HeartWare's CEO Presents at HeartWare International Acquires Circulite Inc. Conference (Transcript)

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 |  About: Heartware International, Inc. (HTWR)
by: SA Transcripts

Operator

Ladies and gentlemen thank you for standing by. Welcome to the HeartWare Analyst Conference Call. At this time all participants are in a listen-only mode. And following the presentation, we’ll conduct a question-and-answer session and instructions that we will be provided at that time. (Operator Instructions)

I will now turn the conference over to the company. Please go ahead.

Christopher Taylor

Thank you, operator, and thank you all for joining us for this conference call and webcast to discuss HeartWare’s announced acquisition of CircuLite. During the course of this conference call the company will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations with respect to costs and benefits to be achieved from the transaction, the progress of clinical trials, regulatory status, research and development activities and the technological potential and commercial success of the Synergy System. These statements are neither promises nor guarantees but involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

A detailed discussion of the risks and uncertainties that affect the company’s business and qualify the forward-looking statements made on this call is contained within HeartWare’s filings with the SEC, particularly under the heading Risk Factors described in the company’s Annual Report on Form 10-K and contained within other filings that the company makes from time to time with the SEC.

Copies of HeartWare's SEC filings and the news release for this call are available online from the SEC or by clicking on Investor Relations on the HeartWare website. Any forward-looking statements are based on judgment, assumptions, estimates and other factors that are subject to change and therefore these statements speak only as of the date they are given. The company does not undertake an obligation to update any forward-looking statements.

Slides for this call are available both on the HeartWare Investor Relations website and by clicking within the webcast link attached to the call. Joining us for the call this morning, HeartWare’s CEO and President, Doug Godshall, as well as CircuLite’s Chief Medical Officer, Dr. Dan Burkhoff, and from the University Heart Center of Leipzig, Germany Dr. Martin Strueber, and Peter McAree, HeartWare’s CFO.

Each of our speakers this morning will provide brief commentary regarding the announcement and background on CircuLite. Those prepared comments will be followed by a question-and-answer session. In the interest of time and with the goal of allowing as many of you to propose questions as possible, we respectfully ask you to limit yourself to one question and one clear follow-up, and then please feel free to return to the queue. Thanks very much.

And now I would like to turn the call over to Doug Godshall. Good morning, Doug.

Doug Godshall

Thanks, Chris, and thanks everybody for joining us with us this morning particularly for Mr. Strueber joining us from Leipzig. Today, we are eager to share with you the news of an exciting transaction one which we believe will have a very positive impact on our company.

HeartWare is announcing that it has acquired CircuLite Incorporated developers of SYNERGY Circulatory Support System, which is designed to treat ambulatory, chronic heart failure patients who are not yet inotrope-dependent. Due to the acquisition of CircuLite, we both accelerate and expand HeartWare’s technology pipeline into partial support for heart failure patients who are considered less sick.

We believe this acquisition secures one of the most intriguing and compelling innovations within circulatory assist for HeartWare’s pipeline.

Turning to the summary of the transaction on the next slide, we provide a quick overview of the terms of the acquisition. We believe this structure provides a good balance of risk through work for both parties and for the shareholders of each company. The initial consideration is the mix of cash and HeartWare common stock. And the milestone schedule is designed in a way that aligns our interest.

We will be quite pleased to make all the payments under this agreement, as it would mean that the CircuLite system has become a very sizeable franchise for us and many thousands of patients who have benefited. The return for the consideration, the transaction offers HeartWare a strategic opportunity to expand our portfolio to address patient population that we don’t currently address and our timeline that is significantly accelerated compared to our existing R&D program.

One of the key goals that we drive towards everyday is to further reduce the invasiveness of the impact procedure for patients. And as you will hear during our call this morning, CircuLite’s platform offers considerable promise in this category. It’s worth noting that the transaction announced today has, of course, been approved by the Boards of both companies, as well as by CircuLite’s shareholders.

Additionally, the transaction does not require a filing under the Hart-Scott-Rodino ACT as the thresholds were not met. According to the terms of the agreement, HeartWare has acquired CircuLite to an upfront consideration of $30 million consisting of approximately $18 million of HeartWare’s common stock and cash of approximately $12 million, in fact, CircuLite’s debt and transaction expenses.

In addition, HeartWare has agreed to certain contingent milestone payment. These payments are due upon transaction of regulatory and commercial success milestones and are not to exceed $320 million in the aggregate over a 10-year period. Specifically, potential payments are tied to milestones including Surgical System European relaunch, next-generation SYNERGY Endovascular CE Mark and FDA approval, as well as royalties and success-based milestones on commercial sales. Combined total consideration capped at $350 million.

Advancing to the next slide, we recognize that since CircuLite who probably know who may not be as familiar with the company, so we hope to provide an introduction this morning. We are delighted to have Dan joined us here in the camp. Together we’ll provide you with an overview of CircuLite and its pipeline and discuss plans for integration and advancing the portfolio over the next 12 to 24 months.

CircuLite was founded in 2004 and is headquartered in Teaneck, New Jersey with manufacturing an R&D located in Aachen, Germany. The company has a staff of 63 employees of which one-third is based in the U.S. and our remaining two-thirds of employees are based in Germany.

CircuLite has pioneered the partial-assist approach for the substantial population of heart failure patients who are not yet responded both to traditional therapy and who are not sick enough for inotropes or a full support bed. Furthermore, they have demonstrated that this technique can significantly impact systemic perfusion and the quality of life for this group of patient.

The Synergy Surgical System received a CE Mark in 2012, and works in concert with the need of heart supplementing its function rather than replacing it. It features the smallest surgically implanted blood pump for long-term use in ambulatory chronic heart failure patients, not responding to optical medical treatment. CircuLite’s next generation, SYNERGY Endovascular System is an extremely promising interventional approach that is implanted collaboratively by an interventional cardiologist and surgeons in a hybrid OR procedure.

