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Executives

Roxanne Oulman - Interim Chief Financial Officer and Vice President of Finance

Gary Burbach - Chief Executive Officer, President and Executive Director

Taylor Harris -

Analysts

Duane Nash - Wedbush Securities Inc.

Jason Mills - Canaccord Genuity

Robert Hopkins

Jayson Bedford - Raymond James & Associates, Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

Suraj Kalia - Rodman & Renshaw, LLC

Frederick Wise - Leerink Swann LLC

Thomas Gunderson - Piper Jaffray Companies

Bruce Nudell - Crédit Suisse AG

Rajeev Jashnani - UBS Investment Bank

Spencer Nam - Madison Williams and Company LLC

Christopher Pasquale - JP Morgan Chase & Co

Steven Lichtman - Oppenheimer & Co. Inc.

Thoratec (THOR) Q2 2011 Earnings Call August 3, 2011 4:30 PM ET

Operator

Good day and welcome to the Thoratec Corporation's Second Quarter 2011 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Taylor Harris, Senior Director, Investor Relations and Business Development. Please go ahead.

Taylor Harris

Thanks, Melissa. Good afternoon and thank you for joining us today. With me are Gary Burbach, President and Chief Executive Officer; and Roxanne Oulman, the company's interim Chief Financial Officer. Gary will discuss key events since our last call, including the acquisition of the Medical business of Levitronix LLC or Levitronix Medical, which we announced today. And Roxanne will review the financial results for the quarter. 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 the documents we file 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 obligations to update or correct any forward-looking statements.

Gary?

Gary Burbach

Thank you, Taylor, and good afternoon, everyone. Thoratec had an excellent second quarter highlighted by double-digit revenue growth on both a sequential and year-over-year basis, reflecting strong market growth in the U.S. and abroad, ongoing momentum for HeartMate II in the Destination Therapy patient population and a solid competitive performance. We continue to benefit from the growing body of compelling long-term clinical data from the HeartMate II patient experience, as well as the impact of our market development initiatives on referral generation, capacity expansion of the existing centers and new center development.

In today's call, I will focus on 4 topics: first, the key factors driving our second quarter results; second, the highlights from our current market development efforts, which are facilitating these results; third, several important longer-term market and product development initiatives; and fourth, the acquisition of Levitronix Medical.

Beginning with our second quarter results. Thoratec generated revenues of $111.2 million, a 17% increase over revenues of $95.1 million in the second quarter of 2010 and a 12% sequential increase compared to the first quarter of 2011. We recorded revenues of $93 million in the United States versus $79.9 million in the prior year, a 16% increase. While international revenues were $18.2 million versus $15.2 million a year ago, a 20% increase or 13% excluding a favorable FX impact of $1.1 million versus the second quarter a year ago.

Note that we are now providing a geographic revenue breakdown for the U.S. on a standalone basis compared to our previous disclosure of North American results which included both the U.S. and Canada. We've made this change in order to conform our earnings calls to our required SEC disclosures and to provide enhanced visibility on performance in our largest geography. Today's press release provides corresponding revenue and pump unit information for the past 6 quarters.

Second quarter revenues from the HeartMate product line were $97.6 million versus $82.5 million a year ago, or an increase of 18%. Revenues from our Thoratec product line, the PVAD and IVAD, were $7.6 million versus $7.3 million a year ago, an increase of 4%. CentriMag sales grew 15% to $5.3 million compared to $4.6 million in the second quarter of 2010. Graft revenues were $700,000 compared to the second quarter a year ago, comparable to the second quarter a year ago.

Strong unit growth was the primary driver of our performance in the quarter. We sold 946 pumps in the quarter, an increase of 19% compared to 795 pumps in the second quarter a year ago and an increase of 10% sequentially compared to 859 pumps in the first quarter. This 19% increase in pump units was mirrored by solid year-over-year growth in pump revenue of 21%, while non-pump revenue grew a more modest 9%, due largely to the difficult comparisons we were facing against last year's upgrade cycle for HeartMate external peripherals.

Looking at the breakout of pump units by geography. We shipped 753 pumps in the U.S., an increase of 22% over 617 pumps a year ago and 193 internationally, an increase of 8% versus 178 a year ago. Looking specifically at HeartMate II, year-over-year unit growth was 21% in the U.S. and 20% in international markets.

We are certainly pleased with our financial results for the quarter, and we believe they reflect several important underlying dynamics. First, in the U.S. market, we are experiencing strong performance across a broad range of centers, driven by increased referral activity and continued investments in additional capacity by our centers. We believe that our market development efforts, from cardiology outreach to clinical support, are facilitating this positive momentum.

On a year-over-year basis, the fastest growth continues to come from midsized transplant centers and emerging open-heart centers. Interestingly though, if we look at our sequential performance versus the first quarter, it was our larger group 1 centers, those that participated in the HeartMate II clinical trial, that contributed the largest increase in pump units with a 17% sequential gain.

