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Thoratec (NASDAQ:THOR)

Q1 2014 Earnings Call

May 06, 2014 4:30 pm ET

Executives

Neil Meyer -

Gerhard F. Burbach - Chief Executive Officer, President and Executive Director

Taylor C. Harris - Chief Financial Officer, Principal Accounting Officer and Vice President

Analysts

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Matthew Taylor - Barclays Capital, Research Division

Suraj Kalia - Northland Capital Markets, Research Division

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Kaila Krum

Jason R. Mills - Canaccord Genuity, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Danielle Antalffy - Leerink Swann LLC, Research Division

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Matthew J. Keeler - Crédit Suisse AG, Research Division

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Operator

Good day, and welcome to the Thoratec Corporation Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Neil Meyer, Director of Investor Relations. Please go ahead, sir.

Neil Meyer

Good afternoon, and thank you for joining us today. With me is Gary Burbach, President and Chief Executive Officer; and Taylor Harris, Vice President and Chief Financial Officer. Gary will discuss highlights from the first quarter of 2014, and Taylor will review the financial results for the quarter, as well as our 2014 outlook. We will then open the call to your questions.

Before turning the call over to Gary, I want to remind you that during the course of today's conference call and the question-and-answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor provisions of the securities laws regarding future events or the financial performance of the company. We caution you that these statements are only predictions and that actual results may differ materially. We also alert you to the risks contained in our documents we filed with the Securities and Exchange Commission, such as our annual and quarterly reports on Forms 10-K and 10-Q. We do not undertake any obligation to update or correct any forward-looking statements. Gary?

Gerhard F. Burbach

Thank you, Neil, and good afternoon. Thoratec's results for the first quarter of 2014 demonstrated continued growth despite known headwinds that we expected would impact the first half of 2014. We continue to make operational and financial progress during the quarter with continued growth in HeartMate II and exceptional growth in our CentriMag acute product line.

And I'm particularly excited by the potential for our new products, HeartMate III and HeartMate PHP, to advance the field and drive further market expansion. With respect to our financial results for the first quarter, Thoratec generated revenues of $125.7 million, a 7% increase over revenues of $117.7 million in the first quarter of 2013. HeartMate II revenues also increased 7% year-over-year, while CentriMag reported strong growth of 25%, and PVAD revenue declined $1.5 million compared with the prior year.

In terms of geographic breakdown, we reported revenues of $95.6 million in the United States, an increase of 4% compared with the prior year. Meanwhile, international revenues increased 19% to $30.1 million compared with $25.4 million last year. Changes in foreign currency positively impacted total revenue growth by 50 basis points compared with the first quarter of 2013.

Earnings per share on a non-GAAP basis were $0.41, consistent with the first quarter of 2013. Taylor will discuss the first quarter results and our 2014 guidance further in his financial review.

During the first quarter, we shipped 964 HeartMate II pumps, an increase of 8% compared with the first quarter of 2013. International pump growth of 28% benefited from a larger than anticipated distributor order in Japan. We estimate that international unit volume increased approximately 9% compared with the prior year, excluding the unexpected stocking in Japan during the quarter. We have historically seen order patterns vary over time throughout all of our distributor markets, and our Japanese distributor ordered units to satisfy demand in future periods. As a result, the possibility exists that we will realize no sales of HeartMate II units in Japan during the second quarter of 2014 as implant volume is satisfied by units purchased earlier in the year. HeartMate II units in the U.S. increased by 2% compared with the prior year. We believe U.S. growth in the quarter was constrained by the high-profile concerns over adverse events in the media and medical journals, which we discussed in our last earnings call and incorporated into our 2014 guidance.

As a reminder, we recently disclosed, that beginning in the current period, we no longer include PVAD sales in our quarterly pump unit numbers, which now reflect only HeartMate products. PVAD unit volume continued to decline during the first quarter as use of this product has become limited primarily to BiVAD applications.

While we will not be discussing specific PVAD volumes going forward, Thoratec remains committed to supporting the product for patients in need of this specific lifesaving therapy.

Revenues for our CentriMag acute product line were $13 million during the first quarter, an increase of 25% compared with the prior year. Strong worldwide pump unit growth of CentriMag and PediMag drove our results, with particularly strong demand in the United States supported by double-digit unit growth in Europe as well. Growth was particularly strong within our top accounts and transplant centers where we are seeing greater adoption of the technology, along with an increase in CentriMag equipment revenue throughout our customer base. We also continue to increase the number of centers using CentriMag, and our worldwide customer base now includes over 550 hospitals.

I'd now like to turn to a discussion of operational developments during the quarter, including our ongoing efforts to expand the market and an assessment of recent clinical developments. In terms of center development, we continue to open new implanting sites and added 7 centers internationally during the first quarter. This includes 4 new centers in Japan, bringing our current total in this market to 18 centers. While we did not open any new centers in the U.S. during the first quarter, 3 additional centers received joint commission certification for Destination Therapy.

