests that the ASP has cropped up quite a little bit. We actually saw that with HeartWare as well. But perhaps give us a bit more color on that. And my follow-up is also outside the U.S. I'm wondering if you gave it, I'm sorry, did you do any implants in Japan on a compassionate-use basis or anything during the quarter? And as you move forward, how do kind of see the European, just the European, market playing out from a share perspective the rest of the year? You guys took over #1 share last quarter, as you know, and then this quarter, it kind of flip-flopped back, seems to be a continuing dynamic there. Those are my 2 questions, I'll get back in queue.

Taylor C. Harris

Jason, how about if I take the first -- I counted 3, so I'll take the first 2. Gary will take the last one. In terms of international ASPs, so we haven't had a fundamental change in pricing that would account for what you saw, so I think what you should attribute that to, there can be fluctuations in customer mix. So if the direct territories are performing better than distributor territories, you can see a shift in ASP that looks favorable there. Also nonpump revenue might have played a role there. But we didn't -- it's not like we changed our pricing strategy internationally.

Gerhard F. Burbach

Yes. And the PVAD decline also changes that mix and brings the ASP up as that goes down.

Taylor C. Harris

That's right. In terms of Japan, there were no compassionate-use implants, there was no implant activity in Q1. There was a very low single-digit number of units that were sold to our distributor just in advance of the launch in the second quarter, but not material.

Gerhard F. Burbach

Yes. And so relative to European market share, there has been some fluctuation. Generally, Jason, it's not kind of what I would describe as fundamental changes in accounts, geographies, but more kind of level of activity, particularly for some of the high-implanting sites that can impact that share a few percentage points one way or another. Also, stocking activity, being up or down in a quarter, can also impact that a bit one way or another. If we look at international in Q1, on a year-over-year basis, HeartMate II growth was basically in line with overall market growth. And in terms of our guidance, kind of expectation, excluding Japan, our

expectation is that the rest of international, we see share that's basically consistent this year versus last year.

Operator

We'll take the next question from Larry Biegelsen with Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

My first question is, it looks like the international growth slowed, if I'm doing the math right. Is that accurate, Gary? Can you talk a little bit about what's going on outside the U.S. And then I have 1 follow up.

Gerhard F. Burbach

Yes, that is accurate. The international growth was in the mid-single digits on a percentage basis. And, obviously, we had a very tough comp versus Q1, the year prior. So certainly, that's an aspect of what's going on there. There are some easier comps in the back half of the year internationally from a growth perspective. So we don't see any kind of fundamental negative dynamics going on, Larry, in terms of reimbursement or enthusiasm or opportunity. So we continue to be encouraged by growth prospects internationally. And, particularly, relative to Japan, which we're just starting up. And as I mentioned earlier, we think there's some greater upside, even here within the first few quarters, than we'd anticipated at the beginning of the year.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

So I think in the past you said o U.S. 15% to 20% growth in 2013, is that still the case? And then my follow-up question is on DT BTT mix, you talked about yours being over 50%, can you give us a sense what -- do you have a sense of what the market was, let's say in Q4 versus Q1? Do you see overall DT going down as a percent in the U.S.?

Taylor C. Harris

So how about if I take the first one, for 2013 specifically, we did not outline guidance for the split of growth between international and domestic. We have talked about our longer-term view, when we gave guidance on the market from 2010 to 2015, and we talked about a mid- to upper-teens growth rate. We did say that it was likely that international markets would factor more heavily into that than the U.S. market. We certainly have seen that over the last couple of years, but we didn't promise that on a year-in year-out basis. And we did talk about the fact that there had been such strong activity in 2012 that we weren't anticipating the same growth rate in 2013. So for 2013, we're certainly anticipating double-digit growth, but I don't think it would be fair to say that we're anticipating 15% to 20% o U.S. Bridge DT?

Gerhard F. Burbach

Yes. So in terms of bridge DT, Q1, actually, was kind of significant step forward, we believe, in terms of DT as a percent of the overall market. Although, it's not quite yet greater than 50% in terms of the overall market. But our expectation is that we should hit that threshold as we move through the year.