Second, it's important to note that volume growth in the U.S. is coming largely from the DT patient population, which represented approximately 40% of our HeartMate II activity in the quarter. I would note that the percent of HeartMate II patients on extended support is significantly higher than that figure, given the increased wait times for patients on the transplant list, as well as patients characterized by clinicians as bridge-to-decision. As an example of this extended support outside the pure DT indication, close to 50 of our HeartMate II bridge-to-transplantation clinical trial patients are still ongoing after more than 3 years of support.

Lastly, our performance in EMEA during the second quarter was encouraging following a softer performance last quarter, demonstrating what we believe is a healthy underlying market and HeartMate II's strong competitive position in the market. Excluding Canada, the rest of our International business showed sequential unit growth of 12% for HeartMate II and 15% for VADs overall.

In terms of new center development, we added 3 HeartMate II centers in the U.S. and 4 internationally during the quarter, ending the quarter with 135 HeartMate II centers in the U.S. and 137 internationally. This compares to 130 and 124, respectively, at the end of 2010. In terms of centers receiving Destination Therapy certification from the Joint Commission, 5 centers received certification since our last call, bringing the total number of certified centers to 99. Importantly, the pipeline remains healthy with 12 centers having submitted applications and awaiting certification from the Joint Commission.

Turning to our ongoing market development efforts. We have continued to invest in a wide range of programs to increase our cardiology outreach and education initiative, which are designed to drive referral activity while also helping VAD programs expand their capacity and improve outcomes with the HeartMate II. In total, we plan to increase our investment in market development and clinical support by roughly 30% in 2011.

To support these activities, our most important investment is in our highly trained field team, numbering over 110 globally as of midyear. We plan to increase this team to approximately 130 by the end of 2011, including approximately 40 individuals dedicated to our market and center development effort and over 50 dedicated to training and clinical support.

We've seen an encouraging response to a relatively new initiative we're calling Shared Care, which is designed to facilitate the post-discharge management of patients by their referring cardiologists and community hospitals. This program is gaining increased traction following a small pilot at the end of 2010, as we now have about 20 sites involved, having purchased equipment to monitor HeartMate II patients post discharge.

As we've indicated in the past, we believe there's great value in having community cardiologists involved in the treatment of patients post-implant, not only to optimize patient outcomes, but also to allow referring cardiologists to assume some of the patient management activities currently borne by implant centers and to facilitate improved understanding of appropriate referral candidate by cardiologists. The Shared Care program also has an important patient quality-of-life benefit, particularly for VAD patients located outside of metropolitan areas who might otherwise have to travel several hours to a major center to receive follow-up treatment.

In terms of other market development activities, there've been a number of important events in recent months. These have included our latest mechanical circulatory support Fellows Program, which drew approximately 40 attendees from across the heart failure, cardiology and cardiothoracic surgery specialties. And a regional cardiology summit in Baltimore targeted to more active referring cardiologists from the Eastern United States. We also sponsored symposia at the American Association of Heart Failure Nurses meeting and the Heart Rhythm Society meeting. While we consider the electrophysiology sector a longer-term channel opportunity, we believe it's important to begin fostering awareness about the benefits of mechanical circulatory support among this group of clinicians.

We have a busy fall ahead of us as well. In October, we will be holding our second national community cardiologists event this year in Orlando. We expect nearly 150 attendees, which is a significant increase in participation compared to the event we held in late April. As a reminder, these events focus on topics such as patient selection, post-discharge patient management and VAD reimbursement, and incorporate interactive case studies and patient panels.

We'll also have a very active presence at the Heart Failure Society of America's Scientific Meeting in Boston, September 18 to 21. This year, VADs will have the largest presence ever at HFSA, with several MCS-specific sessions and nearly 10 hours of VAD presentations and posters. The key sessions cover topics, including the emerging trend toward extended support with VAD therapy, the implications of incorporating VAD programs into non-transplant centers, the role of risk stratification and treatment options for the earlier-stage advanced heart failure population. Importantly, we will be sponsoring the first-ever hands-on MCS workshop at HFSA designed to leverage the increasing interest in the new American Board of Internal Medicine advanced heart failure certification program, which includes a focus on MCS.

Complementing the programs I've outlined over the past few minutes is the continued dissemination of data demonstrating HeartMate II's excellent survival rates and lowest published rates of pump thrombosis and stroke over extended durations of support despite the challenging patient populations and broad base of centers in which the device has been studied.

There have now been 155 peer-reviewed HeartMate II-related data publications as we continue to deliver a steady flow of long-term data around the device. The June 21 edition of The Journal of the American College of Cardiology includes findings from a study at Sharp Memorial Hospital in San Diego reviewing the experience of older VAD patients. The data showed that these patients, who are part of either the HeartMate II Bridge-to-Transplantation or Destination Therapy trial experienced a high level of functional recovery, survival and quality of life at 2 years.

For patients older than 70, the survival rate was 75% at 1 year and 70% at 2 years, comparable to the experience in patients age 70 and younger. In addition, the average length of hospital stay for the 2 groups was essentially the same, and there were no differences in the incidence of adverse events between the 2 groups. The study's lead author, Dr. Robert Adamson, concluded that age alone should not determine whether a patient receives LVAD support, and that LVAD therapy should be considered for the increasing population of elderly patients with advanced-stage heart failure who have limited treatment options.

