Heartware International's CEO Presents at Bank of America Merrill Lynch Health Care Conference (Transcript)

Heartware International, Inc. (NASDAQ:HTWR)

Bank of America Merrill Lynch Health Care Conference Call

May 16, 2013 11:00 ET

Executives

Doug Godshall - Chief Executive Officer

Analysts

Bob Hopkins - Bank of America Merrill Lynch

Bob Hopkins - Bank of America Merrill Lynch

It’s Bob Hopkins of Bank of America Merrill Lynch. Welcome to the last day of the BofA Health Care Conference. I am very happy to kick off this morning with Heartware’s Doug Godshall, the company’s Chief Executive Officer will be speaking on behalf of the company. Chris Taylor is also here who runs Investor Relations Group and Doug will give a quick presentation, and then we will jump into some Q&A and thank you very much for being here.

Doug Godshall - Chief Executive Officer

Thanks, Bob and thanks to everyone joining us live as well as those on the web. I will be making forward-looking statements obviously throughout this presentation. So, we present to you our Safe Harbor statement. At Heartware, we like to say we are leading a small revolution. We have over 3,000 implants in our history. We have nearly 200 customers around the globe, 77 now in the U.S., and as of last quarter, 116 outside the United States. We also have what we believe is a compelling portfolio of next generation pumps and peripheral systems, and a team that is really working to innovate and improve the outcomes for patients.

A quick snapshot on our financial history, in 2009, we are approved in Europe, in 2012, we are approved in the U.S. and towards the end of the year, so that led to a one of our best quarters, well certainly our best quarter financially to-date with $49 million, which is an 87% growth year-over-year. And we also have a comfortable cash position with $229 million as of March 31. Our system for those who are unfamiliar with it is called the HVAD it’s a very small pump. It fits in the chest immediately adjacent to the heart. Though it’s small, it provides full flow and full support to the patient. It’s a centrifugal design, so the blood comes in at one angle and goes out of the right angle from the impeller. It is a fully suspended system with magnets and thrust bearings, so there are no mechanical connections inside the pump to move the impeller only one moving part. It is connected externally to a controller and batteries via a very small flexible and very durable driveline.

So, the fact that it’s small it enables physicians to place the pump in the pericardium immediately adjacent to the heart. As I mentioned, there is no need for a pump pocket. It also with increasing regularities enabling physicians to place the pump by a thoracotomy, which means you don’t have to do a midline incision in the patient’s chest, you can just split the ribs and insert the pump, less invasively, which is gaining traction, because it’s small, it’s very – it uses power the very efficiently. The wide blades of the impeller, which we also migrated to our next generation pump, enables a very low fluid stress and customers are continuing to be pleased with the very easy-to-use surgeon friendly tools.

So, we are approved on November 20 of last year and our target was to have our 50 trial sites and our first 25 non-trial sites up and running within six months. We are ahead of schedule. We have 77 sites trained within the first five months. Our next goal was to have 100 sites by November of this year and we are certainly on track to exceed that target as well. We have had to expand our training facilities now with multiple new both proctors who can go into the field as well as academic centers that are doing labs and preceptoring first site, they want to go visit them and watch how they do cases.

We have a growing clinical and commercial experience now obviously starting well back in our first implant in 2006 as part of our international trial. It was a 50-patient trial, which was added to with our 140 patients and 230 cap patients. The current ongoing trial is our post-approval study which will be 600 HVAD patients and we look forward to having that data rolling in towards the end of this year, so that we can see the real world experience with the HVAD in the U.S. just as we saw the real world experience with the HVAD through the REVOLVE Registry in Europe that was presented last month.

If you look at our growth trajectory over the years and the split between the U.S. and international, it will be very interesting to see what I am sure the U.S. over takes. The international component came close last quarter with 238 versus 244 units. In the split the U.S. is about 60% to 70% of the global market, so our expectation is that the dark blue line will overtake the light blue line although our international sales team is doing everything they can to prevent that from happening.

Perhaps more importantly is the message this sends about the market itself the 925 units we sold last year exceeds the total market in 2008 internationally and 2009. So, the market itself outside the U.S. has growth quite substantially. And while there are sort of quarter-to-quarter vagaries that freak people out because of the sort of lumpiness of the bad market, our impression continues to be that both in the U.S. and internationally, we will see sustained growth for several years to come to design any good alternatives on the horizon beyond that, so we remain quite bullish about the market.

