Heartware International's CEO Presents at Credit Suisse Healthcare Conference (Transcript)

Heartware International, Inc. (NASDAQ:HTWR)

Credit Suisse Healthcare Conference Call

November 12, 2013 12:30 ET


Doug Godshall - Chief Executive Officer


Matt Keeler - Credit Suisse

Matt Keeler - Credit Suisse

Good morning, everybody. Thanks for joining us. My name is Matt Keeler. I am with the Credit Suisse medical devices team. And we are happy to have Heartware here today with us. CEO, Doug Godshall is here. And with that, I will turn it over to Doug.

Doug Godshall - Chief Executive Officer

Thanks, Matt. Welcome everyone and those joining us on the web. Obviously, I will be making forward-looking statements during my presentation, so I encourage you all to review our Safe Harbor statement.

Currently, Heartware has implanted more than – our physicians have implanted more than 4,000 of our HVAD systems. We have 225 customers worldwide and 94 in the U.S. and 131 outside the United States. We are certainly quite encouraged by our pipeline in addition to our current HVAD platform. For those who are unfamiliar with the story, the HVAD is very small pump. It’s placed in the pericardium next to the heart. Despite its small size, it provides full output up to 10 liters of flow although rarely the patients receive more than 5 or 6 liters per minute. It has a very thin flexible driveline and certainly provides very versatile benefit to the patients.

The advantage to the small pump is not that it’s just small, but that is the variety of options that it provides the physicians. They don’t need to create a pump pocket. They are able to implant the pump in small people, big people. They can put 2-in-1 patient. They can put in via thoracotomy and really the – it has helped expand the treatable population outside the United States and now increasingly in the U.S. We are encouraged by the progress we have seen since our launch in the U.S., which took place just about a year ago today. Third quarter, our revenues were roughly $55 million, 140% up over prior year when we weren’t approved in the United States. So certainly, fun to say a 140% increase. One doesn’t get to say that too many times in your life. So it’s good fun last quarter.

Globally, we sold 549 units, 12% sequential unit growth in the U.S. Internationally we are quite encouraged by the great work done by our team and the reception by our physicians outside the U.S. with 34% lift over prior year. The increased rigor with which we are running the company both from an operational and financial perspective is bearing fruit in terms of our gross margin improvement. We, for the first quarter, we have recorded positive operating cash flows which was nice to see and we made sure everyone do that. That probably won’t happen every quarter going forward, just because we have ebbs and flows of investment in interest payments and the like, but certainly, a nice signal that we are heading in the right direction.

We have finished relocation to large new manufacturing facility in Miami Lakes, right around the corner from our old facility, but substantially more efficient layout and lots of room for expansion. Our destination therapy cohort was approved and we discussed on our quarterly call the addition of a new member of management team, Mark Strong, who has 23 years, some odd years of work in the pacing field, impalantable electronics and the like in markets having a very substantial impact. With only six weeks into the job we are really thrilled with this new skill set that he is bringing to the table.

Graphically, if you look at our history since approval internationally in 2009, the dark blue bars are U.S. implant rate and you can see that, that ebbs and flows depending on historically whether we were in clinical trials or not and shows the real substantial impact, immediate impact of U.S. approval, where only one year into our approval, where 735 units year-to-date versus 819 in our international markets, where we have been approved for four years. But certainly, it reinforces the scale of the international market and growth opportunity that has really been a pleasant surprise to us since approval back in the early days when the entire international market was probably about circa of 600 units. We are really thrilled with the role that now play internationally in treating the end stage heart failure patient.

Another graphic just to look at site startup and unit growth in the U.S., we are very actively trying to build the support both for our core indications of bridge to transplant and destination therapy as well as explore new indications or new trials that highlights the differentiation of a smaller pericardial pump of the HVAD. And those are highlighted by two upcoming trials, the subclavian registry which is – actually three subclavian registry which we are having meetings on this week with our international investigators to understand how do we study a thoracotomy placement with an outflow going to the subclavian artery, that’s sort of international should be a real – very persuasive trial if the outcomes are as good as at least the early anecdotal outcomes are showing. Our global BiVAD trial also demonstrated sort of the – should demonstrate the benefits of putting two pumps in patients who otherwise have biventricular failure. And then in the U.S. a trial looking at specifically at thoracotomy for the existing bridge to transplant population, again the feedback has been very positive about the outcomes patients have with thoracotomy, faster recovery time, faster discharge ability to do off bypass which resonates very strongly with the cardiologists and what appears to be improvements in right heart failure at least anecdotally from our international customers. So we see thoracotomy as sort of the next wave for us as a company. And it’s already bearing fruit with 15% of our second quarter implants – third quarter implants in the U.S. being thoracotomy strategy.