Operator

Our next question comes from Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So just a little more granular on the U.S. -- or on the revenue guidance for the year. Currently, it looks like you're on a run rate in the low $470 million kind of area. And you're going to get a benefit from the Pocket Controller in Japan that maybe puts you, for the year, more in the low $480's million, and then is it the right way to think about it that to get to low end of your guidance, o U.S. ex-Japan has to get better at a faster rate then the U.S. gets worse?

Gerhard F. Burbach

Well, I mean, the U.S., I think there's a positive aspect in the U.S., Bob, in terms of the DT market growth. And in terms of bridge, we do expect some additional inroads by competition. Although we think they'll be much, much more moderate than what we saw here in the first quarter. So we expect to see kind of an improved dynamic from a trajectory perspective in the U.S. for sure. And then certainly, we do expect to see some nice benefit from Japan as well as international, generally, as we go through the last 3 quarters of the year here.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then just as the one follow-up, just what are the things you're seeing out there that would give you confidence that things would moderate over the course of the rest of this year from a share perspective in the U.S.?

Gerhard F. Burbach

Well, I mean, the centers that were highly enthusiastic are on board. So in terms of new additional centers, obviously, there are kind of 2 ways that they can gain additional share are either adding centers or existing centers, kind of changing their share allocation. In terms of new centers, one, the existing centers, based on our estimates, account for about 75%, so this is the existing 77 centers, account for about 75% of the overall U.S. market. And in terms of bridge, they, obviously, account for more than the 75%, we don't have an exact number there, but -- so they're already in the vast majority of the market, and then that progression of additional centers is certainly going to slow down substantially, kind of as we go through the remaining quarters here. There's a lot less kind of opportunity on that front. And then in terms of the existing centers kind of the high enthusiasm has been recognized, and so the sledding gets tougher. I think our team is up to the challenge, I mentioned the competitive messaging continues to be refined, improved. And in terms of what we hear from customers, we're not hearing a number of customers saying hey, I've been holding back here for the first kind of couple of months that I've had the device. And now I'm ready to kind of break loose and kind of change the dynamics in terms of what I'm doing. So just in terms of what we're seeing and hearing, we're feeling pretty optimistic about kind of the likely trajectory there.

Operator

The next question will come from David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

I wanted just to come back to one of your initial comments, Gary, in your prepared remarks. I believe you said the open-heart centers represented about 23% of total units in the quarter, and that, that segment of your business grew in high teens. So if I look at that face value, that would imply, I think, that the rest of the business was down in the sort of 20-plus-percent range. For your U.S. pump business to grow, do you need those open-heart centers to ultimately comprise the majority of total? Or is there something that you can do in the other centers to stem the trend that we saw in Q1?

Gerhard F. Burbach

Yes, so one just -- the math isn't quite right, because the high teens for the open-heart centers is correct. And that 23% number also includes a population of small transplant centers that are not a part of that open-heart center group that grew at -- in the high teen rate. So anyway, you have to be a little bit careful with that math, so you have to kind of moderate that percentage down a bit in terms of the decline for the other centers. And so certainly, the expectation we have is that the open-heart center group does continue to grow robustly. But our guidance does not assume that, that group gets anywhere near 50% of our overall business this year or kind of even as we look into next year, I wouldn't have that expectation.

David H. Roman - Goldman Sachs Group Inc., Research Division

So just on the last part of my question, can that business grow in absence of that segment of the franchise becoming a much larger percentage of total? I mean, if you look at this quarter, it would suggest that the business is going to be pretty pressured until those or smaller tertiary-type centers become a much larger percentage of total?

Gerhard F. Burbach

It really depends on Destination Therapy growth broadly versus the open-heart center group, specifically. So it's really about how -- one obviously, how much additional share do we lose on the bridge side, which we expect to be modest. And how actively can we work with the centers to drive the growth of Destination Therapy. That certainly will be the case with the open-heart centers, but we also expect that to be the case at the midsized and larger transplant centers as well, not universally, but certainly for the substantial majority.

David H. Roman - Goldman Sachs Group Inc., Research Division

So if I could just sneak a clarification in here. You made a comment that February and March were better than January. Was the same true with respect to the share dynamics? Did you lose most of the share upfront and that moderate throughout the quarter?