And one of the reasons we are really bullish about our possible role in that market in the future is our next generation platform the MVAD, which should be entering the clinic very soon. It’s a 22 CC displaced volume and the actual volume that sits outside the heart is only 15 CC, it’s a very small pump. It provides a very wide range of support, it can go down to one liter up to 7 or 8 liters, it uses the same concept of passive magnets and thrust bearings to levitate the impeller. We have tried to take everything that we learned from the HVAD that we wish we had done and put it into the MVAD to make it even lower fluid stresses, even smaller driveline, more user friendly implant technique, etcetera.

Looking at the I mentioned the size outside the heart, one of the things that really resonates with surgeons is if though sort of less you have to rub on ribs and other anatomy is the better and the pericardial volume of he HVAD is 50 CC, the pericardial volume of the MVAD is 15 CC, so less than a third the volume of that can interface with the anatomy outside the heart. The other thing that’s getting reviews and we just really unveiled it to a broader audience at the ISHLT in April is what we call the PAL or peripherals for an active lifestyle.

This is a very user friendly intuitive controller system .The driveline is actually a component of the controller that would then connect to the patient’s driveline, so if you have a drive line problem you can just replace the controller as opposed to try to fix the driveline. There is only one piece there aren’t extra cables to connect batteries, so it’s more like a power tools not fit kind of a concept, which particularly for the elderly patients you want to use gross motor skills, not small motor skills to change batteries. And nobody really likes a bunch of cables dangling all over them, it doesn’t feel normal. Touch screen display is something that everybody is getting used to with iPhone, so it makes for easy sort of toggling for the patient to figure out if something is wrong. And there is a whole host of other design concepts that we included in this to try to make the patients feel as close to normal as possible despite the fact that they have a cable connected to a controller.

One of the other things that this power controller enables is a much more sophisticated software system. So, we have things like a pulsatility algorithm that will vary the speed of the pump, and this is just an image screen capture from one of our animal studies where we had this key pulse in the system. The blue arrow shows the speed or the rpm is decreasing, the red arrow shows the aortic pressure. And what you can see is that as the speed drops down the aortic valve opens because we drop the speed enough for the pressure to build up in the aorta and force the aorta to the ventricle to eject into the aorta which opens the aortic valve. This should have some meaningful clinical benefit for the patients should have less aortic insufficiency. A lot of physicians think that one of the causes of GI bleeding which is present with continuous flow that is and absent pulsatility, so we think including a – even though it’s not a paste pulsatility, but having frequent pulse into the peripheral vasodilator will decrease the GI bleeding rate as well, so really easier to see this in clinical setting.

If the MVAD works, the next which we certainly obviously are quite optimistic that it will. The next version of MVAD is something we call Longhorn, this pump sits entirely in the heart. The outflow goes across the aortic valve instead of having a graft going around the heart and the extra procedure time to attach that graft and complications that accrue from that. This pump so far in our animal studies is sort of a 30 to 40 minute skin-to-skin implant very easy thoracotomy incision and we didn’t want to start with this in the clinic because we want to first confirm that the MVAD core architecture works and then start playing with some of the more unique implant approaches that we have. And what’s really great about the MVAD is that the – that core architecture is so versatile, it that should allow us to have a family of pumps that are suited to different patient populations.

For example, the way we are currently thinking about this market is that there are segments and that there are different patient populations you have the current patient segments Class 3, 3B and 4 which is principally 4 where HVAD currently plays and MVAD will play. Then there is this other segment that currently you sort of let them got hospice where they just can’t handle an implant of the elderly and pro-surgical risk and we think Longhorn will be ideally suited for them.

Class 3 at the more we just look at that population the two Class 3s, the Class 3As we think probably need less flow and an even less invasive implant approach. And so we are doing a significant amount of work on a platform that we think will have a great appeal for that population, give them enough flow, but probably not the 5, 6, 7 liters of flow that our current patients are getting. Ultimately, we have to get rid of the driveline and we are quire encouraged by the progress we are making with our TETS or transcutaneous energy transfer system.

So, every year we have one of these slides that look at the year and every year I’m amazed that the year ahead is actually going to be busier than the prior year. And so the commercial rollout is actually progressing well, we are pleased, it could always be more pleased, but luckily customers around the U.S. are responding very positively. We’ll start our MVAD trial, launch the peripheral system, propel hopefully for HVAD this year, if not it will be early next year.

We are making good progress with the FDA on our CAP cohort. Our most recent protocols has been submitted to the FDA very recently, so we are encouraged with the conversations we are having there. We should have approval in Canada but not too distant future. Our test system will go through another round of chronic animal studies and we are actually looking at some modifications that might make it even more patient friendly than our current version, but the core architecture is highly leveragable.