This elegant system has been approved to start clinical trials through a feasibility study and we believe that it has potential to expand the mechanical support market considerably by bringing interventional cardiologist into the implant procedure for the first time. Dr. Burkhoff, will go to deeper detail on both approaches in a moment.

On the next slide, for HeartWare we think this acquisition complements our existing portfolio quite strongly. And then we have a very best both output VADs in HVAD and MVAD. And we also now have the most promising opportunities and partial support through the SYNERGY platform.

While we look at the number of end-stage heart failure patients who could benefit from a VAD and the number of patients who actually receive them, it is clear that we are still in the very early stages of adoption. We believe that the opportunity in the less advanced heart failure segments those who would benefit from a partial support device, has a potential to resignificantly larger than the current end-stage heart failure segment. In fact by our estimate perhaps two to three times large.

The SYNERGY Surgical System implanted by thoracotomy provides a promising near term commercial opportunity to articulate offers an existing longer-term opportunity with its Endovascular System implanted by the hybrid approach using Transcatheter technique and subcutaneous pump implantation.

We believe that the SYNERGY platform provides a strong compliment HeartWare’s HVAD and MVAD systems by broadening the range of minimally invasive treatment options for chronic heart failure patients the HeartWare has development. Finally, we believe that the acquisition agreement is ideally structured to manage the risk and reward for HeartWare shareholders as it allows for a rewarding paths as regulatory and commercial milestones are attained.

Looking at the financial context for the acquisition on the next slide. Before I turn the call to Dr. Burkhoff I would like to spend a moment putting the transaction and its context. Even the timing of the transaction close HeartWare can immediately begin the integration of a stimulation process. This week members of the HeartWare team will be visiting both Teaneck and Aachen in order to kick-off a review process to gain a better understanding of all the capabilities and expertise within CircuLite.

While we have fairly advanced integration plans, we will be in a much better position to make decisions after having had sometime to incorporate our thinking into the CircuLite plans. We do anticipate the incurring elevated expenses for the first six to eight months, but we expect the allocation of our R&D resources to normalize by the one-year mark as we work through the process of observing the CircuLite team and adjust our product gain. As a base line, CircuLite’s cash use has been around $2 million per month as a standalone company.

We view any incremental cash burn is manageable and could be partially offset by the potential revenue contribution from the re-launch of the surgical system, which we anticipate would happen within the first anniversary of the acquisition.

HeartWare’s operating cash flow and balance sheet are sufficient to support solid execution. I’m now very pleased to welcome officially Dr. Dan Burkhoff, Chief Medical Officer at CircuLite to HeartWare and to our call this morning. Dan?

Daniel Burkhoff

Thanks very much, Doug. On behalf of CircuLite’s shareholders, management team and Board of Directors let me state that we are extremely delighted the entering into this agreement with HeartWare. For CircuLite this announcement of this acquisition allows for continued commercial pursuit of a partial-support system for less sick heart failure patient.

Through this merger HeartWare will be able to provide additional technical, regulatory, sales and marketing capabilities that CircuLite do not have the resources to support at the time. Through continued investment and innovations the SYNERGY platform has the potential to address unmet needs of earlier stage heart failure patients.

And as I will soon explain in greater detail the Endovascular approach has the potential to dramatically expand the patient population through the direct involvement of interventional cardiology. We began building or understanding of the benefit for partial support in a defined population about ten years ago and initiated the Endovascular project more than five years ago. We are eager to see this project realize its full potential and we believe with HeartWare’s support we can attain this goal.

On the next slide, we see SYNERGY System was designed to address the segment of the market that is not a core market for current assist devices. This slide shows the core market for HVAD and MVAD on the left, which is primarily Intermax one, two and three level patient. And the core markets for SYNERGY Surgical Endovascular are on the right at Intermax four, five and six.

So the current population addressed by that represents a quite modest cohort when compared to the potential addressable market that includes Intermax four, five and six patient. SYNERGY and partial support devices were specifically designed for and tested in this population.

On the next slide, I’ll give you a look at the product portfolio beginning with SYNERGY Surgical System. This systems proprietary micro-pump is designed to provide up to 4.25 liters of blood per minute and has an attractive profile inside. Approximately the size and weight of a AA battery, the Surgical System is implanted through a right, mini-thoracotomy procedure and does not require a sternotomy or cardiopulmonary bypass. With this approach, the inflow cannula is placed in the left atrium, and the outflow graft is attached to the subclavian artery. CircuLite's proprietary micro-pump is then placed in a pacemaker-like pocket and attached to the inflow cannula and outflow graft, which connects to a wearable, external controller and battery pack.

The first in man implantation of the SYNERGY Surgical System was formed in 2007 in Belgium. And we received CE Mark approval last year following the successful outcome of all the centre of clinical trial. Earlier this year, FDA approved an IDE study enabling us to commence our clinical trial in the U.S. to evaluate the use of the SYNERGY System for long-term support in ambulatory, chronic heart failure patients Intermax four in greater, who remain symptomatic despite optimal medical management. The name of the study is the impact pilot trial and it’s a 20-patient feasibility trial that will be conducted at seven U.S. clinical sites.

As some of you maybe aware, the SYNERGY Surgical system is currently undergoing an upgrade to resolve some issues that arose following commercial release in Europe, which our team has been working diligently to resolve. We’re delighted now to have the resources in support of HeartWare to complement our efforts to move towards a relaunch of that system.

Once resolved this will allow us to also move forward with the impact study in the U.S. Our shared vision for the future of the Surgical System is to carefully and methodically work to return to the market. Surgical System sales are expected to resume in a controlled fashion following regulatory approval to relaunch the system. In the coming months, HeartWare will focus on building experienced at a small number of centers refining training techniques and implementing additional system upgrades. The initial rollout is expected to target a small number of sites with a four rollout plans after the first anniversary of this acquisition.

The next slide shows that our early clinical studies focus on elucidating the impact of partial support on hemodynamic and exercise tolerance. This slide shows the significant improvement in cardiac output pulmonary capillary wedge pressure and pulmonary vascular resistance, which are among a number of parameters that improved after 12-week treatment measured in our CE Mark clinical study.