Gerhard F. Burbach

We don't -- we can't answer that precisely, because HeartWare didn't kind of provide monthly data. But certainly, we don't feel like we had a negative share trajectory kind of as we got to the latter part of the quarter, just based on what we believe.

Operator

The next question will come from Chris Pasquale with JPMorgan.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

So a couple of questions. One, for Taylor, your gross margin was pretty strong this quarter considering the top line headwinds, can you just break out what the impact of the device tax was this quarter? And what other factors could cause gross margin to be weaker over the balance of the year?

Taylor C. Harris

Yes, so the device tax cost us about 90 basis points to gross margin, which means -- just means that we had strong core fundamental improvement year-over-year. However, a lot of that was generated by some of the manufacturing efficiencies that we had toward the end of last year, given the strong volume through the fourth quarter that then rolls through the P&L in Q1. So we had anticipated a good gross margin in the first quarter as part of our full year gross margin guidance.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. And then just a follow-up on Jason's question about the revenue per pump o U.S., how much of an impact, if any, did the Pocket Controller have on that this quarter?

Taylor C. Harris

Yes, really none.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay, so it was just mix and distributor versus direct sales mix?

Taylor C. Harris

Yes. And be clear on the Pocket Controller, the revenue -- the upgrade cycle upside that we've talked about, that's really restricted to the United States.

Operator

The next question comes from Brooks West with Piper Jaffrey.

Brooks E. West - Piper Jaffray Companies, Research Division

Just one for me. Gary, on Japan, just trying to kind of test around cadence and maybe opportunity there. Are you looking at a bolus of patients? Kind of how should we think about that launch progressing? Any further detail there? What kind of gets you to the upside of that $6 million that you talked about would be helpful.

Gerhard F. Burbach

Sure, yes, I don't think it's kind of big upfront bolus. I think it's really more kind of a steady cadence of activity. So at some of the more established centers, I think there maybe is a little bit kind of early activity, but then, over the course of the year, more centers come on line. So I think those 2 factors, our expectation has kind of offset each other, as you look at how does that play out over the course of the year. So it's really -- the kind of our optimism there is based on both kind of what we've seen and heard from the established centers, including some of the early in-plan activity as well as kind of what we're hearing from a broader universe of centers that are interested in getting involved in the therapy.

Brooks E. West - Piper Jaffray Companies, Research Division

And then did you say what you're pricing is in Japan?

Gerhard F. Burbach

We didn't, but it's close to just -- a little bit below the pricing in the United States. And that's our pricing to our distributor.

Operator

And we'll go next to Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

So, I guess, my first question, I just wanted to ask about whether you thought you had seen any dynamic around HVAD, having a draw-down effect of patients that are maybe too small or not as suited for HeartMate II as we kind of see in Europe?

Gerhard F. Burbach

When you say a draw-down effect, what do you mean by that?

Matthew Taylor - Barclays Capital, Research Division

Meaning, I guess, do you think that those patients either came to the front of the line? Or was there any bolus in the outfield in terms of smaller patients or something like that?

Gerhard F. Burbach

Yes. Certainly, we've heard from physicians that, that was one of the focal areas of use, were smaller patients. So, anyway, I think the answer to that question would be yes.

Matthew Taylor - Barclays Capital, Research Division

Okay. And just going back to your earlier comment on BTT versus DT. I think you had said something in the prepared remarks about your estimate for the utilization in DT patients of the competitive product. I guess, how are you getting that estimate? And can you give us any color around how you think the gray area -- or the bright line, either way, is kind of playing out now in the market?

Gerhard F. Burbach

Right. So that gray area kind of as we talk about it, we consider that to be a part of bridge. There's bridge to transplant, there's bridge to decision. We kind of consider that to be one. Just viewing that, hey, that's a population that based on the way that physicians think about things, a device can access with a bridge approval, and then we consider a Destination Therapy separately. And kind of our assessment of their inroads on that front is really based on our field team's interactions with the sites, with the clinicians. And our -- the reporting from the field team of those patients and whether they believe that they were viewed by the team there at the hospital to be a Destination Therapy patient.