We should have a thoracotomy registry in U.S., which was initially going to be a physician sponsored registry, but we’ve realized that putting all of the burden on a physician just was going to cause significant delays and we were going to have to do all the work anyway. So, we’ll be submitting an IDE to the FDA for thoracotomy registry and also looking at thoracotomy to subclavian – so, totaling up to subclavian artery cells in aorta outside the U.S., which have been about 10 cases done so far and it’s very intriguing implant approach.

We also have HDEs for pediatrics and RVADs that we are looking etcetera. So, we are – the last time it was just Japan, so Japan we should get our trial started in the next probably three or four months, we are having several meetings with the regulators over there to kick that trail off. And it’s just a negotiation sort of sample size, we want to do six like Thoratec and of course their first ask is for a lot more than six and hopefully we will land at about the same place that everybody else lands at which is 6 to 10 patients for Japan trial. So, with that said, it’s been a really encouraging six months hopefully the next six months are even better than the last six. And with that, I think Bob, time for questions.

Question-and-Answer Session

Bob Hopkins - Bank of America Merrill Lynch

Thanks Doug. On your 2013 list there, I just want to ask about one of those and that’s pursue additional patient cohort for destination therapy, you guys you used to read pursue DT CAP and now it’s qualified a little bit differently. So, first question is just give us an update on timing and when you expect some clarity there and will you need that cohort to get an official approval for DT in your view or is the current trial are going to be sufficient?

Doug Godshall

Yes, it so we change – we use – we call it CAP, we call it cohort, we sort of use it interchangeably internally as well. And the reason is not a traditional cap as we are trying to test at different hypothesis. We saw a very clear evidence retrospectively that managing may not show the pressure, where it was done well resulted in a substantially lower stroke rate, both ischemic and hemorrhagic. So, and we also saw that the FDA evidently has some anxiety about our stroke rate based on data they put into our label. And we would like to the stroke rate to be zero obviously. So, we want to do everything we can do bring it down. But we also think we need to prospectively demonstrate that if on a broader basis if you are more proactive at managing the mean arterial pressure down that there is a sort of correlation you also see a lower rate.

So, in a traditional CAP you use exact the same protocol and you just do more patients. So, calling it a CAP is kind of sort of accurate and kind of sort not accurate. We do see this data as being something that will be integrated into our submission. If you look at our label, the data was only at six months and you saw a bifurcation between the two arms, so we think not – you don’t have wait two years you see if you had an effect on the stroke incidents. And so we are in the negotiating how many patients you need, how long of a follow-up on the safety end point versus the primary end point analysis or efficacy end point. How much follow-up you would need for this sort of different hypothesis and that’s what we are having productive discussion with the FDA on.

So, we think we’re going to hit our primary end point. We think will be non-inferior to the control in our 450 patient trial, but we also are not sort of dilution or we know that the FDA doesn’t approve stuff just because you hit your primary end point. It’s a requirement, but not sufficient if they have concerns on safety. And based on the label it would look like they had some concern, so we want to – we see this as something that we will integrate into our submission which is, which takes a little longer to negotiate with the agency because that’s different than here is the CAP and we’ll just look at it later more like here is the CAP that we want to be able to show when you do this blood pressure thing, you address this safety noise.

Bob Hopkins - Bank of America Merrill Lynch

So, in terms of timing on clarity what’s the related thoughts?

Doug Godshall

So, hopefully we get a positive response on this protocol and we start enrolling patients will happen next month, because and we have to go to the RBs but sort of early to mid-Q3. And depending on what we ultimately land on with the agency in terms of sample size and follow up that will probably dictate how it integrates into our – how many of the patients actually have to be followed, how long to be integrated into the filing.

Bob Hopkins - Bank of America Merrill Lynch

I mean it doesn’t look like physicians are holding back waiting for this data, but that said with – how does this make you think about your timelines that you have laid out for an official DT approval?

Doug Godshall

I don’t think we’ve ever given a specific date. If I took consensus it’s probably late ’14, early ’15 I am guessing. If this data demonstrates what I – what we’ve hypothesized will it should albeit the need for a panel if we sort of hit the end point and address safety. Then I would argue there is no need for a panel. If there is a -- you hit – if your primary end point, but there is a safety concern then that would probably dictate the need for a panel. So, I don’t know yet if it’s going have any adverse event more than adverse effect other than two to three months a quarter whatever either way. So, again we don’t know exactly they haven’t agreed they have been encouraging, but not they have not said here go ahead. So, until they say go ahead they could always just say no, but that’s, so we don’t see a material change in timeline.