In addition to the hemodynamic improvement, we see concomitant improvements in exercise tolerance as shown by the six minute walk test in the graph at the bottom left. These data validated the concept that in the right population partial support provided by a small device implanted through a less invasive surgery can provide significant clinical benefit.

Moving onto our Endovascular System in the next slide, this is the first mechanical support system that does not require a major surgery. With this approach the inflow cannula is designed to be implanted by a team comprised of an interventional cardiologist and a surgeon using standard interventional techniques for delivery of the cannula in order to minimize the invasiveness of implantation as well as to reduce the rate and severity of adverse events. This approach is viewed by interventional cardiologists as the highly-attractive method of implantation. With this process the cannula is deployed transseptally to the left atrium via the subclavian vein and right atrium. And the outflow graft is then surgical anastemosis to the subclavian artery. This innovative approach creates a new role for the cardiologist as the engaged referrer.

The Endovascular System received approval to commence clinical testing through a study in Belgium. And we anticipate the first patient implant will occur at sometime early next year. The plan is to enroll up to 20 patients in this multi centers CE Mark trial that will expand to additional clinical sites. This study will assess post implantation clinical status and organ function, exercise tolerance functional capacity and quality of life.

This Endovascular System was conceived, developed and tested extensively through collaboration of a several leading cardiologists and surgeons including Dr. Strueber from the University Heart Center in Leipzig who will speak in a moment, Dr. Saibal Kar at Cedar-Sinai, and Dr. Juan Granada of Columbia University and Cardiovascular Research Foundation and the Skirball Research Center.

In just a minute I’ll turn the call over to Dr. Strueber. Just as MVAD have captured the attention of clinicians that have been a part of the HVAD’s clinical trials and commercial launch, it appears that SYNERGY Endovascular is drawing interest from those familiar with SYNERGY Surgical System, leading to increased anticipation for the start of human clinical testing.

The combination of HeartWare’s research and development staff and the technology of its product pipeline will undoubtedly advance SYNERGY Surgical System. We are confident that we now have the expertise and resources that are necessary to not only improve the existing technology but transform the circulatory support market with a launch of a groundbreaking Endovascular treatment for patients with earlier stage heart failure. We’re very excited about the impact, HeartWare’s resources and broad expertise will have on enabling SYNERGY devices to realize their full potential. Thank you for your time this morning.

I will now turn the call over to Dr. Strueber, who will provide some comments about his personal experience with the SYNERGY System and thoughts about what today’s announcement means for the physician’s community. Martin?

Martin Strueber

Dan, thank you, very much. I have a few thoughts, I would like to share here at Leipzig Heart Center. We doing like 80 VAD implants per year and we're familiar with the SYNERGY’s system and personally I’m familiar with the system since the very pilot days. And we know that the SYNERGY system can effectively unload the left ventricle and it works in a different way to promote a native cardiac output.

So it’s very different from other full ventricular assist devices. We learned that this invasive approach reduces recovery time in hospital stay and it's very appealing for referring physicians and also for patients. And in addition to that the interventional cardiology partner, who evaluate these patients are really looking at Endovascular approach very favorably, because it can be done in the hybrid cath lab together with surgeons.

And so the interventional cardiologists interest in the SYNERGY System is also driving to increase the overall referrals for the VAD implant. And I think that is an important point to get the interventional cardiologist into this game. So I think to close this time this morning. I would be pleased to help answer any questions that you have in the few minute.

I will turn the call back over to Doug Godshall. Doug?

Doug Godshall

Thanks so much Dr. Strueber and thanks again for taking time out of your busy schedule to join us. So that finishes our prepared commentary and slides for today. We would welcome any questions that you have, so operator if you just like to open line, I think we do have some people in the queue.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. (Operator Instructions) One moment please for your first question. Your first question comes from the line of Jayson Bedford from Raymond James. Please go ahead.

Jayson T. Bedford – Raymond James & Associates, Inc.

Good morning and thanks for taking the question. I guess maybe if you can go back a little bit and go through the current issues with the Surgical System and then what you need to do specifically to get it back on the market in Europe?

Dr. Martin Strueber

Sure, I’ll do a very segway to Dan. So approved in 2012, the company did not had any issues with the integrity of their inflow cannula in 70 some odd patients, and then no one has been able to figure out exactly what happened, but they experienced some fractures in the inflow cannula that appear to be a design related issue. And based on our assessment of the redesign, it’s incredibly straight forward and logical fix that just reduces the stress concentration within the inflow cannula, which always has to be proven out and submitted to the regulators, but I will let Dan speak to his perspective on it.

Daniel Burkhoff

Yeah, that’s basically sums up the main issue. The cannula fracture issue pumped up when we released the device commercially and put it in the hands of more surgeon and different anatomical variability of placement of the cannula in different patients. And it is resulted in a failure at a very specific site on the cannula, which is now being addressed by a slight modification of the cannula. In order to get back into market we need to fix this issue, do the testing to show that it has resolved and then make submissions to the regulatory body to get their approval to relaunch.

Doug Godshall

And one comment that Dan made, which has certainly been reinforced very strongly by conversations with professor Strueber is, I think our perception and I think CircuLite’s perception is also that there was a missed opportunity to train a little bit more extensively, it’s a fairly straightforward procedure. But I think their assumption was that was – their perception was that it was more straightforward than it really was. So when expanded rapidly to multiple sites, that’s when they sort of discover this potential design opportunities within the cannula.

So probably would have manifested itself at some juncture down the road. They just found it faster, because they put in a lot of different hands with maybe not as careful training and hand-holding going to sites by Martin to learn the technique better, which is one of the things that with our fairly strong resource pool in Europe combined with the existing CircuLite infrastructure, we should be in a very good position. Once we refine the training technique, which is one of the first things we'll do to roll it out more effectively than the experienced person.