We're pleased with continued progress on this front as 131 of our 175 centers in the U.S. have now achieved Designation Therapy certification. We continue to expect solid new center growth, both in the U.S. and internationally, throughout the remainder of 2014, as well as additional progress with centers in the U.S. continuing to work toward DT certification. More importantly, our team is focused on opening the highest-quality centers. We've seen increased success in recent years with new centers that are able to sustain prolonged success and can mature in the established LVAD programs with meaningful implant volume over time.

On the topic of reimbursement, we continue to believe the Medicare national coverage decision that went into effect in late 2013 has not had a pervasive impact on the market as a whole. However, the NCD does appear to be having some modest effects on designation of implants as DT versus BTT in the U.S. We do not believe this modest shift has impacted market growth, and has likely had a very limited impact on market share for a more notable change continues to depend on broad private payer adoption.

Additionally, we believe the NCD has had an unanticipated negative impact on open-heart or non-transplant centers during the first several months of adoption as a subset of these centers saw a disruption arising from implementation of required approvals from a transplant facility.

While not universal across the spectrum of centers, we believe that it did negatively impact results within the OHC group during the first quarter. We are actively working with our OHCs to ensure proper education about implications of the NCD, along with providing assistance to appropriately structure productive relationships with transplant partners.

We expect our efforts will adequately address this issue over time, among a cohort of our OHCs, and continue to remain very optimistic about the growth profile of this category of centers. We continue to be very active with our market development initiatives during the first quarter, and believe these investments will support ongoing growth of the therapy through improved referral patterns that should increase LVAD penetration over time.

In addition to our consistent efforts in the field to work with community cardiologists, we held several notable events to advance market awareness. These include our first-ever OHC summit attended by 24 customers from open-heart centers, and focused primarily on improving productivity in order to allow for increased populations of patients on support at these nontransparent facilities.

We believe these customers which typically use HeartMate II exclusively, represent a significant growth opportunity going forward. And we have multiple efforts to actively engage this group of centers.

We held another successful advanced heart failure therapy forum, attended by over 150 clinical professionals that are potential referrers for LVAD therapy, as well as events for implant center clinicians, including our second emerging thought leaders forum, which was attended by 13 emerging leaders in the field. In addition, we now have 92 shared care sites after adding 8 new sites during the first quarter. And we continue to see building enthusiasm for adoption of this model.

More recently, we hosted our thoratec mechanical circulatory support conference over the past weekend. This event gathered approximately 350 HeartMate II clinicians from around the globe in a productive meeting designed to advance the therapy. Health centers realize their full potential and address current clinical issues through effective peer-to-peer interaction. While feedback from this event is still early, we're optimistic that overall enthusiasm and clinical engagement remains high, which supports our expectation of continued growth in our end market. However, despite the breadth of our ongoing market development initiatives and efforts to partner with implant centers and referrers, we believe an increased focused on thrombus, following the New England Journal of Medicine article and subsequent media attention beginning in late 2013, did impact our results during the first quarter. While difficult to measure precisely, we believe this impact is most pronounced in a smaller number of large implant centers, although there also has been a broader impact on referrals.

Our outlook for 2014 contemplated that some softness would persist throughout the first half of this year, and we remain optimistic that this impact will be temporary in nature and will abate in the second half. We believe our ongoing efforts to work directly with the implanting centers are bearing fruit, and we also remain engaged with a more diverse referral network in order to address remaining concerns over the coming months. Moreover, while the first quarter was the easiest comparison of the year for market growth, we believe a double-digit increase in the overall market during the quarter, despite a very high-profile concern, is evidence of the critical role of LVAD therapy and effectiveness of our market development activities.

The issue of thrombus remains a multifaceted adverse event with many contributing factors, and we believe that our internal initiatives, combined with more recently released clinical data, present a balanced view of the issue that will continue to advance the therapy. Most significantly, the annual ISHLT meeting in April included a number of presentations on improving adverse events with LVADs, and addressing clinical best practices that could prevent complications such as thrombus.

During the meeting, a consortium of 7 medium and high-volume centers presented pool data covering 530 HeartMate II patients with a documented rate of pump exchanges for suspected thrombus at 6 months of only 2.5%. This is materially better than both the broader rates reported by INTERMACS and the unusually high rate cited by centers in the New England Journal of Medicine article, and demonstrates the potential for excellent results with HeartMate II.

In another session at ISHLT, one of Thoratec's scientists presented findings from our comprehensive internal database, covering over 17,000 pumps, showing that while thrombosis rates with HeartMate II did increase beginning in 2011, as suggested by INTERMACS, the rates have stabilized since 2012. Moreover, this data showed no difference in thrombosis rates between the sealed and unsealed vascular grafts with HeartMate II.

In addition, on April 10, the New England Journal of Medicine published multiple responses from clinicians to the Cleveland Clinic article focused on thrombus. We're pleased that multiple highly regarded surgeons submitted responses in strong support of HeartMate II, providing the broader clinical community a view of the vital life-saving benefits this device provides.