Just a reminder of the trials that are the – either have enrolled or in the midst of enrolling in the U.S. bridge to transplant we have done or globally we have done international and U.S. bridge to transplant trials. We will have an updated data set coming out of the BTT trial in the future looking at the full cohort of 382 patients. To-date we have had 332 presented on. The ENDURANCE study, 450 patients in the original cohort of patients with a second cohort that’s now underway, which we will be enrolling at 50 centers currently enrolling 286 of those will be HVAD patients in a two to one randomization scheme. And that is looking at the effects of mean arterial pressure management and what we observed retrospectively a material improvement in adverse events specifically neurologic event with sites that control blood pressure more rigorously.

The pipeline that I referred to earlier is coming much close to the clinic now. The MVAD is a platform we have been working on for several years. It leverages the magnetic and hydrodynamic levitation system or approach of the HVAD, but switches it from a centrifugal configuration to an axial configuration at substantially smaller – about 40% the size of the HVAD, which is already smaller than all the other devices in the clinic or in development. It has a wide range of support capabilities one leader up to seven or eight leaders, it is designed – it’s really ideal for thoracotomy biventricular sort of – it further leverages the advantage of the small size particularly because of the wider range of flow capabilities than the HVAD on the low side.

We also have a steerable sewing ring so that you can get the inflow into the right orientation and also it appears to have multiple advantages which have been designed in based on what we have learned both from our experience and prior devices. For a surgeon thinking about what this means to the patient on the left side of the screen you would see what the HVAD looks like outside the heart and then on the right side you see what the MVAD looks like outside the heart and that – it really takes up no space. It’s just even better fit anatomically than the HVAD

And so leading into the – our clinical experience we have a CE mark trial that is pending, our plan is to do a first in human set of cases before we start our trial just to make sure that we don’t have any bugs in the software or the like. It will be 63 patients at nine sites, those who are in Germany, UK, Australia and Austria that we have six months follow-up. We have already done an initial training. We will have to do some refresher training. We will allow the sites to do either sternotomy or thoracotomy whereas in our prior trials we have restricted all the implants to being sternotomy.

There has been a lot of discussion over the past few months about some enhancements we have been making to the MVAD. We were – we need to make some fixes to the tubing on the inside of our MVAD. We had a failure on one of our tests and have really accelerated faster than we anticipated the fix to that. We initially felt we are going to go to a titanium tube replacement instead of ceramic, which had been what we had run our prior trials with. And yet some of our engineers had a breakthrough that allowed us to move ceramic back to the center. And so our device that we will go into the clinic with will be a ceramic tube. What they realized was there is a way to eliminate the failure mode and stick with ceramic rather than change tubing design and that allows us to leverage the 150 years or some odd implants and just eliminate the potential risk although we felt pretty good about the titanium, ceramic is the known.

We also are implementing an enhanced impellor design. As you can see in the picture, it’s really actually hard to tell the difference between the two impellors. The original design is on the top. The new design is one the bottom, and it’s a small tweak to the impellor, basically a slightly wider flow channel, slightly different angle of where the blood exits the channel and a very minor change in tilt of the thrust bearing. So the depth of the thrust bearing everything is the same, etcetera, just the angle with the blood comes off the thrust bearing is sort of more harmonious with the overall flow path of the blood stream. So it’s just not fighting the blood and what we are seeing is significant reductions in power required to deliver the same flow from the pump. So the graph on the lower left shows basically with a 100 millimeters of mercury, you can get essentially the same flow at 50,000 RPMs with the new impellor that you could get 18,000 RPMs with the old impellor, that said the old impellor is great. So we are running everything in parallel just in case we need to tweak the new impellor for any reasons. We certainly don’t anticipate that we expect we will be doing our clinical studies globally with the new enhanced impellor.