Jayson T. Bedford – Raymond James & Associates, Inc.

Okay. And if I recall there was a thrombus issue very early on. Am I correct in assuming that issue has been resolved with the newer – with kind of tweaks in newer generation?

Doug Godshall

The pump is on its third revision and pumping blood 24 hours a day through a blood pump is going to – we’ll have some level of thrombus. It has certainly come down from my read of the data and now Dan can speak to it. It appears to have come down substantially. We think cannula enhancements will further reduce it, but maybe Dan or Dr. Strueber want to speak to their perception.

Dr. Martin Strueber

You know maybe I can join here. There was an upgrade in the pumps design sometime ago and maybe Dan, you can comment on that and that scores a lot of the thrombosis issues. But I think the current issues we have strongly related to the inflow cannula and the placement of the cannula into the left atrium. And as Godshall explained, it’s the unique procedure, it plays forward, but it’s unique. It’s different to any other procedure, any surgeon will in the world. And so there needs to be a lot of attention that it has trained very well and is done in a very unique fashion to ensure at inflow of blood into the pump and prevent any thrombus formation.

Jayson T. Bedford – Raymond James & Associates, Inc.

Thanks, Martin.

Dr. Martin Strueber

Thanks. I'll get back in the queue.

Operator

Your next question comes from the line of Jason Mills from Canaccord Genuity. Please go ahead

Jason R. Mills – Canaccord Genuity, Inc.

Thanks guys for taking the question. Good morning, Doug. You’ve had a lot of experience learning from the HVAD in terms of protocol and managing these pumps very, very carefully. Is anything with respect to the Surgical System as it relates to protocol that you will pay attention – special attention to as you give this free launch in the European market then I have one follow-up?

Doug Godshall

Well, I think the first – first goal is to obviously address regulators question, so that we have the ability to relaunch. But in parallel with that fortunately we have some very good friends in Europe like Martin and other centers that have significant experience with the SYNERGY System. So we will spend the next couple of months learning from, to refine optimal training approach and patient management to the sort of bad stuff often happens not because of the surgical approach, but because of the postoperative management is now optimal.

So I think we are fortunate in that we have a more extensive clinical specialist network internationally. It’s certainly a burden both creating a new concept, launching it, refining it all in parallel, which is what the CircuLite team attempted to do. So it was hard work on limited resources and certainly we all have limited resources, but we’re in a much stronger position to rollout a methodical and refine training strategy.

So as Martin said, it’s different, it’s not necessarily hard, it’s just different. And so if you’re not thoughtful and methodical about how you teach people than they get from.

Jason R. Mills – Canaccord Genuity, Inc.

Thanks for that, Doug. I guess where I'm going, as you think about patients that would be tailor made for this device and really think about inclusion and exclusion criteria so that once you re-launch this in a full way in Europe you guys aren't putting this in patients that have – that are too sick or have certain anomalies that would reduce the potential success of the device, and I know the last thing that you want is another issue to pop up because it's going in patients that are a little bit more difficult to treat and the pump is just overwhelmed. So, will that be part of your training and research initiatives to sort of start trying to refine what patients and what centers you'll go into initially and maybe any addition color you could provide there? And then I guess my follow-up question on the follow-up is where does the Longhorn development process stand at this point and how does the CircuLite SYNERGY system sort of couple with that, team with that over time to really target this less sick patient population? Thanks again.

Doug Godshall

Yeah, I’ll address the Longhorn first and then I’ll turn it to Dan and Martin to talk about patient selection. So we are increasingly thrilled with what we’re seeing with MVAD first. So we saw some test results last week which were phenomenal. So we’re really excited about that hitting the clinic, sooner than later, which is the backbone for Longhorn obviously.

And getting, some patient experience with MVAD before we roll into the second MVAD version will be certainly very helpful and it was always our plan – we remain very optimistic about Longhorn and in prospect for probably a different patient population than this truly less sick. Because you are still putting a pump inside the heart, its not a subcutaneous pacemaker location like CircuLite, which is incredibly appealing conceptually to a patient, pump is just in a pacemaker pocket versus a pump in the heart, it is always intrigued us.

And so what will likely happen with Longhorn is that it will, sort of fall in line behind, SYNERGY in terms of the clinical role as we will have to manage our, our product cadence and spend appropriately. As I said in our remarks, we don’t anticipate a long-term elevated spend as MVAD spending rolls down and our controller spend rolls down it sort of opens door for the SYNERGY spend that take place. It will be elevated that will be sort of on top of each other for the next six months or so. And then it should drop down inline. So that we are not materially different than where we are now, say a year from now.

But so Longhorn probably just fall instead of next to clinic SYNERGY and SYNERGY Endovascular is next to clinic and then Longhorn thereafter. Now let Martin and Dan talk about maybe Dan could talk about, what he see in a patient selection and Martin could talk about how he was, when the product was approved how he was managing his HVAD and SYNERGY patients.

Daniel Burkhoff

So I think, the comment is right on that clinical outcome are depend on patients – appropriate patient selection and we really did focus a lot of energy through the years on understanding, who partial support is appropriate for and who it might be pushing the edge. And we came up and I think that the clinic data really show that, really just dividing line between Intermax three and Intermax four that is inotrope-dependent really kind of draws the line. We’ve had very, very good long-term results in the Intermax four patients, and their management is only slightly different then patients with HVAD in that they require a little bit more adjustment of diuretics. These patients don't fully come off of diuretics, but they do – usually the diuretics doesn’t come down. Because now they have better flow, better profusion and the kidney function does improve and the anticoagulation management is basically the same. It really requires monitoring of the INR and administration of anti-platelet therapy. So really I think that our data suggests that, again the began that the clinical outcomes can be really, really improved by appropriate patient selection with this inotrope-dependence being kind of the line.