While we do not expect the supportive data and enthusiasm for the therapy generated at ISHLT will immediately address all concerns about thrombus in the clinical community, we believe the event was an important step in moving forward with our process of highlighting the tremendous positive benefits of HeartMate II, while ensuring confidence in LVAD therapy more broadly.

On this front, I would highlight the ISHLT meeting also included positive data on another noteworthy aspects of HeartMate II beyond a concentration on thrombus. The SSI and RESIST studies documented material reductions in driveline infection rates, an area where we continue to see significantly improved outcomes. In addition, preliminary results from both the U.S. and European cohorts of our TRACE study demonstrated the potential for favorable outcomes with reduced anti-coagulation regimens within a subset of the broader HeartMate II patient population.

Collectively, results from these studies continue to advance the depth of supportive data and are important examples underscoring how the overall clinical experience with HeartMate II continues to improve, including reductions in bleeding, stroke and driveline infection while also seeing an improvement in survival during the commercial era.

Turning to the product pipeline, we're very excited that European clinical trials for both HeartMate III and HeartMate PHP will begin in the near future, and feedback from clinicians suggest a high level of enthusiasm for each device.

We continued to make progress on HeartMate III during the first quarter as we near our first-in-man implant and start of the CE Mark trial, which will begin in the coming weeks.

Verification and validation testing required to start the clinical trial was successfully completed in the first quarter. We have submitted regulatory filings to begin the HeartMate III study in major European geographies, and we are currently responding to final questions that will include the regulatory process and allow us to initiate enrollment in all target EU countries.

As a reminder, this will be a 50-patient trial, and we continue to expect that HeartMate III remains on schedule to receive CE Mark approval during 2015. In the U.S., we've submitted final protocol design to FDA regarding our planned single-cohort trial, following productive sessions with both the FDA and CMS. And we continue to expect the U.S. HeartMate III trial will begin later in 2014.

With regard to HeartMate PHP, our acute percutaneous support system, we remain on track to initiate 2 clinical studies in 2014. The first, a CE Mark approval study, will examine the use of PHP to provide prophylactic support of patients undergoing a high-risk PCI procedure. Capital units have been manufactured and are available for use in this trial. Our final software verification testing on the console unit has taken longer than expected and will delay the start of our CE Mark trial. And we now expect to begin enrollment in this study within the next few months, immediately following completion of the final console testing process.

The second study, an IDE trial to begin late in 2014, will examine urgent, multi-day PHP support in patients suffering from cardiogenic shock. We'll submit the IDE mid-year after receiving final feedback from FDA on protocol design.

Thoratec continues to believe that HeartMate PHP will offer clinicians a breakthrough technology for treating patients requiring acute hemodynamic support. In particular, our testing demonstrates the potential for substantial performance improvements over currently available acute support technologies, and the ability to better address clinical needs for patients requiring short-term cardiac assistance.

In closing, we continue to drive forward with our strategic objectives for 2014, including continued growth of HeartMate II, further expansion of the CentriMag product line, and significant clinical progress with HeartMate III and HeartMate PHP. We're pleased with continued growth of the therapy overall despite the visible recent focus on pump thrombosis and adverse events. I'm very proud of our team across the organization who has risen to address recent challenges, and believe the effectiveness of our efforts to partner with clinicians throughout the field will further demonstrate the value of Thoratec's support and infrastructure, while ultimately leading to even stronger relationships with our customer base.

The totality of data demonstrating the benefits of HeartMate II is overwhelmingly positive. The longer-term fundamentals of our market remain very attractive, including an underpenetrated patient population and ability to continue expanding LVAD therapy on a worldwide basis. Moreover, we look forward to advancing the field as the industry leader in mechanical circulatory support through both ongoing evolution of the HeartMate II platform and introduction of new innovative technology in the HeartMate III and HeartMate PHP.

I will now turn the call over to Taylor to review our financial results and 2014 guidance. Taylor?

Taylor C. Harris

Thank you, Gary. Before reviewing our results, I want to remind you that non-GAAP net income excludes the tax affected impact of amortization of intangible assets, share-based compensation expense and acquisition-related expenses, including transaction costs, inventory fair market adjustments and contingent consideration adjustments. You can find a reconciliation between our GAAP and non-GAAP results in our earnings press release at www.thoratec.com.

Revenues for the first quarter of 2014 were $125.7 million compared to revenues of $117.7 million in the first quarter of 2013. Revenue benefited from strong CentriMag performance, as well as the large Japanese distributor order for HeartMate II. Non-GAAP gross margin for the quarter was 69.5% compared with 72.1% in the first quarter of 2013. Non-GAAP gross margin declined compared with the prior year primarily due to inventory related charges and timing of manufacturing variances. We continue to expect gross margin for the full year 2014 of approximately 71%, and as we discussed on our fourth quarter earnings call, we anticipate that the year-over-year gross margin improvement will be weighted towards the second half of this year.

