HeartWare International's CEO Discusses Q4 2013 Results - Earnings Call Transcript

HeartWare International, Inc. (NASDAQ:HTWR)

Q4 2013 Earnings Conference Call

February 27, 2014, 8:00 AM ET


Doug Godshall - President and Chief Executive Officer

Peter McAree - Chief Financial Officer


Chris Pasquale - JPMorgan

Jason Mills - Canaccord Genuity

Matt Taylor - Barclays

Matthew O'Brien - William Blair

Danielle Antalffy - Leerink Partners

Jason Bedford - Raymond James

Larry Beigelsen - Wells Fargo

Suraj Kalia - Northland Securities

Bruce Nudell - Credit Suisse

Steven Lichtman - Oppenheimer

Shagun Singh - CRT Capital Group


Ladies and gentleman, welcome to the HeartWare International 2013 Fourth Quarter and Year-End Results Conference Call on the 27th of February 2014. (Operator Instructions) I'll now hand the conference over to the company. Please go ahead.

Chris Taylor - IR

Thank you, operator, and thank you all for joining us for the HeartWare International conference call and webcast to review the results for the fourth quarter of 2013. 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 financial performance, commercialization, clinical trials, regulatory status, development pipeline and business trends. 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 earnings 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.

Participating on our call today HeartWare's CEO and President, Doug Godshall; and Chief Financial Officer, Peter McAree, each will provide commentary on the company's fourth quarter financial results as well as a corporate update. Those prepared comments will be followed by a Q&A session. In the interest of time and with the goal of allowing as many folks to answer questions and proposed questions as possible, we respectfully ask that you limit yourself to one question and one concise follow-up and then please feel free to return to the queue. Thanks very much.

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

Doug Godshall

Thanks, Chris, and good morning, everyone. Thanks for listening in. We are pleased to provide a review of our fourth quarter and full year results for 2013, expanding on what we shared in our preliminary results released in early January.

As we look back at 2013, we made significant strides in growing our business in multiple areas to both strengthen our core and to expand our footprint to position ourselves for a sustained growth. Last yea, we saw robust expansion of our HVAD business, ending the year with 230 HeartWare sites around the globe, nearly a 50% increase in the number of customers we had at the end of 2012. These customers generated orders for more than 2,000 HeartWare systems last year, a dramatic increase over 2012. And this represents roughly 40% of the total number of systems we have shipped in our history.

Our US revenues for the year increased 281% from $28 million in 2012 to more than $105 million in 2013. And overall, our total revenues grew 87% year-over-year from $111 million to nearly $208 million. We expended a great deal of energy strengthening our core business through both clinical trial development and pipeline initiatives. We received FDA approval or other protocol for our supplemental cohort study and destination therapy for HVAD, and that study is beginning to hit its stride. In other clinical trial initiatives for HVAD, we also received approvals to commence our clinical trial in Japan and conditional approval from FDA on our thoracotomy study.

Throughout the latter half of 2013, we made enhancements to our next-generation pump, the MVAD and its peripheral accessories as well as making significant progress on our test technology. Of course, the most significant expansion beyond our core business came through the acquisition of CircuLite, a developer of the SYNERGY Circulatory Support System. This novel device is designed to provide partial support to patients who have less advanced heart failure.

It was certainly a busy and productive year and we expect this momentum to accelerate in 2014. With more than HVAC systems sold in the US since approval, it appears that more of our US physicians are beginning to understand why their peers outside the US have been so enthusiastic about our device.

While we have surpassed threshold of 5,000 patients treated with the HeartWare system, it still feels like we're very much at the beginning of our journey. The newness of this still ramping US launch, the pending commencement of MVAD clinical efforts, upcoming HVAD studies for thoracotomy and biventricular support in Japan registration, all contribute to the feeling that there is still so much to achieve.

And with that, I will now turn the call to Peter for comments about the fourth quarter and year. And then I'll return to provide some additional perspective.

Peter McAree

Thank you, Doug. We're pleased to report another solid quarterly performance and impressive full year results for 2013. Before going into our fourth quarter operating results, I'll summarize for you the purchasing accounting and other related effects of our recent acquisition of CircuLite.

For background on the terms, we agreed to pay $3 million of upfront conservation consistent with approximately 18 million in shares of HeartWare common stock and approximately 12 million to settle debt and transaction liabilities of CircuLite. And in addition to the closing payment, CircuLite securities shareholders may be entitled to future consideration upon achievement of certain specified milestones. These payments are due upon satisfaction of regulatory and commercial success milestones and are not to exceed $320 million in the aggregate over 10-year period.

The acquisition-date fair value of the consideration was approximately $101 million in total. This included cash transfers of $12 million, 230,000 shares of common stock valued at $22 million based upon a view out computation of spelled out in the merger agreement and $67 million of contingent consideration. The $67 million of contingent consideration was recorded as the liability and measured at fair value using a probability weighted discounted cash flow analysis.

At each prospective reporting day, the fair value of the contingent consideration liability will be adjusted for interest accretion based upon the facets of time and for changes in the probability of achieving each potential milestone.

The total purchase price was allocated primarily to intangible assets of $5 million in process research and development of $35 million and goodwill of $61 million. In addition, the acquisition triggered a $5 million payment for patent rights to a third party, which was satisfied for the issuance of approximately 50,000 shares of our common stock in January of 2014. The purchase intangible assets of $5 million are being amortized over useful lives ranging from 15 years to 20 years and the patent value of $5 million being amortized over seven years. IPR&D, which relates to SYNERGY Surgical and Endovascular System, will remain as an indefinite life asset until put into commercial use. As you know, goodwill is an indefinite life asset, which is not amortized, but is tested periodically for impairment.

To give you a brief update on the integration, we're pleased to have completed our principal integration objective. And as next steps, we plan to transfer manufacturing of the SYNERGY Systems to Miami Lakes, Florida, by the end of 2014 and close CircuLite Teaneck office locations at the end of this quarter. The latter will result in brief exit cost tentatively estimated at $1.5 million in the first quarter.

In connection with our integration plan, we have recorded severance cost in Q4 of approximately $600,000 related to initial termination and there'll be additional termination cost of approximately $350,000 in the first quarter, as well as a minor amount later on in the year. By the end of 2014, after realization of synergies, we estimate that the annualized expense base resulting from the CircuLite acquisition will be approximately $18 million compared to CircuLite's annualized expense base, which has been $28 million. The $18 million will be split out approximately 80-20 between R&D and SG&A respectively.

We're also in the process of moving of our Massachusetts headquarter into our new facility just across the map from where we're currently located in the Framingham. This will also result in a charge, I believe, exit cost in the first quarter, which should be in the ballpark of $500,000.

With that housekeeping complete, I'll now get into the fourth quarter results. During the fourth quarter, 524 HVAD systems were sold globally, a 52% increase from the 345 units in the fourth quarter 2012. There were 242 systems sold in the United States and 282 systems sold internationally during the fourth quarter.

We posted worldwide revenue of $53.1 million in the fourth quarter, a 62% increase from $32.7 million in Q4 2012, including 2 percentage points from favorable currency changes. The US revenue during the fourth quarter was $25.9 million, a 94% increase from $13.4 million in the fourth quarter of 2012. We ended 2013 with 96 sites in the US, having added 46 sites over the course of the year.