Unidentified Company Representative

And then Martin, how are you four, five months go before the cannula issue how were you choosing SYNERGY…

Dr. Martin Strueber

We were looking at the patients and like you explained these patients on the border from Class III to Class IV being not inotrope-dependent or intermediate – intermittent inotrope-dependent that were our target population. But we also had to look at the anatomical things like the shape and the size of the left atrium and I think that is extremely important, when you want to anchor the cannula of the SYNERGY system to a left atrium. It should have the appropriate size and shape to be sure that the inflow is not going into any trouble even if the left atrium is shrinking over time, when the heart is unloaded by the SYNERGY system. And by doing so, I must say we have still two ongoing patients here in less sick and one is about to have his anniversary next day and other one is also 13 months after implant and they’re both doing well. So I think the system has already proved that is also functional on the long-term base.

Doug Godshall

Martin, to segue from your atrium commentary, you for the Endovascular system do you think that expands – assuming that it works. Obviously, we still have to prove that out, but anchoring into the septum do you proceed that expands the sort of diversity of Atrial etiology you can treat?

Dr. Martin Strueber

I think it will be a great advancement to have the Endovascular approach and thereby having the inflow cannula plan step flow into the left atrium. We did extensive animal of trails here our with our cardiologists and we are really thrilled to see that even with this smaller cannulas we can handle a lot higher blood flows with the same pump. So this anatomical position of the inflow cannula in the atrium at the septum that is provided by the Endovascular system, it’s really intriguing.

Operator: Your next question comes from the line of Chris Pasquale from JP Morgan. Please go ahead.

Chris Pasquale – JPMorgan Securities Inc.

Thanks. It sounds like the plan is to move forward with first demand for the Endovascular version prior to proving out the redesign for the surgical system. Can you just talk about what gives you the confidence to do that? Is the configuration there different enough that the in-flow cannula issues really don't factor in there?

Doug Godshall

Hey, Chris, how are you? The inflow cannulas are different materials, different anchoring mechanism produced in different countries. They’re sort of kissing cousins sort of and as Dan just whispered, different bends of the cannula. So while Endovascular has not been proven out and we’re crossing our fingers that it works well, it is not – it is substantially different. You're not having to traverse around ribs and those kinds of things like you do with the surgical. Your subclavian vein kind of gives you a clear path, a defined path yeah, it assistance between patients. So it actually reduces stress on the cannula although it conceptually, we think Endovascular must be harder in terms of stress on catheter, it’s actually less.

Chris Pasquale – JPMorgan Securities Inc.

Okay, it’s helpful. And can you talk a little more about the U.S. regulatory pathway, when do you expect to start the impact trial? What is the regulatory pathway in the U.S., look like beyond that small study, and then kind of how far behind is the Endovascular version from the surgical version?

Dr. Martin Strueber

Yeah, obviously we were assuming that we would go forward with impact. It would be required that we get everybody comfortable with cannula redesign. You ask a very interesting strategic question, I think you ask a very interesting strategic question about sort of, let’s say Endovascular is going really nicely in Europe, how long do you want to wait before you start in the U.S.? That’s one of the things we’ll be sorting out shortly. In terms of impact to physical, assuming we go with base plan that Dan and team are working on, you would enroll with 20 patients see how they go. And then as far define sort of pivotal trial, it's different than a BTT, DT type trial, because it is a different patient population, and Dan, go ahead.

Daniel Burkhoff

At this point, we’ve had, let’s say preliminary discussions with FDA and advisers about pivotal study design in the U.S. And assuming that there is no major changes in the bad community in terms of use of that in the Intermax four and greater patients. Our discussion is really centered around doing a randomized trial between SYNERGY, be it surgical or Endovascular versus medical therapy. It’s similar in that sense to the revive trial except that the inclusion, exclusion criteria are different to be, I think more realistic about who which patients would actually accept a VAD and which patients in the medical community would the medical community would be willing to put a VAD in. So that is the preliminary discussion that we’ve had with the regulators and advisors as well.

Chris Pasquale – JPMorgan Securities Inc.

That’s helpful. And here is one sneak – one last one again, just talk a little bit about the economics of the technology with the ASP been in the limited European experience to-date and is the procedure reimbursed under existing VAD goes or do you require your own special approvals?

Daniel Burkhoff

Currently the design has been sold for roughly the same selling price as full support VADs. We'll obviously be taking a look at what’s the long-term pricing would be if it’s going to be any different. The reimbursement in Germany is…

Chris Pasquale – JPMorgan Securities Inc.

Pretty much the same – is the same reimbursement pattern as other classes devices.

Daniel Burkhoff

Yes, which also mean unfortunately in countries like France you have to apply for a separate reimbursement code. And so one of the benefits of this I think for CircuLite will be we have on-the-ground reimbursement folks in Europe where I think they had folks who were having to double as reimbursement people and salespeople and like to. So it will slow the roll-out to some countries in that we will have apply for separate reimbursement but given that Germany is obviously the largest market, it’s helpful that it’s paid for more people in Germany and as we did with HVAD we will roll country by country as reimbursement allows.

Operator

And your next question comes from the line of Matthew Taylor from Barclays. Please go ahead.

Matt C. Taylor – Barclays Capital, Inc.

Hi. Good morning. Thanks for taking the question. I guess my first question, I wanted to just ask about some of the milestone payments. You obviously set this up so that you could have your goals relatively aligned here. In each case, you're talking about the option to the use cash or stock. Can you talk a little bit about your decision process around each of those payments and whether you might use cash or stock? Clearly, some of the later ones that may be a totally different ball game but maybe if you could address some of the once that could arrive sooner over the next two years?

Doug Godshall

That to the, hopefully the next payment we would make come to that would be encouraging to be approved for relaunch of the Surgical System and that is a stock consideration that’s already been agreed that that would be stock. The ensuing payments, let’s say CE mark for Endovascular which would be fantastic. I think will, it won't be next year, obviously. So, the sooner the better. If it comes anywhere to living up to kind of opportunities that Martin described, it would likely dwarf a lot of the other VAD-type opportunities. So, if we get it soon, that's great and we’ll sort of make the projection of the company, would we rather use stock or cash or combination thereof.

