Thoratec And The War In Heart Pumps

Jul. 9.13 | About: Thoratec Corporation (THOR)

In June, California-based Thoratec (NASDAQ:THOR) acquired the DuraHeart II ventricular assist system from the Japanese company Terumo for an upfront payment of $13 million and potential milestone payments of up to $43.5 million.

It is an experimental device in which clinical trials will not begin for some time. The first human implant of DuraHeart II is planned for 2016, followed by large-scale trials in the U.S. and abroad.

Thoratec's goal with the acquisition must have been staying ahead of the competition in the global race of LVADs (left ventricular assist devices).

The LVADs, simply called "heart pumps," are mechanical devices that circulate blood throughout the body when the heart is too weak to do it on its own.

Thoratec's HeartMate II is not an artificial heart, nor is a heart replacement. The patient's native heart is not removed. HeartMate II attaches to the heart and is designed to assist, or take over, the pumping function of the patient's left ventricle, the main pumping chamber of the heart.

The global market of LVADs is dominated by Thoratec, which controls half of the European market and about 75 percent of the U.S. market. But its rival HeartWare (NASDAQ:HTWR) is coming up fast and some predict it will take over as leader within the next five years.

HeartMate II

Thoratec's HeartMate II, sold since 2008, represents a breakthrough in medical technology and has rapidly become the most widely used device of its kind in the world.

HeartMate II is placed just below the diaphragm in the abdomen. It is attached to the left ventricle on one end, and to the aorta, the main artery that carries oxygenated blood from the left ventricle to the entire body, on the other. An external, wearable system that includes a small controller and two batteries is attached by an external driveline. The wearable system is either worn under or on top of clothing.

Though heart transplants help approximately 2,000 advanced heart failure patients each year in the U.S., over 250,000 patients have no viable treatment option and are considered at high risk for repeated hospitalizations, poor quality of life and even death.

Additional Devices

Thoratec also sells other devices that are variations of its main product.

The CentriMag and PediMag blood pumps provide support to the body circulatory system from the outside. The CentriMag can provide flows up to 9.9 liter per minute and is appropriate for patients larger than 20kg. The PediMag can provide flows up to 1.5 liter per minute and is optimized for children up to 20kg. Both are used as a short-term solution (up to 6 hours) to support the circulation while longer term options are considered.

The PVAD (percutaneous ventricular assist device) is a small mechanical pump for short-term support of the heart from a few hours up to 15 days. It is used after a heart surgery or heart attack to give the heart time to strengthen. The PVAD is worn outside the body and is connected to the heart through a vein in the thigh.

In May the FDA approved the Pocket Controller, which serves as an attachment to the HeartMate II. The controller has an internal battery that can energize the pump at full power for 15 minutes when disconnected from the main source. The device sounds alarms and provides on-screen instructions for what to do, but otherwise stays quietly hidden in a pant pocket.

Competition

In November 2012, the FDA approved the competing company HeartWare's ventricular assist device, HVAD. HeartWare sold 482 pumps around the world, a 62 percent increase over the first quarter of 2012.

In the device's first full quarter on the market in the U.S., HeartWare's domestic revenue more than tripled to $26.2 million and the company is busy to expand.

But if HeartWare wants to grow its U.S. market share, it'll have to convince customers that it can adequately deal with the occasional mechanical problems of the device.

Back in February, HeartWare disclosed in a Form 8-K filing with the SEC that in a small number of events, 11 of approximately 2,900 implants, the rear portion of the HVAD Pump's driveline connector housing became separated from the front portion of the driveline connector after extended use.

In the event of a separation, hand tightening of the connector housing may be sufficient as a temporary measure, says the company; however, healthcare professionals are instructed to contact HeartWare to arrange for a permanent repair. The company promises a redesign to avoid the problem in the future.

Although the SEC filing claims that "none of the confirmed events have resulted in harm to the patient," a separate FDA report describes an incident when the patient died. A family member came to the house of the patient and found her unresponsive with the HeartWare alarm going. The patient subsequently died in the hospital. She used HVAD for almost 3 years. From the report it is not clear that the equipment was solely to blame for the death.

The other issue is the rate of strokes seen in trials. The FDA based its approval on results from the 137-patient Advance trial, which showed that survival was comparable with that seen in a large U.S. registry, Intermacs, that monitors patients implanted with approved mechanical circulatory support devices.

There was no significant difference in most adverse events, but the FDA said in a statement that the risk of stroke associated with the HVAD was such that patients and doctors ought to discuss all treatment options before deciding to use the device.

HeartWare intends to seek approval for its device as "destination therapy," which is the term for the permanent use of HVAD for patients who are too old or too sick to undergo heart transplantation. Thoratec's competing pump, the HeartMate II, is already approved for this use.

The destination therapy is being tested in Endurance, a U.S. trial comparing HVAD with the HeartMate II and due to read out results in 2014. Endurance's primary endpoint is an improvement in two-year stroke-free survival with the original device.

Like any head-to-head study, HeartWare is taking a big risk: this could turn into a curse rather than a blessing. While the aim is to expand market share, if more strokes are seen with the HVAD than with Thoratec's product, HeartWare could be in trouble.

HeartWare will also begin trials of MVAD, the new version of HVAD aimed at European approvals, and a potential competitor to Thoratec's upcoming HeartMate III.

The two forthcoming devices are quite different in nature, according to David Roman, an analyst at Goldman Sachs. Where HeartMate III focuses on flow dynamics, MVAD is miniaturized and is intended to be easier to use.

Thoratec's advantage in the U.S. is that HeartMate II is the only device approved also as a permanent implant in patients too sick to undergo transplantation. HeartWare's HVAD only has approval for temporary use.

Bob Hopkins of Bank of America Merrill Lynch thinks that on the other hand HeartWare has an advantage: Thoratec's device must be implanted via the sternotomy procedure whereas HeartWare's HVAD may also be placed via the less traumatic thoracotomy procedure. This difference could help HeartWare to increase its worldwide share to 50 percent or more.

For the time being, Thoratec is the more powerful player in heart pumps, but the battle rages on.

Investor Summary

Thoratec's revenues were $117.7 million in the first quarter of 2013, a 7 percent decrease compared to revenues of $126.8 million in the first quarter of 2012.

HeartMate II revenues declined 8 percent year-over-year and PVAD revenues declined 34 percent, offset by strong growth in the CentriMag product family of 20 percent. The company sold 935 chronic pumps in the quarter compared to 1,057 pumps in the first quarter a year ago.

Thoratec has added 3 HeartMate II centers in the U.S. and 5 internationally, 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.

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, pointing to a strong survival benefit, low rates of key adverse events, and an impressive improvement in patient quality-of-life.

During the first quarter, the company repurchased 2.1 million of its own shares and ended the quarter with $262.1 million in cash and investments. Thoratec shares in the past 52 weeks ranged from $29.91 to 39.86, the market cap is $1.86 billion.

As it stands, HeartMate and its variations account for about 80 percent of Thoratec's annual revenue, and in spite of the sluggish demand in the first quarter, Thoratec still expects revenue to grow 4 percent to $510 million in 2013, counting on an expanded demand for its LVAD devices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.