As we mentioned previously, there was a clear pause in our VAD implant activity in the United States immediately following the ruling issued by CMS during November. While November appears to have a bit an aberration, we remain aware that some (inaudible) cases may now end up being destination therapy cases.

International revenue for the fourth quarter was $27.1 million, a 41% increase from $19.3 million in the fourth quarter 2012. These gains were primarily across Europe and culminated the year, which we realized 23% international revenue growth. We ended 2013 with a total of 134 hospital sites outside of US, having added three sites in Q4.

For the fourth quarter, gross margin was 54% compared to 49% in the fourth quarter of 2012 and equal to our third quarter gross margin. On a full year basis in 2013, we improved gross margin by 9 percentage points comprised of 2 points related to US commercial pricing, 3 points of cost improvement and 4 points from manufacturing efficiencies.

Fourth quarter total operating expenses for 2013 were $53.3 million, up 50% compared to total operating expenses of $35.4 million in the fourth quarter of 2012. The overall increase compared to last year was the result of investments supporting our commercial growth in ongoing research and development initiative compared to 2012. In addition, we picked operating expenses of $2.5 million for the one month that CircuLite was included in our P&L as well as another $6.7 million of non-recurring expenses described in the non-GAAP reconciliation table, which is included with our press release, which I'll later describe.

Comparing operating expenses on a sequential quarter basis compared to the third quarter, SG&A expenses increased by approximately $3.1 million to $23 million in the fourth quarter from $19.9 million in the third quarter of 2013. The $3.1 million increase included $1.2 million of CircuLite expenses inclusive of $600,000 of severance charges and transaction expenses and $2.3 million recorded as a result of the acquisition during the fourth quarter. That was transaction expense. All other SG&A expenses decreased by approximately $400,000 compared to the third quarter.

Research and development expense increased by approximately $4.4 million to $30.3 million in the fourth quarter from $25.9 million in the third quarter of 2013. The $4.4 million increase was comprised of $3.7 million related to impairment charges recognized in the fourth quarter, CircuLite research and development expenses of $1.9 million and a decrease of $1.2 million across several areas of R&D spending. The $3.7 million impairment charge, as I mentioned, included $1.2 million of goodwill and $2.5 million of in process research and development that was recorded in connection with the World Heart acquisition in 2012.

The World Heart acquisition enhanced our know-how in patent portfolio and also led to enhances in our MVAD and power design. However, given the outstanding pump attributes to present that in our recent CircuLite acquisition, we recently decided not to proceed with commercializing the (inaudible) technology.

Net loss for the fourth quarter of 2013 was $22 million or $1.33 per share as compared to a net loss of $21.1 million or $1.46 per share in the fourth quarter of 2012. There were approximately 16.6 million weighted average shares outstanding during the fourth quarter.

On a non-GAAP basis, net loss per share for the fourth quarter of 2013 was $0.92 per basic and diluted share compared to a loss of $1.46 per basic and diluted share in the fourth quarter of 2012. As of December 31st, we had approximately $202 million in cash and investments. During the fourth quarter, we utilized $2.6 million of cash for operations, which included $4.8 million for CicuLite operating deeds and transaction cost of $1.1 million which were paid within the quarter. We also utilized $20 million of cash for strategic investments, including cash to acquire CircuLite. All other sources and uses of cash during the fourth quarter netted to close to zero.

We were very pleased that our underlying operating cash flows excluding the effects of the CircuLite acquisition were positive for the second consecutive quarter. In summary, the fourth quarter was another solid quarter for HeartWare and a very ending to an exciting year of growth. We're happy to welcome our new CircuLite colleagues on board and look forward to an exciting year ahead.

Thank you for your time. I welcome your questions when we move to Q&A. Now I'll turn to Doug.

Doug Godshall

Thanks, Peter. I'll begin with a little more color and context on CircuLite before commenting on our HVAD's commercial growth and our pipeline of trials and technologies. To our acquisition of CircuLite in December, we have expanded our opportunity well beyond our core full support to VAD segment to incorporate a large patient population that promises to benefit from partial support drawn from the left atrium.

As developer of the SYNERGY platform, CircuLite pioneered partial assist approach designed to aid the substantial group of heart failure patients who have not responded well to traditional therapies, but who are not yet sick enough for inotropes, a full-support bed or a transplant. The SYNERGY Surgical System received the CE Mark in 2012 and is designed to work in concert with the native heart, complementing its function rather than replacing it.

Due to issues that arose following commercial release, the Surgical System was removed from the market last summer. Our new expanded team, which includes integrated CircuLite personnel has been diligently to identify the cause of the issues and prepare this device for relaunch. In parallel, we are completing our analysis of additional hospital upgrades in areas such as tighter tolerances and impeller geometry changes.

Given the anticipated improvements in outcomes, these changes are expected to precipitate. We will integrate them into our return to the clinic, which we envision will be later this year or more likely early next, given the regulatory review that will be required.

We are also eager to commence a study of the SYNERGY Endovascular System. This is an extremely promising minimally-invasive approach that involves the collaborative implantation of the device by an interventional cardiologist and surgeon in a hybrid cath lab setting, which we believe has the potential to expand the mechanical support market considerably. This elegant system was approved to start feasibility studies, but we plan to wait until the aforementioned enhancements to the micro-pump are completed, as improved pump performance will benefit both Surgical and Endovascular Systems.

The SYNERGY platform provides a strong complement to HeartWare's existing portfolio of mechanical circulatory support systems by broadening our range of minimally-invasive treatment options. What has emerged since the acquisition has potentially more intriguing about SYNERGY is the level of enthusiasm for this platform for different unaddressed patient segments. One that regarded particular interest is a subset of the diastolic heart failure population also known as Preserved Ejection Fraction. This population basically has no treatment options other than diuretics or transplant. Traditional bed do not work for them. And overall, diastolic or Preserved Ejection Fraction accounts for more than 40% of the total heart failure population. So providing an alternative for even 5% to 10% of that cohort could dwarf the current bed market in scale.

We are beginning to draw plans to study these patients following our relaunch in Europe. Overall, combining the likely benefits of our design changes and our growing appreciation for just how large the CircuLite patient populations appear to be gives us even greater optimism about this platform and its potential to provide a compelling alternative.

Moving now to commercial growth in our core business. Enthusiasm for HVAD in international markets remained strong. We continue to see substantial support for our pump in markets around the world, with the HeartWare system being the most (inaudible) internationally for the last two years. This is really a testament to the effort of our teams and more importantly the good outcomes our customers are seeing with the HVAD.

Last year, we trained 28 new centers and then entered 10 new countries, a reflection of the expanding demand for VADs in general and the HVAD in particular. We concluded the year with 134 international sites and that number continues to climb.

Of course, the most significant change in market orientation was in the United States, where we've just completed our first full year of commercialization. By the end of 2013, we reached a total of 96 trained US sites, 14 of which were pediatric centers. And the pipeline of new sites expressing an interesting in being trained continues to grow.

According to our estimates, sites that were implanting the HVAD at the end of 2013 accounted for above 75% of the US VAD volume. We still have several large centers that have yet to come on board and some of late 2013 additions are just now beginning to line up patients.

We are particularly encouraged by the momentum that we're seeing build as our supplemental DT study begins to ramp. And our discussions with the US sites becomes more concrete about the upcoming thoracotomy study. There has been much discussion regarding the two big news items in the VAD world at the end of 2013, the NCD from CMS and the very visible publication in the New England Journal.