And that will obviously be calculated based on how we feel about our cash position, how we feel about our stock price certainly. So we felt it important that we have the flexibility and sort of make the decision when the time comes. We would, I hope we make all these payments that would be we have some happy CircuLite shareholders but I think it’s better we have some incredibly happy HeartWare shareholders that would mean we had a really vibrant business.

Matt C. Taylor – Barclays Capital, Inc.

Great. And then just a follow-up on your earlier comments on the Surgical System, I think on the call in your prepared comments you said you thought it would get approved within 12 months of the closing in terms of the CE Mark. And then can you just clarify given the things that you talked around with improving the training and other factors, how quickly you would be able to ramp the product commercially following that approval?

Doug Godshall

So we, based on what we understand and a conversation with Dan and the team, the enhanced cannula design ought to be finalfinished testing and the like the end in the first quarter. It’s a really straight forward change, so but you’ve got to cycle the tests and prove that it won't fail the same way the old one failed. So then unfortunately you're a bit at the mercy of regulators to agree that your enhancements really are enhancements and approved it. So you can calculate your own sort of how long it takes for the European regulators to approve it. Luckily it's not the FDA so it shouldn't be as long as maybe the FDA would think.

So that would put us back in the clinic, at least able to start doing cases maybe whenever middle next year or sometime. We would then want to roll out our the product within a handful of sites that already have experience to confirm that we don’t that sort of our enhanced training is effective and then expand thereafter which is why we – we have sort of described a post one year anniversary for a broader commercial ramp. We would want to make sure that Martin and his colleagues feel like the fix is a fix and that the techniques are working well, so that we can then expand it to a broader population.

I think its going to be, the challenge we're going to have is we're already getting emails from guys saying hey, so glad you did this, can’t wait to start using the device both in Europe and in the U.S. So we will have to be stubborn in some ways to make sure that we’re confident and the relaunch and this space. And not get pulled into 50 centers simultaneously and risk stubbing our toe by not having all our ducks in a row when we relaunch.

Matt C. Taylor – Barclays Capital, Inc.

Great. Thanks a lot.

Unidentified Company Representative

Sure.

Operator

And the next question comes from the line of Danielle Antalffy, he is from Leerink Swann. Please go ahead.

Robert Marcus – Leerink Swann

Hi, this is Robert Marcus in for Danielle. Congrats on the deal. Just wanted to ask about reimbursement. It's been a little troubled in the U.S, in the Class III patient population. How compelling of data do you think you're going to need to get CMS to pay for this down the road?

Doug Godshall

Yeah, great question. We will need, well first of all we’ll need a strong data set to get the device approved. Because it is going to be an auxiliary – substantial auxiliary population to the current VAD population. So without that data we won’t get approved and without the data reimbursement codes won’t be initiated. Fortunately, CMS has over and over again that they are open to participating early in the conversations and please include us in trial design and we're not addicted to this DT, VTT concept.

It’s just what we keep getting sort of fed in terms of approvals. So that’s we have no other alternative. And if I had a conversation with the surgeons who is going to be a permanent member of the Medtech’s panel going forward who reinforced that once again two weeks ago when I was with him, he said that they are hoping that companies come forward with alternative design, because they would think of a more – at CMS even they think it would be more appropriate to have some sort of a chronic heart failure indication. And if we go forward with a kind of trial design that Dan described randomized against medical therapy, that’s exactly on point for that kind of reimbursement code.

Robert Marcus – Leerink Swann

Yeah, if I can just supplement that by just saying that or discussions with FDA even for the pilot trial we broke them all of saying this is destination versus this is a bridge transplant study. Eligible patients at least for the criteria that FDA has approved, patients can be either bridge to transplant, bridge to decision or destination therapy and the requirement really is the expectation of long-term support.

And it’s really moving more towards a heart failure study as opposed to a VAD study with even more incorporation of more traditional, let’s say heart failure endpoint as opposed to just survival that we’re really looking at quality of life and exercise tolerance as key components of the primary endpoints. So we’re really moving with this opportunity with the less invasive device that kind of address maybe a less sick population. We are moving more towards the heart failure kind of attitude both on the regulatory side and hopefully that will translate into the – also onto the reimbursement side, that same philosophy.

Robert Marcus – Leerink Swann

Great, thanks so much. And maybe again one follow-up, this is a much bigger market than it is downstream, so it does kick off hopefully successful as you think. How should we be thinking about the downstream affect, the DT patient population?

Doug Godshall

The good problem to have I guess this is how I would think about it. As we contemplated this opportunity and we’ve been watching CircuLite as close as we can since early 2007.

It struck us that we would be foolish not to take – not to try to take a shot of this, and Endovascular might not work. It hasn’t been tried before, but boy it sure seems logical that it should work. And if this works out and we weren't part of it, we would be kicking ourselves forever. And in part we might be kicking ourselves, because we could see our core business adversely affected by it.

I’d always rather catch a patient early and sort of cannibalize my own business than have somebody else do it to me and patients are – their end organ function is better when they are less sick. Their chances of recovery are better if they’re less sick. It’s sort of all good generally across most of these dates, if you can get them earlier it’s better. And you’ve got thousands of motivated patients who get CRTs every year and about 40% of them don’t get the response they hoped for. And so you’ve got a fairly large motivated less sick population who aren’t necessarily going to sign up for the invasiveness in complexity of in HVAD or Harvey2.

And so Martin get them when they are sicker and that makes it harder or Martin and his colleagues because they have done a lot of other bad stuff going on with more pressure on the pump and the position to treat the patient.

Robert Marcus – Leerink Swann

Maybe with some of the surgery, surgical community, we’re working quite hard internationally to move into a less invasive implant technique also for classical devices. And I would expect that while the pumps gets smaller and with this pump as small as the SYNERGY device, there will be more referrals for DT patients. And I think there will be a kind of experience in the next three to five years with the increased referral of these patients of what device is to be used and what procedure for what patient? And I think we will see a lot of less invasive, implantation technique and hopefully we see a lot of more healthful DT by that way. So I think with the SYNERGY device at hand, we would help a lot of more patients we could deal with and then talk about and divide them into the appropriate categories to give them the best treatment we have.