Operator

We'll take the next question from Michael Rich with Raymond James.

Michael Rich

This is Mike calling in for Jason. First off, with respect to the Pocket Controller, can you give us an idea of maybe the number or the percentage of folks that you think you'll be able to upgrade in the U.S. in 2013? And what exactly is the process there?

Taylor C. Harris

Sure. So the way to think about the upgrade cycle for Pocket Controller is that your -- patients are generally eligible for an upgrade, if they've been on support for over a year. We have roughly 6,000 patients ongoing on HeartMate II on a worldwide basis. You can do the math just based on historical numbers to get to what you think the U.S. population is. It would certainly be the majority of that. And then a subset of those have been on the therapy for year or longer. The process would simply be that if they're in the implanting center for an evaluation they -- and they want the Pocket Controller, the center would simply need to make sure that reimbursement insurance is going to pay for it, and then they'd be able to get it. So hard to say the exact number of patients who are eligible. The way we've thought about the $2 million to $3 million per quarter number, just to let you know, every time a patient upgrades, they'll get 2 devices, one primary and one back up, and each controller is in the mid-single-digit thousand-dollar range. So using that, I think, you can back into what our assumption is on the number of patients. We're certainly not assuming that everybody is going to upgrade. But it's a pretty attractive new product. And so we do think that there'll be good reason to, both from a safety and patient quality-of-life perspective.

Michael Rich

And then just as a follow-up. In relation to your upcoming discussions with the FDA on the PHP pathway, which indication are you going to pursue there, shock or PCI? And would it be possible to pursue them both in parallel?

Gerhard F. Burbach

Yes. I think it would be possible to pursue both in parallel. But I think we're more likely to pursue a shock pathway. The FDA has indicated their kind of reservations around PCI, so I think that's unlikely that we would pursue that.

Operator

We'll take Suraj Kalia from Northland Securities next.

Suraj Kalia - Northland Capital Markets, Research Division

Gary, let me ask a specific question, and then a more general question. Forgive me if I missed this and you've already mentioned this. So if the 77 HVAD sites represent greater than 75% of the U.S. BTT market, and as is the prevailing wisdom, 238 HVAD units were said to be all BTT, then is it fair for us to say that the share loss or Thoratec share loss in the advance sites in BTT is much greater than 50%? And in the known advance sites is still greater than 50%. At least that's what our math is leading [ph].

Gerhard F. Burbach

Yes, that's -- I don't believe that's accurate, Suraj. So first, you have to consider stocking. I think the information that they provided was that 40 to 50 of those units are stocking. Secondly, I don't believe 100% of their volume is Destination Therapy. So they did have some Destination Therapy usage, like I said, I think it was relatively low. But nevertheless, there were some usage in some of those most enthusiastic sites. So once you kind of deduct those aspects, I don't think that's at all accurate.

Suraj Kalia - Northland Capital Markets, Research Division

And would you say then it's 50-50? Or just some broad markers in where you see the advanced versus and non-advanced stratification?

Gerhard F. Burbach

Suraj, there's certainly some centers where it was -- there are some centers where it was greater than that. Some centers where it was less. We don't have perfect number for you on advanced versus non-advanced sites, but in aggregate, we don't think that it was over 50%.

Taylor C. Harris

Yes, I mean, their bridge share was way below 50%.

Suraj Kalia - Northland Capital Markets, Research Division

And, finally, Gary, you mentioned, at least I heard earlier on the call, about a sharper clinical messaging. And Gary, this is a general question, somewhere along the line, over the years, there's been a hiccup in HeartMate II. We've seen a spike in thrombus. And the perception, and again, perception has changed that. At best, both pumps are imperfect or equal in [ph]. The patient management part of the equation seems to have disappeared, at least from the clinicians, what they are -- the feedback is nowadays. The neurological events with HVAD, really have at least seemed to have gone by the wayside, I guess my question to you is, when you talk about a sharper clinical messaging, help us, at least to the extent that you can, what does that mean in the current framework?