We aren't anticipating any sustained share impact as we view these two phenomena as largely offsetting. In terms of market impact, we would expect that to the extent there is any effect, it will be biased towards the early part of this year.

Our confidence in the medium-term trajectory of the VAD market both internationally and in the US is unchanged. Our confidence in the long-term trajectory is actually strengthening as we contemplate the impact our portfolio could have on the market in the years to come.

Let's discuss briefly on some of our ongoing clinical efforts. Upon receiving FDA approval of the supplemental cohort of our destination therapy trial, our team has been engaged with the sites to distribute final protocol language to assist with submission of documents to the IRB for approval and conducting site initiations. Currently, 42 of our 50 sites have received IRB approvals. Enrollment in the supplemental cohort commenced in October with a couple of sites and expanded modestly through 2013. As anticipated, enrollment has begun to pick up in the first quarter.

The ramp started a bit slower in the beginning than we had initially expected, while sites to contract IRB and local CMS approval, which is a new wrinkle for trials. We are now at critical mass in terms of number of sites activated, but we expect a slight startup lag from a completion of enrollment to early next year unless the bullishness expressed by our sites translates into a steeper ramp through 2014.

As a reminder, the second cohort of the trial evaluates how patients respond to an enhanced blood pressure management protocol. We've observed retrospectively that patients who have tighter blood pressure controls experience lower neurologic event breaks. We look forward to prospectively confirming the benefits of blood pressure management and feel that this study will have a major impact on how all of VAD patients will be treated in the future. We've been encouraged with how those types that had not previously been as focused on blood pressure management with VAD patients have embraced the concept.

While we're on the topic on destination therapy, we're preparing to complete two-year follow-up on the last patients enrolled in the original cohort of our ENDURANCE trial this May. As a result, the data from this pivotal destination therapy study should be available for final analysis and calculation of the primary end point toward the end of this year. Once this year follow-up period and analysis is complete, we're targeting early 2015 for presentation of VAD data. Our PMA filing is anticipated to include ENDURANCE data as well as data from the supplemental cohort patients we are enrolling today.

In the meantime, we are anticipating our next presentation of data, which will be preliminary subset of patient outcomes from our post-approval study for Bridge-to-Transplant. We are currently awaiting a download of data from INTERMACS, from which we will generate the ISHLT presentation. As a reminder, our post-approval study is comprised of 600 patients who received the HVAD for Bridge-to-Transplant post FDA approval, as well as 600 controlled patients also with gathered from INTERMACS.

Besides advancing our existing clinical trials, we're also planning to move forward with a few new trials over the next several months, which we are quite enthusiastic about. Late last year, we received approval to commence our study to evaluate the safety and efficacy of the HVAD for Bridge-to-Transplant patients in Japan. Enrollments should commence in the next month and we expect it could enroll somewhat expeditiously as this trial includes six patients at five centers with a six-month follow-up.

The primary endpoint of the trial is a live on the original device transplanted or explanted for recovery. We are particularly eager to initiate this trial since it is clear that Japan is beginning to show its sizeable potential.

A trial that is generating a great deal of interest in the US is our pending thoracotomy IDE. Currently, our label describes HVAD implantations are in ministernotomy and prohibits us from teaching sites how to implant our device through the less-invasive based on thoracotomy technique. We received conditional approval late last year and are awaiting feedback on our response to the conditions in that approval.

This less-invasive approach has been widely used by surgeons in Europe and some of those surgeons have been active in recent months, demonstrating this technique to their US colleagues. With the thoracotomy procedure, the surgeon may make small incision in the ribs instead of performing a medium-sternotomy and fully opening the chest. Approximately 18% of our implants in the US in the fourth quarter were done by thoracotomy, which is up from 15% in the third quarter. We have anecdotal evidence from physicians in the US and internationally that this less-invasive approach reduces the adverse events and decreases length of hospitalization. This positive impact was reflected in a presentation by Dr. Simon Maltais of Vanderbilt at the STS meeting and helps explain the high level of enthusiasm we are witnessing.

Anecdotally I received the same validation from one of our sites I visited on Tuesday where they've done two thoracotomy so far. And when I asked the cardiologist what his impression was, he said their hospital discharge time for those two patients was dramatically shorter.

Part of the reason we're so eager to commence this thoracotomy IDE is that we believe this study could serve as an important catalyst, driving the VAD industry for the less-invasive approach. Based on feedback we received from surgeons who are already performing thoracotomies on their own, we expect that that therapy could bias heavily towards this technique within the next couple of years.

Our BiVAD trial is on track to commence this year. Key opinion leaders from around the world met a few weeks ago to help us refine our trial design and they are remarkably interested in this study. Lack of reimbursement for BiVAD has remained an issue for us in several countries, and we hope this study delivers results that address the reimbursement hurdles.

Turning now to our technology pipeline with MVAD first, we announced during our third quarter results call that we had resolved the inflow tube issue that we discovered last summer and made great strides to move the platform back toward the clinic. The MVAD program is on track and we're working rapidly towards its submission in the next month to conduct this in human cases. We will then follow with our international MVAD GE Mark trial. This trial will be comprised of 63 patients at nine sites in Germany, the UK, Austria and Australia. Patients will be followed for six months.

We've already continued site selection and initial training at each of those nine sites and enthusiasm for this miniaturized device seems higher than ever, particularly given the dramatic improvements and sheer stresses we're witnessing preclinically with the enhanced impeller geometry.

With the start of the MVAD clinical activity will come the introduction of our new PAL controller, which we think will be a major upgrade for VAD patients. In terms of safety and ease of use, this new controller will be smaller, light weight and more user-friendly, featuring an interactive touch-screen display that is color-coated and tells the patient how much battery power remains. PAL, which is our acronym for Peripherals for an Active Lifestyle, is designed to provide additional safety enhancements beyond current capabilities. It's snap-on batteries have the ability to be chargeable running on an AC adapter and the new cable will include coils, which function as a shock absorber to reduce the pressure on the site with a driveline exit. Trauma at the exit site is often the preceding event to an infection. The simplicity of this integrated system has consistently received positive reviews from patients and customers.

And finally, we're moving forward smartly with our fully implanted system or test as we call it, which will allow us to eliminate the driveline and make a dramatic improvement in quality of life for patients. We've completed our initial test on chronic animal studies, involving our fully implant system and initial results are very promising. Our great success with our chronic animals last year has led to regulation of the work being done to refine the design and move it more aggressively towards the clinic.

That concludes our prepared quarterly commentary. At this time, we shall now open the call to questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Mike Weinstein from JPMorgan.

Chris Pasquale - JPMorgan

Chris Pasquale here for Mike. Doug, you had commented previously that you thought the weakness in November was a temporary air pocket and that December was actually quite strong for you. Can you just talk about whether that strength has continued into January-February and whether your view on the 4Q performance has changed in any way now that you've had some more time to analyze?

Doug Godshall

There is a small subset of patients that they used to be able to not list under Medicare at some sites. Most sites listed everybody. But some sites were not in the Medicare population. So there is some number that we will not gain. And yet we think the momentum we're seeing with our outcomes with thoracotomy are pumped more regularly. It compensates for what was lost for MGD. And certainly our rear-view mirror observation that that air pocket was an air pocket and not a sustainable that we still feel that that is indeed the case that is was a November freeze-up. We're a little reluctant to give commentary on exactly sort of what our activity looks like quarter-to-date, given that we're two-thirds of the way this quarter. But I would say that the one-month phenomena looks like it was a one-month phenomena.