Operator

And your next question comes from the line of [indiscernible] CRT Capital Group. Please go ahead.

Unidentified Analyst

Hi, thanks for taking the questions I just wanted to get a better sense of the revenue potential for this product in your prepared comment you mention that this is going to be a controlled roll out. How should we think about the ramp for the product and possible revenue contribution in year one?

Unidentified Company Representative

Thanks [indiscernible] and welcome abroad thanks for the all the work you just did in your initiation.

Unidentified Analyst

Thank you.

Unidentified Company Representative

The – I think Martin would you yell at me if we launch this to aggressively after we get re-approve, well actually you would allow. So I don’t like remark the entity and frankly I think the opportunity is far to significant for us to screwed up by being over laid aggressive early. So what we’re – while we as you know, we don’t give guidance on revenues generally, but I been very cautious about any meaningful revenue forecast for 2014.

For context that day the company was probably on a rate to $7 million to $8 million in revenue before they starting having pick up in 2013. And that was with the limited sales present, but we’ll prevail and then they started having some issue they had a controller issue that was quickly result, but that both things and then soon after that they had the cannula issues so.

It’s hard to know exactly where they would have landed, but it was actually fairly impressive about quickly it was being adopted if we want to make sure that assuming we have a real strong components in the cannula and the training that we are able to have a rapid draft once we’re ready to take-off the governance. So I say next year is really going to be a really heavily managed constrain confirmation year as at 2015 or assuming that August well on 2014 is probably when we would expand the surgical roll-out.

Unidentified Analyst

That's really helpful. Thank you. And my follow-up is on the expected closing. When do we see the $30 million go out of the door?

Unidentified Company Representative

Did it go up this morning?

Unidentified Company Representative

Yes it is.

Unidentified Company Representative

That we had different consideration will beat today invest, so again that’s roughly $18 million of equity and then $12 million of retired debt and expenses.

Unidentified Analyst

Okay. Thank you. And if I could just squeeze in one last one. You mentioned elevated spending levels over the next six to eight months and I know you mentioned the $2 million per month number. I just wanted to get a sense of is that mostly R&D, is it evenly spread out? And then just overall looking at the spending levels for the Company, I just want to get your sense of spending and R&D given all the trials that are in place for 2014 as well as sales and marketing expense to bring key products to market, any color there would be helpful? Thank you.

Unidentified Company Representative

And I’ll let Peter go.

Unidentified Company Representative

I’ll start and then let Doug finish on the latter part. So, as the company stands today, we'll be filing the financial statements within hopefully 30 to 50-day timeframe in a supplemental 8-K. You will see there that they have roughly $2 million per month and as we’ve said earlier, the overall spend if you look at an annualized cost base of $24 million a year, is roughly 40% SG&A and 60% R&D. Now, that’s on a look-back basis given where the past priorities have been in terms of the R&D project and investments as well as some of the clinical undertakings that we are in process by the company.

In our hands, we’ll be doing an in-depth evaluation over the next 30 to 50 days. And so the outcome of spending going forward will look different ultimately. We’re not prepared to comment on how different it will look today, but we do expect that there will be some synergistic opportunities especially in that SG&A category again, which is roughly 40% of the overall. And then on the R&D side it really will depend upon just the overall cadence of investments to bring the pump back to market and then how we then choose to progress from a clinical standpoint from a next step standpoint. So more to come on that, but really that’s the color we can provide today Jason.

Doug Godshall

And we have some meaningful spend coming off of the book early next year in internal hardware spend. We had to use considerable external resources to supplement our two controller platforms, one for HVAD and one for MVAD. And so as that finishes testing and goes into submission for HVAD early next year, that’s an enormous spend line that comes down, doesn't drop to zero but a whole lot closer to zero than it is. The it – that combined with the HVAD technical spend coming off of the book, really will help to accommodate the CircuLite spend both from technology enhancement and clinical trial activity.

So while the – there will be overlap for the next six months, which is why we say it will be sort of out-of-whack for six months, while we integrate and carry the full version of the spend, we’ll see opportunities to integrate and cadence our product activities. And so it will – next year – this year was sort of MVAD and controllers next year will be SYNERGY and tests as our sort of key investment vehicles.

On sales and marketing, I think particularly as we prepare to fully relaunch SYNERGY a year from now or so, I think our sales team is certainly going to be chomping at the bit to participate internationally. And we’re definitely in a strong position to manage the impact trial, whichever trial we pursue in the U.S.

Operator

And your next question comes from the line of Larry Biegelsen from Wells Fargo. Please go ahead.

Larry Biegelsen – Wells Fargo Securities LLC

Yes, guys, thanks for including me and two questions. First, this may be a naive question, but there are two prominent companies pursuing Class III patients, CircuLite and Sunshine Heart. Maybe if some of you could just compare and contrast the different approaches there, that would be helpful.

Doug Godshall

So, I’ll let, if Martin is still on the line maybe Martin sort of has an opportunity to use both the TLX or maybe Martin, I know you better head back and actually save patients life, so if you would, - I talking pretty well.

Doug Godshall

I have no experience.

Unidentified Company Representative

I’ll cover you up.

Dr. Martin Strueber

With the Sunshine Heart so far and it’s a different principal of care. And we still have to see the long-term results of it and I think it’s a competing concept and its not directly related to blood pumping with the actual pump, its helping their heart by a balloon kind of pulsation technique. And we haven’t seen the long-term results yet. And so I think this is a complete open question about the affectivity of Sunshine over a time period of a year or even more and I think with the CircuLite system we have seen that its working for more than a year in the same fashion, and actually its working and improving the patient for such a long time. So I think for the principal – the CircuLite system is safer and we have to wait for long term results on the Sunshine.