Also in our MVAD trial and soon thereafter with HVAD, we will introducing our new Pal controller, really a dramatic step forward in terms of quality of life and interaction with the electronics for the patient. The battery is a snap fit, like a power tool battery you don’t have multiple cables for the battery. The battery can be charged through the controller instead of having to take the battery off to recharge it. We’ll have a small and a long battery, so if you’re just puttering around the house and you don’t find having a smaller device either changing or recharging, you’ll use the smaller one because its lighter if you are going on a longer excursion you use the larger battery. Touch screen display which everyone is now accustomed to and a driveline that is actually part of the controller so that if you have a problem with the driveline you just change the controller instead of having to repair a driveline, so the patient’s driveline from the pump will exit with just sort of a little stubby out of the skin instead of a long external driveline that is connected to the pump.

We are also able to implement much more sophisticated algorithms and data collection in PAL, because it uses sort of circa 2013 electronics and sort of circa 2005 like we have in our current controller inclusive of things like what we call qPulse or pulsatility algorithm. No one really knows exactly what the impact of having a proscribed pulse in a continuous flow pump is going to be and does it help with aortic valve function. Does it help with GI bleeding, nobody really knows but everybody knows that all things being equal, it you would take pulse instead of pulse.

One of the beauties of MVAD as a platform is that it is a platform. It is much more configurable than other pumps that either have mechanical bearings or centrifugal flow and design, because there is no upstream or downstream suspension architecture. And the MVAD you can put it into a lot of different anatomical configurations. The next most likely version that would go to the clinic is what we call Longhorn, also provides a full suite of flows. And in fact with our new impellor we are probably gong to get more than 5 liters of flow on the upside. We would envision this being for poor surgical risk elderly population analogous to the Sapient approach where this device would probably be implanted in sort of 30ish minutes skin to skin as opposed to couple hours like most VADs are. Simple thoracotomy, insert through the apex across the aortic valve when you’re done. No outflow graph, so a very straightforward, low flow invasiveness procedure.

Ultimately, we also see the MVAD is enabling us to move into the less sick patient population because we can put it in different anatomic locations. We can think about pulling it outside of the heart as opposed to having it inside the heart and providing probably a little bit less flow for the patients who need less flow, but also further reduction in invasiveness. Ultimately, we think all the patients are going to want to have their driveline eliminated and have the electronics implanted. We are very encouraged by the progress of our TETS platform or transcutaneous energy transfer where we are in the midst of chronic studies. And 60 days into the chronic study, we are having no heating issues. It’s running the pump beautifully. We are quite encouraged by the technical progress of our TETS team.

I mentioned our new facility, if you are ever in Miami Lakes, it’s a state-of-the-art facility, former J&J location and certainly again gives us tremendous capacity both in terms of pilot lines as well as full production. So we would be happy to absorb a much higher percentage of the total global VAD market as it grows, because we certainly have the ability to do so in this facility.

So as we look to the future, we are well on our way towards expanding to 100 sites in the U.S. More importantly, we are thrilled with the traction we are getting at our existing sites and the momentum at the pending sites many of which are quite substantial in size. Our DT controller – DT additional cohort of patients is now enrolling and we really see the enrollment ramping starting in the first quarter as we get all of our sites up and running which we are actively doing today.

Our Japan trial is anticipated to cut off – kick off early next year. It’s only a six patient trials, so it should kick off and complete enrollment almost simultaneously since there are so few patients in that trial. With a six months follow-up we are getting some positive feedbacks that overall approval time should be a little bit shorter now that they have approved another device. And Japan ought to be the second largest international market within the coming two years behind Germany given the scale of the population, the scale of the heart failure disease and the fact that they don’t really have any alternative. They don’t really even do transplants in Japan, so there is a huge VAD opportunity in Japan.

And that should kick off shortly our data from our post-approval study at least the first snapshot of that data is targeted for the ISHLT in April of next year. We will be submitting an application for a supplement for the PAL controller for HVAD, so that will be later next year BiVAD trial I talked about as well as the subclavian trial. So we have a lot going on both on the technical side and the clinical validation side that gives us great optimism for the future.

So with that I appreciate your time and I think we have a little bit of time for questions.

Question-and-Answer Session

Matt Keeler - Credit Suisse

Thanks. I guess just one on recent conference call, you talked about fourth quarter assumptions I think you said mid-single digit growth in the U.S.?

Doug Godshall


Matt Keeler - Credit Suisse

And to us I know you don’t like to talk about the market on quarter-over-quarter basis, but we sort of look at the market growth we have seen over the last six months even assuming kind of a slightly lower share growth, it seems like that’s a probably easily achievable number and I guess I am wondering if you can just sort of qualitatively talk about what market share and market growth assumptions are that underlie that?