Non-GAAP operating expenses for the first quarter were $52.3 million, a decline of 1% from $52.8 million in the first quarter a year ago. The decline is largely timing-related as we still expect operating expenses will ramp with ongoing investments, particularly as we enter clinical trials with HeartMate III and PHP.

On a non-GAAP basis, the company's effective tax rate for the first quarter was 32.8% compared with 27.9% in the previous year. The variability relates primarily to the timing of tax credit recognition, and we continue to expect our tax rate will be approximately 32% for the full year in 2014. Our 2014 guidance assumes that continuation of the federal R&D tax credits will benefit the full-year rate by approximately 100 basis points. And we expect to recognize this favorability following legislation later in the year.

Non-GAAP earnings per diluted share in the first quarter were $0.41, unchanged compared with the prior year. Weighted average diluted shares outstanding for the quarter were 57.7 million, down from 58.5 million in the prior year due to share repurchase activity over the past 12 months. Our balance sheet remains well capitalized with $299 million of cash and investments at the end of the first quarter. As a reminder, our primary focus with respect to capital allocation remains on preserving flexibility for strategic investments. But we also will continue to assess share repurchases in a disciplined and opportunistic manner. And to that end, we repurchased $13.5 million of stock during the first quarter. We are reiterating 2014 financial guidance for revenues in the range of $520 million to $535 million, and non-GAAP earnings per diluted share of $1.72 to $1.82, with both revenue and EPS growth weighted towards the second half of the year.

Other elements of our guidance also remain unchanged, including non-GAAP gross margin of approximately 71% and a tax rate of 32%. With respect to key underlying assumptions, market growth, particularly outside of the U.S., exceeded our expectations during the quarter, while our market share trended unfavorably. However, as we have noted historically, the business is inherently lumpy on a quarter-to-quarter basis, and our guidance continues to incorporate a range of outcomes for both of these variables.

Looking forward, I believe Thoratec remains financially strong and well-positioned to capitalize on growth opportunities and to realize the potential of our exciting pipeline products. Despite near-term headwinds, we remain focused on achieving our targets as we continue to drive penetration of MCS therapy on a worldwide basis.

Thank you, again, for joining us today. And we'll now open the call to your questions. [Operator Instructions] Operator, we're now ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Larry Biegelsen with Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

I wanted to just start with the OUS market. So, Gary, just do I have the math right, there's about 40 stocking units in Japan?

Gerhard F. Burbach

Approximately.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

And so -- the growth outside the U.S. was strong as you mentioned, but you can you talk about your share? I mean, excluding -- outside of Japan, your share was about 35%, and plus or minus a few percentage points. But your share has trended down over the past few quarters. Can you talk about what's driving that, number one, and what turns that around?

Gerhard F. Burbach

Yes. So there hasn't been a consistent pattern if you look at the last few quarters. But if you look at Q1 particularly, you're correct that there was -- we did lose some share. The most significant factors OUS, in that regard, were thrombus, particularly in the core markets,. And then secondly, the distributor markets, which have a fair amount of volatility in terms of their order patterns and kind of can swing share in some substantive ways on a quarter-to-quarter basis. So those are the 2 most significant factors that impacted share in the first quarter versus if we look at the second half of last year.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

And what do you think drives the patterns -- well, a reversal of the trend in your view?

Gerhard F. Burbach

Yes. On the distributor front, that tends to be a lumpy kind of a dynamic. So we've seen that go with ups and downs, depending on which distributors are ordering in particular quarters. So we don't believe there is a fundamental shift in terms of those distributor markets if we look at the first quarter versus the second half of last year. So we feel good about the potential for that rebound as we look at the coming quarters just based on kind of patterns that we've seen historically. In terms of thrombus, there, it's obviously, really, our effort to drive the education of the market, the understanding of -- put that into the appropriate context, including the range of clinical outcomes. And that's really true of not just Europe, but that's also true in the United States. If we look at the U.S., we think that thrombus was a factor in terms of share in the U.S. So that's definitely a very significant focus for us here as we continue forward. We expected thrombus to create some headwind here in the first half of the year. So that's certainly not unexpected that we were going to be heavily focused on thrombus.

Operator

We'll go next to Matt Taylor from Barclays.

Matthew Taylor - Barclays Capital, Research Division

I guess, my first question was just if you could help us quantify what you think the impact was from thrombus by geography or just on your overall results. And can you speak to whether you thought it was more or less than when you told us, coming into the year, there was going to be some pressure on the first half?

Gerhard F. Burbach

Yes. So thrombus, I think, had an impact both on market growth more in the U.S., because I don't think we really saw a growth impact outside the U.S. But I think that was relatively modest. I mentioned it was concentrated in a smaller number of larger centers, with some broader base of referral dynamics. So there was an impact there in terms of market growth, but I'd describe it as relatively modest. And then similarly, with market share, we believe, as I mentioned, that both in the U.S. and outside the U.S., in Europe in particular, in our core direct markets, that we saw some impact in terms of some market share loss. And really, that looks like the kind of primary driver of market share loss outside of kind of the 2 other factors. Outside the U.S., there's distributor volatility that I mentioned, in the U.S., of course, the DT trial, which -- those numbers are known and you can pull those out. So if you look at, kind of the share dynamics in the U.S., predominantly really that DT trial enrollment acceleration in Q1, and then the impact of thrombus.