Larry Biegelsen – Wells Fargo Securities LLC

Thank you. And this – Doug, sorry, I hate to ask this question but while we have you, it would be helpful to hear your reaction to the thrombosis data last week, and specifically your concerns that that may, how the impact that might have on the overall LVAD market and maybe if Dr. Strueber wants to chime in, that would be helpful. Sorry to ask the question on the CircuLite call here, but I think everybody is interested to hear given the results, the data that came out last week. Thanks a lot.

Doug Godshall

So, as the Chairman of our Board said in an e-mail to me the other day, this stuff is really hard. I think he used a different word than stuff. And so we try to be - well, I think we often succeed at being our own strongest critic because we see so many opportunities where we would like to get better. I still think as I've said many times to you, Larry, and everyone else, I still think that HeartMate II is a fantastic device. I know it is a fantastic device. It is hard to pump blood 24 hours a day in any patient and particularly in sick patients, and they've done it 15,000 times or whatever and generally very effectively. What we've also said is physicians in the U.S. and internationally would not be as enthusiastic about the HVAD if the alternative was a perfect device.

So, our device is imperfect. Our competitor's device is not yet perfect either. We're both working diligently to find ways to both enhance the technology and enhance the management of the patient postoperatively and are humbled by how hard our clinician partners work to create a great outcome for their patients both bridge and destination therapy. So, I don't exactly know the inner hematologic effect of the HeartMate II and sometimes we're mystified by how well our pump works in some people and how it doesn't work in other people and it's a head scratcher. But I’ll – I don’t anticipate that the issue will have a material effect on market because the fact is these patients don’t have a good option and pump exchanges are bad, but death is really bad. So, my sense is while it will cause angst in some of the clinical community and probably more on the street, I don’t think it will have a long-term effect. I do think that finding ways, as Martin described, to further drive down the invasiveness both of existing VADs and future VADs as well as improve the hemodynamics as we are constantly trying to do and hope to do with CircuLite as well, will accrue the long-term benefits of the market and will enable us to realize the potential both for full support and partial support system.

Martin, I don’t know if you want to? I don’t know if the New England Journal shock reached over to Germany as well.

Dr. Dan Burkhoff

Of course we were discussing these issues for a couple of months because we have talked to our colleagues from Cleveland and from Duke. We had a few pump exchanges ourselves. It’s an alarming issue. And as you can see from this publication, this is a new thing to us. The device worked fine until 2010 for five, six years. Now we see this increase in pump thrombosis. And really have to find out what the issue is and if it's a pump-related thing or a management-related thing or a combination of both, we really have to get to the bottom of this and solve that fast because it is having a negative impact on the overall picture of mechanical long-term support and I think it’s also meant in the way that this issue needs to be solved. companies. We have been more and more generous with anticoagulation protocols over the last years, especially with the HeartMate II because we haven’t seen pump thrombosis in this device for many years. And so it may also be a management-related issue there, but we have to solve this and this will be extensive discussions among cardiologists and surgeons for the next five, six months to solve that problem.

Unidentified Analyst

Thanks Martin.

Operator

Our final question is a follow-up from Jason Mills from Canaccord Genuity. Please go ahead.

Jason R. Mills – Canaccord Genuity, Inc.

Thanks, Doug, for taking a follow-up. Just quickly, interested in retaining the talent that you would like to keep on board at HeartWare from the CircuLite team. Just sort of what contracts are in place or what you expect to occur with respect to integration over the next 6, 12 months?

Doug Godshall

Okay. And, Jason, I apologize that when you asked me if I thought the Chiefs would win a couple weeks ago. And I said yes, they have not won since they don’t think. So, I am sorry – but if they are going to be fine. So, on the talent issue, I'm amazed that I am sitting across from Dan Burkhoff who, ten years ago when I was at Boston Scientific, whenever we were looking at anything in heart failure we would say, should who we’re going to talk to, let's call Dan Burkhoff, he's like the smartest guy in heart failure. Maybe he can tell us what it would be. So I’m flattered to have an opportunity to sit across from Dan and as one of the e-mails I got this morning from one of our key clinicians said Dan is one of those smartest guys, he knows that he has been for 40 years, so he has met a lot of people since then. So we’re – I’m hopeful that Dan will stick with us that these are real assets. Likewise, there are less talent people obviously more talented folks in Germany, because there are more people in Germany with the company. There will be some early changes for sort of the functional areas that everybody knows end of changing in transactions like this.

But our hope is that, we give a very motivated team of – on the technical side, and we’re pretty optimistic that we will, because they struck with CircuLite, because they believe in the opportunity clearly and they struck with it when the back account was draining towards the NPS, there were less of promises that we are going to get finance, we are going to get finance, and so they struck with us through that uncertainty because of the belief in the prospects.

And so now they – we hope that they believe that this combination will enhance the likelihood of success as if they can sort of be their dream realized and have the – and have an opportunity to see both the surgical and Endovascular more broadly utilized and is that will sort of infectious when you see what you can do and what Martin and his colleagues can do to save the patients life and get them back on there be. There aren’t many opportunities like this in devices, so once you’re in it, people have a hard time leaving it and particularly you have adequate resource to actually invest in the platform and enhance the platform.

So we’ll – not everybody in HeartWare will be here two years now, because they may not choose – they – but I hope most will do and likewise not everybody in CircuLite will still be here, but I hope a lot of them choose them, because we think the opportunity for the platform is profound and will rely on lot of their balance to guess where we are going.

So I think that’s it and thank you all for your interest and great questions. We will look forward to sharing some great news hopefully on CircuLite and MVAD and HVAD going forward as we work to expand the mechanical support market to an ever lighter population adjacent to who are in need of help. And so Martin, particularly I apologize that we kept you online longer than we had expected, but your answers were excellent. So I really appreciate that.

Dr. Martin Strueber

Thank you.

Doug Godshall

So we’ll talk to everybody shortly.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, and please disconnect your lines.

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