Doug Godshall

So your first comment is correct. We are loath to talk about quarterly variability just because of the lumpy as usual the word people used to describe VAD, so there is always a little uncertainty about exactly how the patient flows will occur on a quarter-to-quarter basis albeit on a broad strokes basis, certainly it’s quite encouraging the increased volume of patients. And last year was perhaps a good example where we every year before last year we saw a nice pickup internationally from third quarter to fourth quarter and last year we didn’t. So it make one a little bit cautious to say that you know with certainty exactly how the flow of patients are going to go from the third quarter into the fourth quarter because last year we had no loss of share in the fourth quarter internationally, so the numbers were just not – they just didn’t pickup and then they picked up very nicely in the first quarter. So our thought on the single-digit growth quarter-to-quarter is just based on a recognition that we continue to penetrate our sites and build greater relationship with the sites as well as add new centers, timing exactly of when things like stocking orders would occur or in some centers that are getting through the process of getting approval from finance and the like may require some consignment of at least components of the inventory. So we want to make sure that we urge some caution in thinking about the fourth quarter, particularly since we also think the BT impact will be more of a first quarter bias, not a fourth quarter bias.

Matt Keeler - Credit Suisse

And just staying on sort of the launch that you appear on pace to easily beat your first year target of centers, what does the second year of the launch look like? Is it more of the same? Are you expecting a lot of new centers or is it more penetration at existing sites?

Doug Godshall

I think it’s going to be both. We have meaningful upside at our existing 90 some sites. We are – I would say we are – our share has been maxed out at a very small subset of those sites. And we love those centers who are maxed out already, but we also see that, that’s a model that could easily be extrapolated to a higher percentage of the site. So we are by no means contempt with our ability to partner with the sites and their willingness to adopt the device as readily as we think is appropriate which is great, because if we added no more centers from this point forward, which is certainly not the plan. We still have we think substantial upside in our existing centers. And we are only sort of one year into building relationships that allow these sites and we have expanded our sales team by about 50%. So a lot of them are just building the relationships necessary to expand utilization at those centers.

That said, we have got a list of very substantial sites that is not even close to sort of a diminishing return kind of site volume. So given that those sites currently use zero HVADs we think we have meaningful share upside at those sites when they come on board. What we don’t know is at what point do we think we have diminishing returns? So if it’s 120 sites, 115 sites, 125 sites, where we stay okay, let’s take a pause and really focus on partnering with our existing centers, building their business, helping develop their referral patterns and gain additional traction at those sites versus go to our new sites that does fixed implants a year, is that really sort of best use of our time. We are nowhere close to that yet. So I don’t think we have to make that call until maybe the end of next year, but for now, we see substantial number of centers both existing that aren’t using the device as well as new that we are hoping to get on the shelf here in the not too distant future.

Matt Keeler - Credit Suisse

Okay. And just one last question and I think we’ll have to wrap it up, but x U.S., mostly in Europe this year, it seems like your market share has trended the right way the last three quarters. Are there any geographies specifically that you attribute that to and maybe what are the learnings from that that you can apply to other markets?

Doug Godshall

So we have been pleasantly surprised with some of the market that one would have assumed, where fully penetrated in terms of utilization of our device and number of centers. And what we are seeing is quite the contrary. We have – we have seen an uptick in the countries like Germany in terms of percent utilization and uptick in number of centers within Germany that are doing that. And perhaps most importantly, a growing recognition from a sort of surgeon-centric culture to realize, hey wait, I did a 100 this year, I could have done 300 if I could just get my cardiologist to participate. And that’s a real change in the past two years in some of the international markets, particularly Germany which is circa 40% of the international volume. That was – they sort of treated the patients that came to them and they didn’t contemplate the benefit of reaching out.

And we have been very proactive for the past two years in helping the VAD centers, think about outreach and education. And we have held symposia where the surgeons thought nobody would show up and it was standing room only of cardiologists, so they have started to realize hey, just like in the U.S. where a market development is so important. Internationally, we think there is substantial upside. So while Germany would be the most saturated, it still has meaningful incremental upside and then we have also grown with addition of new geographies. And our last growth strategy is where we have done less wealth. We have recognized the part of it as – part of that as just under investment in our side in relationship to the customers, particularly in submarkets where we have been totally dependent on distributors and we have not maybe supplemented them with internal resources as well as we could have.

Matt Keeler - Credit Suisse

Thank you very much. The breakout is in Room 3.

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