Gerhard F. Burbach

Yes. So I don't agree with kind of aspects of what you said there, Suraj, in terms of like the neurological issues have gone by the wayside. I mean, there are some limited data sets that have shown lower rates, but if you look at the broader data sets, those continue to show higher rates. So certainly, the kind of neurological event rates continue to be a key focus area, helping people to understand that data more thoroughly, both in terms of the HeartMate II as well as competitive products. Also, functional recovery, I think, is an area that people really don't understand that well at this point. And I think that in terms of multicenter data, that HeartMate II has shown the highest level of functional recovery. So building that into our clinical messaging, more effectively is also a key. And finding different ways to deliver that information that's more engaging, not dependent on just the individual sales rep who oftentimes isn't best positioned to do that in the same way that can be done in other kinds of forums. So that's really what I was referring to.

Suraj Kalia - Northland Capital Markets, Research Division

And forgive me, Gary, I'll just squeeze in one more, please forgive me. Gary, you mentioned reservations for high-risk PCI in PHP, what was that about? Why does the FDA have reservations? Is it the market based, is it product based?

Gerhard F. Burbach

It's not product based. It's really indication based, and what are the end points to demonstrate significant benefit and giving 2 [ph], because I think that's certainly more challenging in an application like high-risk PCI as was demonstrated in the Impella trial versus in a shock trial, where you have a kind of much cleaner ability with survival, to provide kind of real significant demonstrable benefit.

Operator

And the next question comes from Bruce Nudell with Crédit Suisse.

Narendra Nayak - Crédit Suisse AG, Research Division

This is Narendra Nayak in for Bruce. Getting back to the U.S. market, I was hoping you could provide some more color on the relative growth rates of the BTT and DT segments this quarter based on what you know about your own implants and HeartWare's.

Gerhard F. Burbach

Sure, we think that the DT market grew in the mid- to upper-single-digit percentage rate in Q1, and that the bridge market was flat to slightly down.

Taylor C. Harris

Yes, and Narendra just keep in mind, I think we've mentioned this before, but in aggregate, this was the toughest comparison -- quarterly comparison for the overall market, probably both segments this year, so hence, the rates that Gary outlined.

Gerhard F. Burbach

Yes, and clearly the expectations for growth rate are higher the balance of the year.

Narendra Nayak - Crédit Suisse AG, Research Division

Understood. And then a quick follow up. Does your guidance assume that you will have a dominant share in the U.S. BTT segment exiting this year?

Taylor C. Harris

Yes. So dominant is probably a strong word, but we do, Narendra, believe that we'll retain a leadership position in the bridge market as we've discussed before.

Gerhard F. Burbach

Yes. And I mean, I describe it as a very solid leadership position. As I mentioned earlier, we're expecting that the additional inroads will be moderate.

Operator

We'll take the next question from Mimi Pham with ABR HealthCo.

Mimi Pham

Just regarding the DT market development, for patients that are being referred for VADs, for DT, that aren't sick enough yet. Are you seeing an increased pipeline of these potential DT patients? And what are your market development managers doing to make sure that they get referred back in a timely manner such that they're not deemed next time too sick.

Gerhard F. Burbach

So I'm sorry, can you restate the start of that question, Mimi?

Mimi Pham

Yes, so I'm just wondering if you're seeing an increase of patients being referred for VADs for Destination Therapy that are just not sick enough yet? They're being held off, but that they're in the pipeline? And if you are, what's your -- market development team is doing to keep tabs on these patients to make sure they can get referred and back in the system? [indiscernible]

Gerhard F. Burbach

Right. Yes. Yes, I'd say there is an increase -- I wouldn't call it a dramatic increase. And our market development team definitely, with the clinical team at those centers, keeps tabs on those patients. The clinical team at the centers, generally, do a good job of maintaining contact with these referring centers on those patients to monitor the progression and be able to bring them in as they become appropriate candidates.

Mimi Pham

And then related to that again, I'm just looking for more clarity on the DT referral. You talked before about 100 of the thousands that referred, at least 1 patient that have gotten a HeartMate II, getting 3 or more HeartMate II in patients implanted. What is it about those 100 subset, it's just they had one patient come back -- or their first patient come back with the VAD and they're happy? I'm just trying to get a sense of what your team is doing to convert those next set of higher referral referrers.