Matthew Taylor - Barclays Capital, Research Division

And just to follow up, was there growth in the Japanese market, excluding the stocking order? Can you speak to underlying trends?

Gerhard F. Burbach

Yes. We didn't see growth outside of the stocking, so that's definitely an area of focus for us to continue to drive the process of enrolling centers, but more importantly, driving the process of education, developing the referral channels, which really haven't existed historically in Japan. We've recognized that it's going to be a multiyear kind of an effort, including moving towards Destination Therapy approval, to really realize the significant potential in that market. So right now, that continues to be a core thrust to achieve sustainable growth in that market.

Operator

We'll take the next question from Suraj Kalia with Northland Securities.

Suraj Kalia - Northland Capital Markets, Research Division

So, Gary, going back in 2012 and 2013, one of your primary competitors around this time, plus or minus, did see a huge step change in OUS units. And I'm curious, are there -- specifically in this quarter, were there any new geographies in Europe, specifically, that were missed by Thoratec that could have been as a result of distributors stocking primarily by one of your competitors?

Gerhard F. Burbach

So we think there is at least one new geography where there was a stocking order.

Suraj Kalia - Northland Capital Markets, Research Division

Fair -- and this was a new country that Thoratec hasn't been there before?

Gerhard F. Burbach

That's right. So that's a country that we're going to have to play some catch-up. We're certainly focused on making that happen.

Suraj Kalia - Northland Capital Markets, Research Division

Fair enough. And one last question, Gary, and I'll get back in queue. Just looking over the past few years, Gary. I mean, for HeartMate II, specifically, as far as I can recollect, this thrombosis issue is really the first event that has been published and has gotten negative press. And we are seeing a pretty -- or at least by the numbers, it seems like a pretty dramatic impact in terms of market share in Europe and in growth curve in the U.S. Gary, what is different, specifically related to your primary competitor where we see a constant drumbeat of higher adverse events, delayed approvals, new trials? What is the messaging or what are we missing in this picture that you all have seen such an impact? Or do you think this is just transient and moving Q2, Q3 forward, things will normalize?

Gerhard F. Burbach

Sure. Yes, I think I really can only answer the latter part of your question. So we do believe that this is a manageable issue, that there has been an impact in the short term. We were expecting some impact just given the reaction that occurred after the article came out. Certainly, I think some of the impact being more significant is how profile it was. That it was a publication in the New England Journal, which is kind of at the very high end of the medical literature, and picked up by the New York Times and other high-profile media. So it got a tremendous amount of attention in that regard. So I think that distinguished it a bit and increases the difficulty of working through the process of recalibrating the clinical community. So it's something that we are highly focused on, and we do continue to believe that as we work through the course of the year, that we'll be able to moderate that impact.

Operator

We'll move next to Chris Pasquale with JPMorgan.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

I just want to start, certainly, back on Japan. What were the total Japanese unit sales this quarter? It sounds like there was some volume on top of the 40-unit bolus.

Gerhard F. Burbach

Yes. We'd mentioned, Chris, that we weren't going to break out Japan specifically. No, we don't provide country-by-country counts.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. Fair enough. So peripheral sales grew significantly faster than pump revenues again this quarter. It's 4 or 5 quarters in a row that, that's been the case. Do you think that will continue over the balance of the year or does that have to reverse as we start to lap the comparisons from the GoGear launch?

Gerhard F. Burbach

Yes. So it's not GoGear, this is the Pocket Controller. But we would expect that to moderate, Chris.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. And just one last one. Now that you've submitted the final protocol for the HeartMate III IDE study, can you just comment a little bit on that trial design, is it still your plan to evaluate a single cohort at different time points to support both indications? And I think I heard you say it was going to be a single arm study. So what will the results be compared against? Is it just going to be an INTERMACS comparator or a performance criteria?

Gerhard F. Burbach

Yes. So it's not a single arm study, it's a randomized study, the HeartMate III versus the HeartMate II. And it is a single enrollment criteria in terms of inclusion, exclusion criteria. So patients will be enrolled and would be followed to 2 different endpoint timings to achieve a short-term approval, as well as a long-term approval.

Operator

Our next question comes from David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

I wanted just to start with the revenue progression as you think about it for the balance of the year. Gary, in your prepared remarks, you did talk about comparisons getting more difficult in the balance of the year. Could you maybe just give us some very specific signpost that you're seeing or conversations you're having as to why you're so confident that, that acceleration can play out given the trends you've now seen in the first quarter?