Chris Pasquale - JPMorgan

On the MVAD, so it sounds like we're getting very close at this point. Is it fair to assume that we're on track for, I guess, maybe April start of first implants? And then given how we've had some delays here, it sounds like the CE Mark trial is basically ready to go at this point. So this comp has been vetted pretty thoroughly in the preclinical setting. Can you just talk about why you decided to continue with this first in man pre-European approach?

Doug Godshall

We're anticipating a March submission to Canada, which is the Country we're anticipating that will do Special Access. But that's got to go from the physician to the government and the government has to get data from us and review it. So April would be great, but things have to align with sort of patient showing up and the government approving it, et cetera, et cetera. So April could be feasible, but I don't know if it will be April or May or whatever. But the review time internationally for trial is obviously more rigorous than for a Special Access type setting. And we also will have to include a little bit more longer-term test data than we would need for Special Access. So that's why we anticipate that while they are coming closer to overlapping, it's still more likely that we'll get some cases done under Special Access than we would under pivotal trial setting.

And what we'd love to be able to learn is that the device is perfect in that there is no tweaks to software or anything. What we learned with the HVAD in our first patient is that there were tweaks that needed to be done to the software that we just hadn't found on the bench. And so the second and third patients had a better run with their software than the first patient did. So there is a benefit to getting some experience under our belt in a couple of patients who maybe don't in fact say pivotal trial internationally.


Our next question comes from Jason Mills from Canaccord Genuity.

Jason Mills - Canaccord Genuity

First question just on the plethora of trials and data milestones that you've talked about, Doug. Perhaps you could set the record here for what we might expect specifically from the post-approval study in number of patients and then sort of the key metrics that investors should be looking for specifically as it relates to adverse event data coming out of that trial and what you think would be interesting to folks to pay attention to?

And then secondly, just a bit more color on the thoracotomy study. When do you think that might get going in earnest and how that might enroll and sort of what might be the regulatory pathway for that, given that you're not getting approval for a new implant, but just a new delivery mechanism and how that might impact 2014 if we should be looking at that out next year?

Doug Godshall

The post-pivotal study from our bridge trial, I know that it will be more than 100 patients representing on. I don't know if it will be 200 patients. It's hard to say, because as we've received downloads from INTERMACS, given that we aren't monitoring those patients, we can't go to the sites and since we don't really know what site the patient is coming from, we can't go and say, hey, make sure you get your data in, make sure you get patient and further six-month follow-up. So it's a bit of a wait and see for us as to how much high integrity data we're going to have and how many patients that's going to be on.

We're more at the disposal of the normal data entry times. Now it does seem like INTERMACS and the sites have improved the timeliness of data entry into INTERMACS from what we can tell relative to what we used to hear, but there's still some lag. And given that we don't have the final download for that patient set, I'm reluctant to commit to a specific number. So it'll be the first cadre of patients post-approval and I wouldn't be surprised if we see a sicker patient population than what we saw in our pivotal trial. I mean that's predictable, given that they're not going to be restricted by increasing exclusion criteria. And as yet, we won't have seen the impact of thoracotomy, because that trended towards the second half of the year, not the first half of the year.

And hopefully, we'll start to see some positive impact of enhanced training around things blood pressure management. So we'll be very interested to slice the data as many ways we can to see if we learn anything about new sites versus old sites from IDE if there's any difference in outcomes that way. So I guess stay tuned, because we're staying tuned and looking to getting a good understanding of that data in March.

In terms of thoracotomy, we are to hear from the agency in response to our responses in the coming few weeks and then we will unfortunately still have to go through IRB process even though the device is already on the shelf. It is a study and there's not a lot of incremental work required from the site, because they're just going to put the data into INTERMACS. And yet we'll want to make sure we go through a training process, which hopefully will be in the second quarter and pull everybody together so we have a consistent approach.

We have certainly seen in the US, given that we have our hands tied a little bit in terms of how we train or can't train. There're some sites that pick it up and immediately have procedure time down dramatically and it's no different than sternotomy procedure time, but we have other sites where they really struggle and take something like nine hours to do a thoracotomy. The site that I was on Tuesday, one of the lead surgeon there was sort of my most (inaudible) thoracotomy guys a year ago and kept telling me you cannot have thoracotomy as an option for MVAD, thoracotomies are bad, outcomes are worse. Well they've not done two thoracotomies and unfortunately it's one of those sites where it took them multiple hosts to get those implants under the patient left multiple days, sort of like week-ish earlier than normal.

And I asked the cardiologist on my way out, so what do you think, is it worth it. He is like, oh, I'm amazed at how much better it is. They just fly out of the ICU. I really didn't anticipate it would make this big a deal. And our hope has been if it is a six-hour procedure for the surgeon, the cardiologist doesn't really care if his patient gets out six days earlier. And for the system getting the patient six days earlier is a huge benefit. So our dream has always been can you improve patient outcomes and recovery times so substantially. There are now enough multiple ns of 1s put together that it seems like a pattern, not an anomaly.

In terms of timing, hopefully the trial is enrolling this year. Follow-up won't be done this year. Label change won't be this year.


Our next question comes from Matt Taylor from Barclays.

Matt Taylor - Barclays

Just a follow-up on market dynamics. I guess I wanted to just ask if you had seen any change or evidence of a change in referral patterns over the last several months if something has been hypothesized that could be a result of some of the negative publications around thrombosis for your competitor.

Doug Godshall

By and large in my conversation with sites there, it's business as usual with maybe a little more effort required to hold hands of referring docs, which is kind of what we had thought might be the impact. I know of only one that occurred and maybe there are, where their overall VAD volume is down meaningfully in the first quarter-to-date. But they also were like, gee, we think it's going to rebound. So they didn't suggest that it was attributable to adverse events. Now they had had a reasonable run of that kind of adverse events, so maybe they got spooked or their docs or their cardiologists hold on to patients a little bit longer in hopes of a transplant, I'm not sure, because the VAD market is so lump anyway that we've had enough quarters where everybody thought the sky was falling in different geographies and then the sky didn't fall. So I'm reluctant to draw conclusions on a seven-week observation.

In terms of the effect on device selection, as I indicated in my commentary, I think for the sites that we're keeping a private list on their desk of transplant, patients who now have to put them on to their list, we're going to lose some of those patients, because they're government pay patients. If you had a series of VAD events with one device, I mean you see it validated in the clinical journals and maybe you're going to look to the other device a little bit. So I think we'll lose some to CMS and will probably gain some from the events with the other device and the follow-up patients.

But we've got to earn the business. And if sites have a run of VAD events with our device, they're not going to stick with it. So we have to work really diligently to make sure we're always finding ways to improve outcomes with our system and if we don't have good outcome, figure out why and do what we can do to correct it.

Matt Taylor - Barclays

I just wanted to ask about your expansion plans for 2014. Can you talk as to how many centers we might see you moving into outside the US?

Doug Godshall

Outside the US, just got two in an e-mail five minutes ago before I walked into this call. The leader of our international business said we're on five. I think it was what he said. I'm happy with my sales guys are fired up. So we added a lot more centers like in Germany last year than I ever would have modeled. And not that we don't have a math for where we hope to expand this year, but some things fall our way in timeframes that are a little hard to predict. We'll get payment in the country and suddenly we'll pick up five or six centers all at once. We'll get the government to agree to pay for five patients total in a country and that's it. And then kind of get one center and you try to build from there.