Gerhard F. Burbach

Right. Yes, I think it's a combination of referring physicians that are more in the early adopter mindset. If you kind of think about that kind of classic model of technology adoption, along with positive experience, both in terms of clinical outcome of the patient, the way that the implanting center has interacted with them, the patient coming back. Maybe they're not following that patient, but at least they've had exposure to the patient, and they see the remarkable improvement in that patient. So it's a combination of all those things, the first one, we can't control, but we can definitely have a major impact on all the others. And so as we move forward here, we move through from the early adopters to kind of more the mainstream of the physicians, and so we expect that number to continue to grow from the base that we have now as we continue to get to a more mature mainstream therapy.

Mimi Pham

Got it. And just last question. You talked about wanting to get into 20 to 25 new international centers, half of them, Japan, half x Japan. How are you identifying the x Japan international centers? Are you going after -- are you trying to keep an eye on centers where there's already competitive VAD activity there?

Gerhard F. Burbach

I mean, certainly, there are sites that fall into that category, but then there's also new market opportunities. Last year, we had a lot of sites that fell into that category. In Turkey, in Kazakhstan, as examples. So kind of those are the 2 general categories. It's kind of new geographic opportunities, markets that are already existing with new site opportunities. Germany would be an example of that. Or cases were there's already be a competitive device in place, and we're looking to try to get in there as well.

Mimi Pham

So would you say this year's target is more favorable in mix towards the, current VAD centers or new ones?

Taylor C. Harris

Yes, it would be -- we're going after, primarily, centers that are new to VAD.

Operator

We'll go next to Charles Croson with Sidoti & Company.

Charles Croson - Sidoti & Company, LLC

So first question is on the breakdown o U.S., and this seems to be somewhat consistent over the past few quarters here between you and HeartWare. On a unit basis, especially for this quarter, it looks like they had more pumps sold. But on a sales basis, it looks like it's pretty much half and half, depending on how will you slice them [ph]. My model's not perfect here. So I'm just trying to understand. I think somebody had touched upon this in terms of you guys maybe having gained higher ASPs. And it sounds like that didn't really happen. So my question is, are you seeing them discounting a little bit? Or is it just that they're maybe in some different markets that have different pricing, and then there might some stocking, and then -- that you have some direct sales as well?

Gerhard F. Burbach

Yes, Charles. I think the one thing you need to make sure you're factoring into the math is that we sell CentriMag and PediMag outside the U.S. When we report our units, we're only reporting units for chronic VADs, that's HeartMate II, PVAD, IVAD. We don't report CentriMag units. But we do have CentriMag revenue coming outside the U.S. So my guess is that, that's the single biggest variant in the analysis.

Taylor C. Harris

The other thing they'd probably -- if you're looking at that, how that changes over time, kind of the mix of activity between direct and distributor, which I think you were alluding to in your question, definitely would have a major impact in how those ASPs go up or down quarter to quarter, where one quarter, their mix may be higher on one than the other. And ours could vary in the opposite direction or the same direction. So I can definitely make those kind of comparative ASPs move up and down pretty significantly.

Charles Croson - Sidoti & Company, LLC

I see, okay, that's helpful. I did factor in those CentriMag, but -- so that does help though. In terms of R&D for the next few quarters, it seems to have popped up a little bit more than we were expecting for this quarter. How should we think about that going forward?

Taylor C. Harris

Right. So, I guess, in general, for operating expenses, as we gave guidance for the full year, we did assume that Q1 would have a modestly higher level of spending than the balance of the year. That's not the pattern that we've had over the last couple of years. But we do expect that to be the pattern this year. And that's not really a function of personnel, we are planning to continue to hire, both to support our product development initiatives, as well as sales and marketing initiatives. So it's more a function of project-related expense.

Operator

And that does, actually, conclude today's question-and-answer session. Mr. Burbach, at this time, I will turn the conference back to you for any additional or closing remarks.

Gerhard F. Burbach

Fantastic. Thank you, and thanks, everyone, for joining us. We appreciate your time and your questions. And we look forward to keeping you updated as the year progresses.

Operator

That does conclude today's presentation. Thank you for your participation.

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