Gerhard F. Burbach

Yes. I mean, it's -- certainly, our expectation from the outset of the year was that the year was going to skew towards the second half based really on 2 factors. One is kind of the thrombus overhang that we knew was going to, or we expected was going to impact the first half of the year, and that we'd be able to work through that, kind of regain increasing confidence in the clinical community, both implanting and referring, and kind of drive a positive impact, both in terms of growth and share, in that regard, as we work through the year. The other factor is that it is a 53-week year. And so that extra week falls into Q4 this year. So that's a significant additional element of revenue, of course, in that fourth quarter. And in terms of progress on kind of that first piece around thrombus, certainly, we're encouraged by what we're hearing, particularly from the implanting center community, which is the group that we have most direct access and highest level of interaction with, including, most significantly, here this last weekend, as I mentioned, we had 350 clinicians from around the world, predominantly U.S.-based, together, for a conference. And we did have a session that was focused on thrombus. And I've say that, that was very well-received, very good feedback. So I felt like that was a very strong step forward in that regard.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay. And then maybe just a follow-up on the capital deployment discussion, which, Taylor, I know you touched on in your remarks. I guess I'm struggling a little bit with the message that you're trying to send versus the actions you're taking with your cash balance. Clearly, the past year or so has been challenging for the company as you digest a new competitor in the U.S. and there, the thrombus issue arose later in the year. I guess, I don't understand why you're not being a lot more aggressive with deploying capital to shareholder returns, given that you're asking people to wait and be patient here for things to turn around.

Taylor C. Harris

Sure, David. Well, I would say that we have returned a fair amount of capital over the last couple of years. We're on pace just based on what we did in the first quarter, on pace for approximately $50 million of share repurchase during 2014, which represents a pretty good portion of our free cash flow. So we are trying to go about that in a disciplined manner, as I said. But to your point, we do have dry powder. Our #1 priority remains strategic activity. And so we want to be ready for that if there are opportunities. In the absence of larger opportunities, though, we do have the flexibility to be opportunistic.

Operator

We'll take the next question from Matt O'Brien with William Blair.

Kaila Krum

It's Kaila in for Matt. Just a couple of quick ones for you. Can you just touch a bit on the increased number of thoracotomies that we've been seeing in the U.S.? And just whether or not you believe that this dynamic could potentially impact your growth over the next several quarters?

Gerhard F. Burbach

Yes. What date are you referencing, specifically?

Kaila Krum

As far as the thoracotomies?

Gerhard F. Burbach

Yes. You mentioned the increased rate...

Kaila Krum

So, I guess, we've been hearing it from our competitors, just the number of thoracotomies that are being done.

Gerhard F. Burbach

Yes. I thought their last report actually had it kind of not up significantly. So I think there is some modest increase there, not a substantive impact. We have actually had some good progress at a number of the more, the kind of, I'd say, the leading centers in terms of those kinds of less invasive procedures in terms of taking on those kind of procedures with the HeartMate II, as well as with the HVAD. So we've seen that at Hannover, in Vienna, over in Europe, as well as a couple of centers here in the United States. So I think that, that opportunity isn't exclusive to the competition, it certainly was kind of pursued first there. But I think it's something that as there are physicians [indiscernible] that's obviously an off-label usage of the product. So it's certainly not something that we're going to be out there promoting. But as physicians are kind of exploring that possibility, I think it's increasingly optimistic that, that's not going to be something that's exclusive to the competition.

Kaila Krum

Okay. Great. And then with respect to Japan, can you just give us a sense for what your guidance implies in terms of what you're expecting from that region, despite the lumpiness that might occur in the next couple of quarters?

Taylor C. Harris

Sure, Kaila, this is Taylor. So we haven't really changed our outlook since the beginning of the year for Japan for the entirety of 2014. And as you'll recall, as we progressed through 2013, we noted that we were at a run rate of approximately 100 implants per year. So we haven't changed our outlook on a full-year basis, but we did note that we pulled some -- or not we, but our Japanese distributor, just given the decision to stock during the first quarter, put some revenue into the first quarter that will come at the expense of the second quarter. So that quarterly phasing has changed likely that we won't have our next order until the third quarter.

Operator

The next question comes from Jason Mills with Canaccord Genuity.

Jason R. Mills - Canaccord Genuity, Research Division

Gary, sorry if I missed it, but outside the U.S., excluding Japan, because we've passed over it quite a little bit, in Europe, I was wondering if you could give us a sense for what, in total, your unit growth was in everywhere in the world except for Japan and U.S.

Gerhard F. Burbach

Yes. In Europe, our HeartMate II unit growth was about 7%.

Jason R. Mills - Canaccord Genuity, Research Division

Okay. And total unit growth, was it positive as well? Can you at least help me out with that part?

Gerhard F. Burbach

What do you mean by total unit growth?

Jason R. Mills - Canaccord Genuity, Research Division

Well, I know that you're not focusing on PVAD and IVAD anymore, but unfortunately, our models still include them. So as we transition to just looking at HeartMate II, it'd be helpful just to kind of give a sense for total unit, if you are, in fact, selling PVAD/IVAD on a limited basis OUS.