So I don't know if we're going to at 150 at the end of this year internationally or more or a little bit less. If we continue to see the kind of growth and enthusiasm, there's a new feel to it, because it was done in very select number of centers and not really talked about. And now that it's getting much more visibility, that's sort of a chance for us to re-enter discussions with sites that had not adopted our technology yet. So we've not put out a forecast for this as exactly how many centers we're going to have in US, nor there is so many centers we're going to have internationally. But certainly we anticipate growth in both geographies.


Our next question comes from Matthew O'Brien from William Blair

Matthew O'Brien - William Blair

Doug, I was hoping you could just provide a bit more color on the DT cohort delay. I mean what is it specifically that you're having a challenge with on the IRB side? And then I think you said early '15 in terms of it being done there. So are we basically talking about a month or two delay or is it a five or six months delay?

Doug Godshall

Part of it was some of our bigger enrollers from the DT 1 experience our biggest, our number one impact just came on. I think it was last week. So some of the bigger hitters just took longer. They did have this extra hurdle of needing to get local CMS intermediary approval before deciding to implant, which didn't seem to be the case the last time around. So that added an incremental few weeks per site to start up. And so if you delay the start, then you delay the screening of patients and you delay the time that they get enrolled. So I think it was just a lag in start. But the lag in the beginning always affects you on the back-end, because you've got to get up to the ramp and you can't make up for a little bit of lost time.

So we're certainly hopeful based on the level of enthusiasm we're hearing from the site to get as many patients as possible under this trial that it's sort of one of two month, not a one or two quarter kind of effect.

Matthew O'Brien - William Blair

Looking at your international growth over the last couple of years, it seems like that growth kind of corresponds with new center additions. Again, I know that within certain centers, you're doing better. But is that opportunity there beyond what you had your sales over there saying as far as you guys being on fire, but is that opportunity to continue to add considerable number of new centers still there? And then within that question, are there centers that are taking long at about two units per center per quarter that are doing seven, eight HVADs per quarter?

Doug Godshall

So we're still lagging in terms of number of centers relative to the total number out there and we're still second in terms of number of centers using our device. We're circa 130 versus circa 170-plus. And so we know for sure there's 40-ish that we're not in, but it's even more than that, because we share with (inaudible) maybe 100-ish, 90 to 100 of the 130, which means there's really more like 70 to 80 that we have existing VAD centers that we're not in. Now a lot of the centers that we add are greenfield centers that don't do any VAD. So it's certainly logical that the international aggregate VAD market, which is currently 200, maybe 210 total centers is very likely going to be 250 in coming years. And we see meaningful geographies with huge populations that are very seriously considering getting into VADs. We're trying to figure out the probable allocation of resources and upfront understanding of regulatory and reimbursement pathway into some of those geographies to make sure that if we're going to spend there that it will be time we'll spend, because we still see meaningful opportunity both within existing geographies and without.

Matthew O'Brien - William Blair

And then just on that note, I guess what I'm getting at is your same-store growth and opportunities, I'm sure there's a bell curve there. But just some of the higher use centers, can you just frame some of the number of devices they may be using per quarter?

Doug Godshall

I think you're probably right. It's a bell curve, where there are a handful and really is like a handful of really large VAD centers and I'd say there're a lot more that are 10 a year than there are that are more 50 a year. We see what they're doing in the US, training the cardiologists and doing the market development, let's do that here too. And so they're much more engaged with the referral process than they used to be. They just used to take everything that came to them and rely on just overall prevalence and displace the transplant with VADs for the past several years. And now they're realizing there is this huge opportunity to do more. So I think both the large centers and the medium centers have meaningful upside, particularly in geographies where there're not sort of payment constraints. There are certainly countries like UK and Belgium where the payer has tried very hard to limit use by putting a specific number restriction on the number of patients in those countries. So those will be the hardest ones to expand.

On the other hand, some countries like Australia, where we've had a nice business for quite some time are strengthening their reimbursement and that's reducing the utilization hurdles somewhat, which is great. So I think same-store sales across the board by and large has upside. Countries with healthy reimbursement, there is appreciably more upside. And certainly with some of the feedback we're getting from some of those larger centers on things like our CircuLite acquisition and the prospects for MVAD is they think that's going to be a tremendous carrot for them to dangle in terms of their referring physicians, because the smaller the device gets, the easier it is for cardiologists and patients to centralize the implants and feel comfortable with it. And so we think that over the next couple of years, the advent of those technologies will certainly be simulative. It won't help this year, but will help next few years to follow.


Our next question comes from Danielle Antalffy from Leerink Partners.

Danielle Antalffy - Leerink Partners

Just wanted to ask, just to get a sense of the underlying US BTT market growth in the quarter, is there any way you can quantify the growth impact due to the November weakness or what you'd estimate the growth impact might have been? Based on our estimates, it looks like the US BTT market maybe declined over the mid single-digit versus up mid single-digit. So we have a guesstimate, but just curious what that underlying growth might have been?

Doug Godshall

Just to remind everybody thought or the feedback we got initially was, boy, there just aren't any cases. We realized it wasn't just a procedure phenomena, it was that there was an oversight reaction to the NCD in November, where everyone just said, oh, that's it, I've got to shift everybody to DT or I've got to list everybody, et cetera. And then in December, they sort of better understood and moved back closer to normalcy, particularly sites that were already listing Medicare patients and weren't necessarily listing their private pay patients.

But that would be enough of a phenomenon in that month to slow down that market and reduce year-over-year the BTT segment. So it would not surprise me at all if the numbers groove out and someday we look back at INTERMACS and see that in that quarter, BTT was lower than the year prior.

Danielle Antalffy - Leerink Partners

Just on MVAD, was wondering if you could give any sense of timing for the initiation of the US pivotal trial and sort of what that trial could look like. Obviously your competitor has talked about their HeartMate III going into the US clinic here in the second half of the year. Are you on a similar timeline there? Could your timeline come sooner or later and sort of would you also pursue a heart failure type trial design versus separate BTT or DT?

Doug Godshall

So in terms of US timing, our current inclination and we're finalizing protocol here shortly, I won't get into what our exact indication is going to be, because there's some meaningful debate amongst our committee of physicians working on the protocol as to whether we should stick with BTT, DT or go to a broader heart failure indication. The obvious advantage to speaking with BTT and DT is that every payer already knows that language. And even though CMS has been quite open in their willingness to consider, as does the FDA, a broader more generic indication, that feels good, but may carry uncertainty, just because CMS does one thing as we see with private payers, private payers don't always follow. And so while our initial strategy was going with that sort of more generic heart failure or chronic heart failure indication, we're not at all certain with who the latest NCD having opens and closed, that messing with the current structure is necessarily the best idea.

Likewise, as we've indicated, our current plan is not to start with a pilot study in the US. It's to use some international data to support the safety of the device, so that the FDA will allow us to go straight to pivotal. Having met with both of the PIs for our MVAD trial this week, they're both interested in doing a pilot study, but they also appreciate that it may not be in our best interest and it may just add time to the process, not decrease time. So I would say that based on the description of HeartMate III timing, it sounds like we'd be a little bit later than that. But just because we plan on getting some patients in our international trial in the second half of this year, by definition you need at least a little bit of data, a little bit of follow-up, not six months or anything, but enough follow-up to put it in front of the agency, which we'd be doing that toward the end of this year. So it would start next year.