Bob Hopkins - Bank of America Merrill Lynch

Okay. And then probably as importantly, if not more importantly can you just remind us when we’re going to see sort of the next important data set from Heartware that will help us understand that the relative stroke risk?

Doug Godshall

So, we don’t think sort of further mining of our bridge and CAP cohort is probably going to – that thing is probably not going change very much at this point. And it’s probably not going to be particularly informative because there is not a – that will be hard to see a before after effect. On the other hand, we are quite intrigued to see what’s going to happen in the U.S.? So far, obviously doctors wouldn’t be using the device post-approval as they were having a rash of events, whether it’s any kind of better than strokes or promise what have you and I am sure the number is not zero, but if they have certainly been sensitized to the stroke issue, so, if they saw it, it’s now like they would say, GI didn’t realize, (indiscernible) ever had strokes.

So, we expect that the first new prospective dataset will be post-approval study. And if it’s anything like what we saw internationally, they actually do a pretty good job in the post-approval setting in terms of managing the patients. And we would certainly trend a lot on blood pressure management and we get a lot of commentary back from sites on how they are trying to manage. We get more reports of hypertension than we ever got before last October when we first started talking about blood pressure management. In fact, I don’t think we ever had a hypertension complaint before last October. And now we get them often. So, that to us is a good signal. When we see people present at ISHLT and from the audience, doctors ask other doctors. So, were you managing the patient’s mean arterial pressure aggressively? That is really encouraging to me, because that suggest to us that sort of, however, we got the word out the word has gotten out pretty effectively, because they didn’t have her ask that kind of question before. So, we are cautiously optimistic that a post-approval study will be positive. And even though it’s not the same DT population, it’s not going to be all that dissimilar, because these patients kind of blur together anyway. Exactly what the timing is we are trying to figure out, because we have never – we have never been the recipient of Intermax data flows on a quarterly basis other than as our control arm for a trial, and we didn’t get that data quarterly. We just got that at the end of the trial.

So, we have been getting reports. We can see the implant volume, but there is lot of data fields that aren’t filled out yet. So, there is probably a three to six-month lag, which suggest that the best case new post-approval study dataset would be kind of end of this year. And we just have to figure out when we have enough follow-up on enough patients and have given enough time for data entry lag, so that we don’t sort of present data and then come back two months later and say oh, never mind actually half the data was missing, here is the real data, so sort of end of this year, beginning of the next year is our expectation.

Bob Hopkins - Bank of America Merrill Lynch

Great, thank you. That’s very helpful. The other thing I wanted to ask about is something you spent some time on the call by talking about I mentioned in your prepared remarks here and that is the opportunity for thoracotomy implants, because obviously one of the things I think a lot about long-term is what’s the share split? And this is one of those things that could tip things potentially in your favor away from that 50-50 market I think so many people do loosely think about. So, when you talk about getting your optimism that that can become something that can really be a big benefit for Heartware in terms of market share as we think forward over the next 12, 18 months.

Doug Godshall

Sure. It certainly has accrued to our benefit internationally at some of our larger European centers. It’s not fewer than half of our international centers are doing thoracotomies, but some of the larger centers do them either all the time or almost all the time, and when you kind of activate a patient on the table every now and then, when one center said his patient – his HVAD patients get kicked out of the ICU for outpatients, the same day of the procedure, because they are just so – they are doing so well post-op. That when they need to bed, his patients are kicked out which sort of never happened before these to hang around for a week.

Now, in Europe, there is not much sensitivity to things like length of stay etcetera or much less sensitivity in the U.S., where there is significant sensitivity to that. Thoracotomy seems like it will definitely help. It will be really interesting to see as now that the European experience is growing sort of anecdotes are, I have less right heart failure, I have less bleeding, I have less other complications, infections and the like because of thoracotomy. So, if there is actual clinical evidence that there is a difference, the first presentation suggested the outcomes were kind of the same, but the anecdotes are certainly that the outcomes are better. So, if you can combine less invasive sort of better physical outcome for the patients that are appealed to a cardiologist, because now it’s not a sternotomy and it sounds less invasive to do a thoracotomy, I think that’s an interesting appeal. We think it should have a meaningful difference – impact on our business, because it should have a meaningful impact on the patient. The U.S. physicians tend to be a little more reluctant on thoracotomy. So, thankfully, TAVI has really gotten them back in the game, so they are going to think it about thoracotomy again. So, it’s happening organically, even though we don’t have the study going yet. I think once we get the study it will be helpful, because it will empower more people to think about thoracotomy versus thoracotomy when I can’t do a sternotomy.