Gerhard F. Burbach

Yes. We are still selling it. We indicated specifically that we're not reporting those numbers anymore. But they really are de minimus, Jason. I mean, the numbers are very small. They really should not be material in your model.

Jason R. Mills - Canaccord Genuity, Research Division

And just going back to Kaila's question, to your point, Gary, there isn't any, at least we haven't seen any published data with respect to how many thoracotomies are being done, but anecdotally, we certainly hear a lot about it. So could you just help us with your thoughts on sort of over the next couple of years, as HeartMate III becomes part of the product portfolio and not just the pipeline, you've talked in the past about its ability to be done perhaps a bit easier with a thoracotomy. Just generally speaking, how you're viewing thoracotomy, and I guess, other less invasive procedures to implant these devices, how that might contribute to the market, both in the U.S. and outside the U.S., in general?

Gerhard F. Burbach

Yes. No, that's an important question. And as you look at that little kind of more mid-term to longer-term time horizon, I think it will become an important growth enabler. And certainly, as we look at the HeartMate III clinical process, initially, we'll be entering trial with a more traditional sternotomy approach. But my expectation is that we will also then conduct some trial work to prove out a less invasive procedure also with the development of tools to enhance the ability to do that in a very consistent and repeatable and clinically effective manner. So I think those things have to happen. Where there is strong clinical data, there's consistency, repeatability to achieve a real significant growth driver. But that possibility is there, and certainly, our expectation is to achieve that with the HeartMate III.

Operator

And the next question comes from Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Gary, just clarifying things on the Japan, or Taylor. Does the 40 unit stocking number that we're talking about, is that all bolus or was that normally -- would a normal cadence have been 20 in Q1, 20 in Q2, or is it all a bolus in Q1?

Gerhard F. Burbach

Yes. The 40 was the bolus. And the reason for that is that there was a tax increase that was going into effect in Japan that was going to impact them after the end of the first quarter. So that's why our distributor decided to place that additional order ahead of that tax increase.

Brooks E. West - Piper Jaffray Companies, Research Division

Got it. And just so we're all on the same page, can you give us average distributor ASPs in that region?

Gerhard F. Burbach

Yes. So it's similar to our U.S. direct to customer ASPs.

Brooks E. West - Piper Jaffray Companies, Research Division

Okay. Okay. And then you had talked about an impact from the NCD on open-heart centers. Can you give us a little bit more detail just around the potential revenue impact there and how we might think about that progressing through the year?

Gerhard F. Burbach

Yes. So I don't think it's a real significant revenue impact. And our best guestimate is that it roughly offset the positive impact that we saw from some migration towards Destination Therapy. So in the first quarter, it seems like the NCD was roughly a kind of wash between these 2 factors. And we did see in Q1 that, that group -- we used to report on Group 1, Group 2, Group 3, with Group 3 being these newer centers, predominantly open-heart centers, which have, over the last few years, been our strongest growing segment of customers within the U.S. That group was actually down in Q1 versus a year ago. And we think that definitely, this NCD was a substantial factor in that regard. It really revolves around with the -- when they have a bridge patient, they need to get an approval from a transplant center and a certification from the transplant center that they will transplant that patient. And that transplant center now is, they have to put them onto the UNOS registry. And so that's raised the bar in terms of how rigorously some of the transplant centers are looking at those patients, increasing some of the challenges of that dynamic between the open-heart center and the transplant center. So we're focused on working through that with some of these open-heart centers and their transplant center partners to try to obviate. And we think we will be able to obviate that issue, which looks like -- we've talked to a sampling of these customers that maybe a third or so of them are being impacted by that.

Operator

We'll move next to Danielle Antalffy with Leerink Partners.

Danielle Antalffy - Leerink Swann LLC, Research Division

Just a follow-up on the prior questions about the back-end loaded growth acceleration. Can you talk about, as it relates to the thrombus issue, is it -- Gary, you just gave great color on the NCD issue and the number of centers you think it might be impacting. Can you give that type of color as far as the thrombus issue? Is it limited to a specific few centers that you guys can target and go after, and help to reeducate or retrain or whatever is required? Any color there?

Gerhard F. Burbach

Yes. So I'd say there is 2 separate dynamics there. One is around share and one is around growth. Relative to share, that's a pretty focused set of customers. On the growth side, I'd say it's more diffuse. Because there, you have the referral channel that's involved. So there -- kind of a bit of 2 different kind of dynamics. I mean, it revolves around the same concern, but in the one case, it's much more focused when you look at share. And so I think that's more easily -- kind of easier to get our arms around, kind of get focused up against. In terms of the growth, we are very optimistic about being able to impact that, but it is a more broad spread effort, not only our territory managers, but also the MDMs. We have over 40 of those folks in the field that are addressing the referring physician community, are very much focused on that aspect of things.