We'd love to go first. Then again, thank god, we came up with this new impeller, because even though it's a mending the MVAD to the software, our initial timelines of last year, I think the device is going to be just so strong and so good for the patients that I'm not particularly fussed about being a quarter off here or there.


Our next question comes from Jason Bedford from Raymond James.

Jason Bedford - Raymond James

In terms of new patients coming on board in the US, if you're already in centers that account for, I think you said, 75% of the bridge volume today, by year-end '14, kind of what percent of the bridge volume do you expect to be addressed?

Doug Godshall

We've always wondered when and at what point do we hit diminishing returns. So is that a 130 centers, where all of a sudden we look at the rest of the centers and say, gosh, they're just hardly doing any business. And similar to what we see in pediatric, where we got pulled into pediatric to some extent against our will, a busy pediatric center did prior cases last year. So I'm not going to say no, but it's not where you would prefer to allocate your time versus a center where you could 30.

But that's a different question when we get to the adults, because to some extent if somebody is doing five a year, it can be really hard for them to rationalize the effort as well and bringing new device on for somebody that happens once a quarter. And so we assume that in that sort of 120, 130 range, you probably add 90% of the BTT volume probably. And our challenge in figuring out exactly are we really at 75%, we think we're 75%, but that pediatric bogey in the middle, we've wondered if we're closer to sort of 65%, 70% versus 75% already. There is such baffolation in VAD volume year-to-year quarter-to-quarter that you don't know for sure. And as we look at some of the sites where we are getting traction now, we know there is still considerable upside left, which is the other reason why we're sort of in challenged on this 75% assessment.

But we also look within the 75%, we are so vastly under-penetrated at a bunch of our centers that it's almost like they're still new to us in terms of generating increased volume at those centers. So we think in more than half of our centers, we have meaningful same-store sales upside in addition to the incremental sites that we are at in today.

Jason Bedford - Raymond James

The language you used when referring to the impact of the NCD and the media blitz around thrombosis was to the extent there is an impact, and so my question is do you think market growth will be slow in the first half of the year because of these dynamics?

Doug Godshall

There was a suggestion that the first half of the year may be affected and that the back half would be stronger. So in my tour of sites recently trying to see if I could validate that for myself versus relying on other people's commentary, in that one site that I mentioned, it's certainly slower. You got enough of those because of the size of the VAD market. It just takes a few big sites to slow down a little bit and you feel it. So I don't think it's illogical to think that the first half could be a little more challenged. We certainly anticipate that the full year will grow nicely in the US. We're not seeing adverse effects internationally based on the journal. And it's a widely enough read journal that we had an initial eye on it just to see if those guys certainly change their view. And they don't seem to have.

So it's a guess, but I would guess it'll have a modest effect in the first half. And so we look at it in two ways. We looked at the effects on share and I think those two events offset each other. And NCD doesn't really have any effect on market size. But I don't think it would be rational to say that, okay, there was this big new news item that every patient is going to google, but it will have zero effect. I just don't think that's a logical conclusion. I think it's going to take more work. It's going to take some docs to let some patients go particularly if they've just had a VAD event with a patient, are they going to be a little more reluctant to refer the next patient. I think it's logical that they'd be a little more reluctant.

So I do think it'll take some time and effort to pull those patients in. We suggest that the first half might be a little more challenged than the second half.


Our next question comes from David Roman from Goldman Sachs.

Unidentified Analyst

This is actually Amy in for David Roman. So I was wondering if you could just give a little bit more detail on the US market, if you could maybe talk about the market growth and share dynamics and the larger transplant versus the lower volume centers and what the dynamics between BTT versus DT are in those centers excluding the trial?

Doug Godshall

Not all sites are created equal, I would say. So I'll start with a very large percentage of the sites that were prior to October of 2013 who were listing all of their bridge patients that were government pay and many were listing all bridge patients. So an NCD comes down for them, nothing changes. There were certainly a handful of centers that weren't listing probably anybody and that included both government and non-government pay. And then the NCD came down and those handful of centers suddenly had to rethink their approach. And some of them overshot and they started saying, well, we have to list everybody now until we got to them and reminded them that their private payers hadn't changed the rules.

And so for them, they seem to be now, from what we can tell, they list their bridge patients who are government pay and they don't list their patients necessarily who are non-government pay to the extent that they are private payers who have maintained their policies, which so far we haven't seen anyone change their policy.

And so in those centers, however, the patients still get VAD. So the national coverage determination didn't actually change the total volume in the VADs. And yet, they'll probably do more DTs this year than they did last year as a percent of their total volume, because there were patients that they were calling bridge and now they won't.

And what we like to see is that the growing number of centers that are fighting really hard to figure out how do I call this patient a bridge, because that one uses an HVAD. And so that's another variable that affects the mix to the extent that you have somebody who could go either way, particularly if they're a private pay. The better the results are if you go with HVAD, the more it seems your mix will shift to bridge even within the confines of the NCD.

So on a macro level, I think Danielle's observation that maybe the fourth quarter was light on bridge entirely logical, given the immediacy of the NCD, but we don't anticipate long-term that it's going to cause aggregate bridge market to decline. We believe that the bridge market will be restimulated as this year goes along. They're going to find a way to use our device. And we've always felt that in the end our business is entirely dependent upon the outcomes we are able to achieve for the patient and that that will have the greatest determinant on the growth of the bridge market and the health of the bridge market until we have destination therapy.

Now at 50 centers, they will have the ability to use our device per DT. So then they don't have to worry about whether or not they're going to call somebody a bridge or DT, provided that the patient fits within our trial enrollment criteria. So long-winded answer, we see bridge continuing to grow this year, as it grew for the first three quarters last year, it grew faster than it had in prior years. We anticipate it will continue to grow this year, particularly as we add new centers that are new to HVAD and as old centers get their outcomes. And within that mix hopefully, we'll continue to do well in terms our play within the bridge volume at those centers as we have in aggregate of the percentage where we're right now.


Our next question comes from Larry Beigelsen from Wells Fargo.

Larry Beigelsen - Wells Fargo

I wanted to focus my questions on the BTT post-approval study, because obviously there was a time when some of us were concerned about the stroke rate we saw in the early interim data. So I wanted to focus on that. So at this point, do you have a good sense of what will be presented? Are you still optimistic about the data? And just how will you determine how many patients are going to be presented? Is that something that is in your control or INTERMACS? Who decides where the cut off is?

Doug Godshall

I'm going to rely largely on anecdotal feedback. I mean the anecdotal feedback has obviously been good for our device. So we wouldn't continue to see traction and new sites wanting to come on and the like. I've seen some preliminary data, but it's been sort of patients at three-month follow-up. So I'm really reluctant to say that I know what today it will look like, because we just don't have it yet. And yet, our hope is that what we see is over time that as we proliferate our training around proper management of our system and advancement of the patients on our system that we will see improvements over the course of the registry data that patients in the second quarter do even better than the patients in the first quarter that were implanted, as both get a better appreciation for the blood pressure management.

And certainly I think there's been multiple conversation this week about it, it certainly has resonated. Whether they listen and understand then actually practice is another question. And that's the value of our DT cohort. It's for the practice.

I think the patients are going to be a little bit more sick, but what we'd hope that we'd see our resident rates that are as good or better than we saw in our advanced studies. But love to see better than it obviously and better than and trending to better is what you'd like to see over the course of that study.