Bob Hopkins - Bank of America Merrill Lynch

Is it the biggest limiting factor to sort of training the difficulty of the procedure, things of that nature or are there other limiting factors that we should be aware of?

Doug Godshall

There is, as (indiscernible) talked about in our call that we had this panel, our think-tank kind of a session with 20 of the top probably 25 sites in the world. And it was funny, one side of the room was U.S. docs, the other side of room was the international docs and every international person was talking about thoracotomy, thoracotomy, thoracotomy, don’t make me go back to sternotomy, and the U.S. docs were, yeah, but you can’t clean up the ventricle and they make me really nervous and I don’t have full control. And then probably half of them went back and did a thoracotomy the next month, so even though they were really nervous about it. The big difference seems to be that 3D echo quality is vastly superior to what it was four years ago. You can see everything now. So, you can actually probably see what’s in the ventricle now better than when you blindly put your finger in and look around for thrombus, which is what they do today.

So, as the European showed image after image of their ability to really visualize inside the ventricle and be confident that there is not thrombus, because that’s really the anxiety as what if I suck a big goober into the pump and I have got to exchange the pump, because I didn’t clean up the ventricle. And even my sort of most adamant sternotomy guy, have been noticing, they just probably done four thoracotomies since that meeting. And so as you see that there is really rarely thrombus present and I can usually confirm that it’s not there, you will start doing thoracotomies. And I think they will baby step, they will start with on pump thoracotomy, so they can still check the ventricle and then they will realize they don’t – there is really not a benefit to the pump, I don’t need the pump, and that will go off them.

Bob Hopkins - Bank of America Merrill Lynch

Great, that’s very helpful. I just wanted to get one quick question on your view in the market. And I think in your prepared remarks, you were pretty clear. So, but I just when you look at the Q1 results obviously, there were tough year-over-year comps, but sequentially you try to adjust for stocking and things like that, it did look like sequentially, it was very, very low single-digit growth for the market. So, I just want to kind of get your view on, I mean, I know your view in the long-term, I don’t think it becomes your view on the short to intermediate term, are there any things that in the next couple of quarters besides tough comps that would have an impact on this market on the negative side that you can share with us?

Doug Godshall

No, I think in the U.S., there is an adjustment underway. There is for the first time doctors have a choice. And for the first time, there are two companies in the market trying to sort out what it’s like to co-habitat. So, I think the first quarter was a bit of a how do I if I have got this patient sitting in front of me, how do I now describe two devices? When I describe one device, and then another one that’s in a clinical trial, I know how to do that. When I have got two devices both of which are approved, how do I walk a patient through the choice? So, I think first quarter was a bit of an adjustment quarter and certainly for our colleagues at the other company, it was an adjustment for them to figure out what life is going to be like when they don’t get every case.

So, there is no evidence that we see. And certainly the ISHLT was the most bullish of that meeting I have ever been to. There I was almost uncomfortable how much of that’s sort of given it was by every physician that I – now I was talking to a lot of believers, but so many more of them were just saying in the future, in the not too distant future, transplants are just going to be a bail-out for that patients who are having complications, because our outcomes are getting better. Transplants are decreasing. So, significantly this is – that was so vastly outstripped transparency in the not too distant future, which as a bad guy makes me sort of happy. And I don’t think they were saying it just to make me happy, I think they are just seeing the trends with their patients where they aren’t just not getting transplant volume. So, I know it’s hard when you’re trying to figure out on quarterly basis achieved. First quarter was not exciting, is the second quarter going to be equally unexciting or more exciting. I’m sort of – I’m certainly comforted by the long-term perspective. And I am reminded that in the beginning of 2011, there was a panic that Germany had stopped doing beds.

And then in the second quarter it went berserk. So, I am not predicting a berserk second quarter this year in Germany or the U.S. But I do think that there is just –there just aren’t good options for these patients. And the clinical momentum is so real, and I do think things like thoracotomy will have a profound effect ultimately. Now, it’s probably not going to have a profound effect in the second quarter, because it’s just going to take a little bit of time. But I think as we direct on the invasiveness patients will get better, if there really is a benefit for right heart failure then thoracotomy could be transformational because rate for heart failure has emerged as is biggest frustration for these guys.

Bob Hopkins - Bank of America Merrill Lynch

Thank you very much for your time. I appreciate it.

Doug Godshall - Chief Executive Officer

Great, thank you.

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