Danielle Antalffy - Leerink Swann LLC, Research Division

Okay, that's helpful. And then I was hoping you could maybe comment, just following up on that point. Sort of what -- if you could give any color on what the split is between growth and share as far as the impact of the thrombus issue, and where you see it impacting you the most, I guess. Because -- I ask this question because your competitor put up relatively strong growth numbers. And so, just curious on what the moving parts are for you guys.

Gerhard F. Burbach

Yes. I think that the impact on share is probably a bit more acute. And so that will have, I think, the greater part of our attention here in the near-term to focus up on that smaller universe of centers that we've seen a share impact, and kind of work them through their concerns.

Operator

We'll move next to Jayson Bedford with Raymond James.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Just on the thrombus issue. I don't mean to beat this horse here, but pinpointing who was impacted, did you see an impact on the number of referrals, which would suggest that kind of the referring cardiologist is more concerned with the thrombus issue than the surgeon?

Gerhard F. Burbach

Yes. We did see some impact on referrals. So as I mentioned, I'd say that with the -- on the -- there were some surgeons, some implanting centers, where there is a higher level of concern. And that's where we have some work to do in terms of recapturing share. In terms of the referring community, that is a little broader-based. So again, it's not universal, but it certainly is a broader base that we have to tackle when you look at that referring community side of it.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Okay. And in those centers, the few that you mentioned that have pulled back here, have you seen them come back here in the second quarter?

Gerhard F. Burbach

Well, yes -- I mean, we're not obviously going to comment on the second quarter. As I mentioned, we did have our -- this users' conference where we had 350 physicians. We had a significant focus on thrombus during the course of that meeting. And I was certainly encouraged by much of the feedback that we got, including physicians from a number of those centers.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Okay. Just last one. Can you mention the DT as a percent of the HeartMate II implants in the quarter?

Gerhard F. Burbach

DT?

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Yes.

Gerhard F. Burbach

Yes, DT was over 60%.

Operator

Our next question comes from Bruce Nudell with Crédit Suisse.

Matthew J. Keeler - Crédit Suisse AG, Research Division

This is Matt on for Bruce. You mentioned that distributor patterns might have affected growth in Europe in the quarter. I just wondered if you could quantify that at all.

Gerhard F. Burbach

Yes. I mean, I don't have a specific quantification, but I'd say it was kind of a few share points if you look at Q1 versus the second half of 2013.

Matthew J. Keeler - Crédit Suisse AG, Research Division

Okay, that's helpful. And then could you just remind us, has anything changed with respect to your expectations for U.S., and x U.S., x Japan market growth?

Gerhard F. Burbach

Well, for certainly, we saw Q1 OUS was substantially stronger than our projection for the year. We're not expecting to see that level of growth continue through the balance of the year. But we do expect to see continued strong double-digit growth o U.S., double-digit growth in the U.S., but priced slightly higher growth outside the U.S. than in the U.S.

Operator

And we'll go to Steven Lichtman with Oppenheimer next.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Just putting the U.S. discussion into context, you had assumed some impact, obviously, here in the first half, and talked about a dampening of the market growth potentially in the first half. It seems based upon the numbers that things came in a little bit better. Would you say overall, looks like relative to referrals in overall market, a little bit more resilient than maybe you had expected? And if so, what gives the confidence that, that can continue as you guys go into the field and discuss with the broader universe of referring doctors throughout the year?

Gerhard F. Burbach

Yes. No, I think you're exactly right, that it was a bit more resilient. The growth was a bit stronger than we'd anticipated. We did have a little more share impact that we anticipated. So that was an offsetting factor. So we certainly feel good, given that the thrombosis was front and center kind of from the beginning of the year about maintaining kind of growth momentum. As I mentioned, OUS, we're not expecting to see the level of growth that occurred in the first quarter. We think there were some unusual factors. Certainly in Japan, we had that stocking order that you have to pull out that will have a negative impact on Q2. We think there was some distributor potentially unique activities in Q1 that won't be repeated necessarily. So there'll be some moderating, I think, internationally. But certainly, we expect to see that growth continue strongly. There aren't other factors that we see that are kind of going to be negative drivers, and we think that the thrombus dynamic becomes a less and less significant factor as we work through the year, both in terms of governing market growth and also, for us, importantly, on the market share front.

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

And then secondly, Gary, looks like you're on track here with HeartMate III in Europe. I forgot how many centers the 50 patients are going to be done in, but to what extent can that have a sort of overarching impact potentially in those regions on your business overall, now that you're starting a trial in those centers in Europe?

Gerhard F. Burbach

Yes, it's in about 8 centers. And we certainly believe there is a positive impact there in terms of our engagement with those centers. They're focused on Thoratec as an important partner. It gives us a reason to spend a lot of time in those centers. So I think there is a potential for some positive spillover effect to the existing commercial activities with HeartMate II, as well as with CentriMag for that matter.

Operator

And it appears we have no further questions at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

Gerhard F. Burbach

Okay. Thank you very much. We'd just like to thank everyone for your time today, and we'll look forward to keeping you updated.

Operator

That concludes today's presentation. Thank you for your participation.

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