The number of patients is just hard to know, because we've gotten interim downloads and we'll see, okay, here is 75 patients, but 25 have not gone to their six-month follow-up yet, which you need that data to be entered, even though there might have been an attempt 35th and 88th or whatever, 60th patient. Some came in and some didn't come in or the data isn't entered yet. And so I expect that the first 100 will certainly be solid by then, because they should have all been through. And my hope is that the next 100 is solid by the end, because they have had enough time to get in for the site to enter their data.

So we are dependent upon the sites to put the data in and INTERMACS to crunch the data and to get it to us. And so if the patients don't have full data for their six-month follow-up, then that patient we won't present on, because we don't have a full picture.

Larry Beigelsen - Wells Fargo

When will we see the complete 600 patients with the comparator?

Doug Godshall

We won't see the comparator data until all 600 have reached follow-up and everything is done. So similar to this data lag that we witnessed so far with INTERMACS, there's going to be a similar data lag at the end of the study. So my hunch based on what we see from INTERMACS so far is that that data probably shows up beginning in next year, not at the end of this year. Even though the patients probably got implanted in third quarter, early fourth quarter last year, whatever the final patient, so they're just nearing end of their six-month follow-up, but they've got to get in, the sites have to enter the data, INTERMACS has to get up the data and there is a lag from when we get it. So my guess is it's best case end of this year, but likely over the next year.


Our next question comes from Suraj Kalia from Northland Securities.

Suraj Kalia - Northland Securities

I guess I'm a little confused about the MVAD. I thought I heard your comments say a new impeller. If I remember correctly, at the last call, it was the same impeller with some minor modifications. I guess twofold. I presume I've probably misheard or misunderstood either of the comments. And at the same time, I just wanted some clarification on the preclinical studies you've done with whatever impeller you're going ahead with and is FDA okay with using the 120 or so animals that you've done in the back and then going forward with the new impeller or new design change or whatever?

Doug Godshall

As a non-fluid dynamics guy, if you put both impellers in front of me, you have to look hard to see the difference. They're subtle, but very significant differences in the geometry of the impeller. Our team of CFD, Computational Fluid Dynamics design guys have tweaked angles a little bit, soften the edges a little bit and basically dramatically improved the efficiency of the system by reducing the sheer stress, so essentially the impeller is just fighting the fluid less. So we're able to get the same flows with about 20% reduction in RPMs. And if you reduce the speed, because of the same volume, by definition, you're also reducing this sheer. So there's a sort of compounding benefit to this slight modification.

So we call it new, because if you look at the preclinical results, both in-vivo and ex-vivo, it's a dramatic improvement. We barely hemolysis in our venture studies now versus any of the pump we've ever tested. And it wouldn't feel right based on what we see. It wouldn't feel frankly almost ethical to go with our old impeller if we can see the kind of results we're seeing with this impeller, because if you can have this kind of positive effect on sheer, it certainly ought to have downstream benefits for the patients. Every doctor we've shown it so far, sort of like there is an obviousness to them it's odd to have positive thromboembolic effect, it's ought to have a positive effect on other blood constituents, platelets, et cetera.

No one knows for sure if it will translate into better outcomes, but it sure can't hurt is sort of the conclusion. And most believe that if you can do this in such a small package like the MVAD, a few years from now when we look at the adverse event tables, it ought to look dramatically different than the adverse event tables we see for other VADs.

So that's where we stand with it. We've not put anything in front of the FDA yet with it, because we have to finish all of our testing obviously. And hence that's also why we haven't finalized our protocol with the FDA, because we kind of wanted to be done enough with our testing before we set down the list and to be able to have an intelligent conversation. We will not use GLP data from our old impeller. We will GLP data from our new impeller. Everything that we do is informed by everything that we did before. So the 150, 160 animals to date, most of which were done with the old impeller, we're incredibly informative and indicational. So it's not a lost sunk cost. It was incredibly helpful experience, because we kept refining our system, refining our software, et cetera.

So we think the best things that have happened to us was having an issue with our inflow cannula in July, because that forced us to slow down, fix the welding process and open the door for this new impeller, which we had been developing in the background. And everything we've seen since then has been fantastic. So stay tuned. We're pretty excited about it.


Our next question comes from Bruce Nudell from Credit Suisse.

Bruce Nudell - Credit Suisse

Doug, I had a question about the US market and then I had a question about CircuLite. So on the US market, in the quarter, for HeartWare, should we be assuming about 40 to 50 DT units? And the market this year in unit basis looked like it grew around 13%. Should we expect something like that next year? And you have 24% share in aggregate this quarter. Should we expect share gains across the year?

Doug Godshall

Well, our plan is not to be static in terms of our market position. We historically haven't been and we don't plan to be in the US either. We've not given a projection for DT implants for this quarter. So as we indicated, the ramp lagged a little bit relative to what we had initially expected, but we expect the ramp to pick up here currently and shortly. So we've not given a number for what we think the number of implants are going to be this quarter.

Bruce Nudell - Credit Suisse

In terms of the market growth in the US next year, units for '13 this year, where am I expected to be?

Doug Godshall

So over the course of the year, yeah, I think it's going to be double-digit. And again, given the caution that Taylor provided that even though they hadn't seen an effect yet, they were cautious about the first half. It's something you're going to end the year north of the 10% growth for the market in the US.

Bruce Nudell - Credit Suisse

And then on CircuLite, it seems to be very interesting on a strategic level. Can you just comment on the technical hurdles that you have to resolve in 2014 to get it back in the European market? And also, when we think about the application in less-ill patients, it's going to be harder to prove in a short trial anyway mortality benefit. And does that have any consequences for the price point? Is it more like LVAD pricing or is it more like CRTD pricing?

Doug Godshall

So the pricing historically has been LVAD pricing, even though it's more of a left atrial assist device versus left ventricular in a way. So they had (inaudible) it's clear there were just some assumptions made about where the stresses are on the cannula that passes through the ribs that led to the cannula design that was not optimal. And we're pretty close to what we think finalizing resolution to that, because we think we know what the root cause is and we think we have some pretty simple design enhancements to address the root causes and we've been testing it here.

So that's factor one. But while we're at it, similar to what we did HVAD, we threw their pump design at our fluid dynamics team and said, okay, can you improve washing with this system, because CircuLite had gone through three different pump design versions, impeller versions and the last one was certainly the best of the three. But we sort of asked the question, while we're off the market, can we also improve the impeller geometry to improve pump performance. And thus far, our conclusion has been yes, we think we can. It's a tiny little impeller, so small spaces to wash. It looks like we can enhance the system, both in terms of washing as well as forward flow simultaneously.

So we're modeling those now and assuming that we've got a run of the tests on the cannula and repeat animal testing on the cannula sort of like we did with our inflow tube, why not also take advantage of this window and test it out and improve pump configuration. And if we do those two things together, what we don't know yet is how will the regulators respond to this. Will they say, hey, that's really cool, it looks a lot like the old one, come back to market or will they say, hey, that looks really cool and the data looks better in the animal, but we'd like you to sort of confirm it in some people before you fully relaunch. And can't really have that conversation yet until we have data to put in front of them, which will be sort of later this year once we've generated the data.

And it'll be interesting, because I could envision the endovascular hitting the clinic as soon or sooner than the surgical, because in that system, the cannulas aren't a question. And if we insert improved pump with some animal data, it may actually be simultaneous with or before the surgical reentry into the clinic or at least reentry into the market. So we're quite intrigued, particularly if we can get this fluid dynamic enhancement analogous to what we're seeing with the MVAD. And that's what at least our models are suggesting.

On the patients and long-term pricing, one of the intriguing things about this HF/pEF, as people call it, heart failure with Preserved Ejection Fraction, one of the interesting thing about that segment unlike the less sick patients, the diastolic HF/pEF population may actually probably would see a mortality benefit, certainly in massive rehospitalization benefit if this thing works for them. So that's one of the reasons it has gone up the interest level for us, both because doctors are saying I have nothing for these patients whatsoever and if you could pull blood on the atrium, it could be a huge win for at least a subset of those patients. But it may also enable at least mortality as the number one secondary endpoint part of the composite could be helpful.

If we stick with the current design, the trial design that they have in front of the FDA and approvals they do a pilot, it is randomized against like it's we, not they, that we have is randomize the medical therapy for INTERMACS four or five, six type population, so pre-inotropes, you're right, mortality would be by definition harder to prove, because you've got lower mortality in that patient population.

And we're cognizant of the fact that we'd have to be really thoughtful about, okay, if that is our target population and it's huge, one would have to think about what the appropriate pricing strategy for that population, because it would be under DRG-1, it would be hard if you had an uncomplicated VAD impact. It'd be really hard to get DRG-1 prices of that, because if the patient is going to discharge in a couple of days, you could actually even adversely effect your D-1 if you get it. So maybe it's like a DRG-2, uncomplicated VAD or something, which would imply something north of CRT, south of VADs if that's ultimately the strategy.

So we're quite intrigued by HF/pEF and we're quite intrigued by sort of really the breadth of the different types of patients that CircuLite could treat. And this year, we'll probably spend sorting out exactly what our go-forward strategy is going to be, assuming we stick with the current indication in Europe, what is going to be our indication in the US, because that probably does have the biggest implication on pricing.


Our next question comes from Steven Lichtman from Oppenheimer.

Steven Lichtman - Oppenheimer

Just this first question is on market development and I guess maybe SG&A outlook. Doug, if you're answering, do you expect increased investments in market development, is that an opportunity you guys are anticipating to ramp looking forward?

Doug Godshall

With a little bit different model. We have a few folks who are sort of our internal advisors on market development. And then our territory managers own it at the site level. And so we don't at this juncture have plans to build that in parallel, because our sales organization that goes out and does market development. We are building out our medical affairs competency, which is also another sort of component in market development. So we envision sort of an internal high-caliber expertise on those areas of market development rather than a local complement to the territory manager and clinical specialist.

And thus far and precisely what we've done has been helpful and for us it's efficient to have somebody who feels like they own everything about a site, including building referrals, including day-to-day management, including bringing reimbursement expertise. So we like for people to feel like it's their business X, Y, Z hospitals, not part my business, part somebody else's business.

Steven Lichtman - Oppenheimer

Secondly, a follow-up on the MVAD process in Europe. It sounds like there are going to be a couple of patients. How long do you plan to follow those patients' reports starting the CE Mark study. Just trying to get a little bit more sense of potential timing there.

Doug Godshall

We're not waiting for those patients. It's more just process for kicking off a pivotal trial is going to take longer than kicking off a Special Access type experience. So if we get one patient and we got three days before we start European trial, so be it. If we get five and they're out three months, okay, well, then I wish the European trial start a little bit sooner. But I'm okay with that too. So it's preferred. If we can learn some safely and ethically and the patient gets what we think is going to be the device out there, then great. If it just turns out that we're wrong and we can't do the Special Access before the European study starts sooner than we think, then that's okay too. So it's more opportunistic than a requirement.


Our final question comes from Shagun Singh from CRT Capital Group.

Shagun Singh - CRT Capital Group

I had a question on the international HVAD placements. It came in lower than what we were looking for and it sounds like though the market should be up, it may be choppy reimbursement market to market. My first question is can you remind us how much revenue you generated from Germany this quarter. And then you had mentioned anecdotally last quarter that even in Germany, centers feel they can triple capacity. How do you feel about that and what is the gating factor at existing centers? Or in other words, why are not seeing adoption as fast as it could possibly be?

Doug Godshall

Germany was about $14 million last quarter, that range. And so part of the issue in some of the larger centers in Germany is that they have been traditionally such a state, surgeon-centric world. And I remember a few years ago, one of our colleagues over there was trying to pull together a meeting and he called us and asked if we could get them names of some good cardiologists in the US to come speak in a German VAD meeting. And we said, why don't you just ask one of your cardiologists. He said, well, there really aren't any VAD cardiologists or at least none of any note in Germany.

We're starting to see that change, but it takes a little bit of time to change. So a chunk of it is just no one ever spent time on the referrals, because they had so many patients that were just naturally coming in for transplants and the transplant waiting time had become closer to infinity. So you just put added people, because you didn't have the transplant option. Now that they've sort of tapped that stream, they're realizing they could do more and they want to do more. And so there's been an evolution of sort of evolving mindsets. Some got there sooner and they're very actively engaged with their cardiologists and some less so.

I mean just like I was mentioned sort of the hook of thoracotomy, I don't think it's a surprise that some of the sites that seem to have engaged the cardiologists more are doing a very high percentage of thoracotomy, because I think that does in some cases a little bit harder for the surgeon, but it just seems to be better for the patients. So you want to have something that engages the cardiologists and ultimately I think that's where MVAD and CircuLite are going to be stunning in terms of how well they resonate with the cardiologists, which doesn't really help us next week or next quarter, but long-term it certainly does.

So Germany has done well. As I mentioned before, we added more sites in Germany than we anticipated. It grew actually faster than the rest of the world, which was a flip from the year prior, where the rest of the world grew faster than Germany, as I recall. So that actually makes us more excited about the rest of the world for this year, because it strikes us that we ought to see a similar stimulus in non-Germany growth. And our team is working obviously quite enthusiastically and aggressively in pursuing growth in some countries where we had assumed we had already tapped out and we're hopefully putting building blocks in place for those to reaccelerate this year.

Shagun Singh - CRT Capital Group

We were looking for HeartWare to be free cash flow positive perhaps in the back half of 2014 or maybe like early 2015. But obviously CircuLite related investments really changed that. So firstly, the question I know you put out $18 annualized number out there. Is it fair to assume that will be closer to the $28 million annualized mark early in the year and then perhaps $18 million in the back half of the year? And then secondly, I just wanted to get your thoughts on how quickly you think you can get to the free cash flow positive level?

Peter McAree

CircuLite standalone hurdle rate had been prior to acquisition, you've got low there. And for obvious reasons, they were conserving cash. But if you were to annualize out what we took on for the December, in fact, we come to roughly $28 million. So your point is correct that early on, we will have an elevated burn rate of refocusing or probably putting more research and development expense more than they were incurring. And then by comment, exiting the year, by the time we end the year, the incremental OpEx we'll be taking on will be $18 million. So we view that as an annualized run rate exiting the year. But it's elevated at the start of the year.

Doug Godshall

So thanks all for your time. And we appreciate your interest in joining us today and look forward to sharing news on our progress in upcoming conferences and I'll see some of you next Tuesday. So enjoy and have a good day.


Thank you. This does conclude your conference call for today. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!