I'd like to shift now to a few important initiatives contributing to our longer-term strategy of broadening the range of patients we can serve with mechanical circulatory support. These efforts include generating additional clinical data on HeartMate II in targeted underserved patient populations, geographic expansion and new product development.

With respect to our clinical efforts, we've made good progress with an upcoming clinical study called ROADMAP. We've already selected the first 8 centers for participation in the study and are on track to initiate enrollment later this fall. As a reminder, ROADMAP stands for Risk Assessment and Comparative Effectiveness Of Left Ventricular Assist Device and Medical Management in Ambulatory Heart Failure Patients.

It is a post-market study involving ambulatory advanced heart failure patients who meet HeartMate II's existing FDA-approved indication for Destination Therapy but who are not being referred for LVAD therapy in meaningful numbers. It will be a prospective, multi-center, non-randomized, controlled observational study involving up to 50 sites and 200 ambulatory NYHA Class IIIb and IV patients who are not dependent on continuous inotropic support, or those typically classified as INTERMACS 4 to 6. The primary objective of the study is to evaluate and compare the effectiveness of HeartMate II support versus optimal medical management in these patients. The patients will be followed for 2 years, and the primary endpoint will be a composite of survival and functional improvement as measured by the 6-minute walk test. Secondary endpoints include actuarial survival, quality of life, pump replacement, adverse events and rehospitalization.

In addition, the study allows for evaluation of therapy pathways from a wide range of centers with different implant strategies, as well as comparisons of the results from early versus delayed implantation. We believe there is a substantial unmet need for treatment options to improve functional status and quality of life in this patient population, prior to the need for continuous inotropic support or the development of irreversible end organ dysfunction.

In terms of geographic expansion, the major highlight of the last few months was the completion of our HeartMate II regulatory submission in Japan at the end of the second quarter. We've been pleased with HeartMate II's clinical performance in Japan, as all patients in our study continue to do well on support. We've been encouraged by the regulatory process as well and currently expect BTT approval in Japan by mid-2012, with reimbursement approval following within a few months.

Turning to new product development. The full commercial launch of our field inflow and outflow graft for the HeartMate II, which occurred at the end of the first quarter, is going very well. We continue to receive positive feedback from the clinical community with respect to ease-of-use, reduction in operating room time and reduced rates of perioperative bleeding.

During the quarter, we also reached an important milestone in our fully implantable VAD program with the announcement of a technology development agreement with WiTricity related to their proprietary wireless resonant energy transfer technology. Thoratec and WiTricity engineers have demonstrated the ability to transfer power wirelessly to a HeartMate II to start and run the pump in a setting that replicates a fully implantable VAD system. Under this agreement, we are providing funding to WiTricity to further optimize the technology for use in a fully implantable HeartMate II system. This agreement is an important step in our effort to continue to advance the HeartMate II as best-in-class LVAD technology, reduce adverse events and dramatically improve patient quality of life.

Meanwhile, we continue to progress towards first-in-man implants of HeartMate III, PHP and our fully implantable system in line of with our guidance from the beginning of this year.

For PHP, we anticipate our first pre-IDE meeting with the FDA during the third quarter. And for HeartMate III, we anticipate our second pre-IDE meeting in the fourth quarter. We anticipate providing an updated comprehensive review of our pipeline early next year, at which point, we should have enhanced visibility on key developmental and regulatory milestones.

Lastly, I'd like to discuss our acquisition of Levitronix Medical. As many of you know, we have enjoyed a very productive relationship with Levitronix for a number of years. Today's acquisition solidifies and expands this relationship. Since 2006, we have provided distribution and clinical support in the U.S. for CentriMag, and we've grown that business to $17.7 million of sales in 2010 with a current U.S. customer base of 150 centers, including 69 transplant centers and 81 open-heart centers. This distribution arrangement would otherwise have expired at the end of 2011.

We have also collaborated on the development of the fully magnetically levitated motor technology employed in our HeartMate III program. As a reminder, the CentriMag acute circulatory support system is an extracorporeal full flow, acute surgical support platform incorporating a bearing-less centrifugal flow pump based on Levitronix Medical's full magnetic levitation technology. The device has 510(k) clearance for use up to 6 hours in patients requiring circulatory support during cardiac surgery, is FDA-approved under humanitarian device exemption for use as an RVAD for periods of support up to 30 days and has CE Mark approval for support durations of up to 30 days as well.

In the U.S., CentriMag is currently being studied in a pivotal trial designed to demonstrate safety and effectiveness for the 30-day indication. CentriMag has generated a very strong data profile, and we believe that its clinical performance, combined with Thoratec's clinical support, has driven the strong U.S. adoption trends experienced in recent years. The CentriMag system includes a motor and console that are also used to drive the PediMag and PediVAS pump, enabling the treatment of acute pediatric patients with the same equipment platform.

Strategically, the acquisition enables Thoratec to provide our customers with comprehensive mechanical circulatory support solutions for both acute and chronic needs on a global basis. CentriMag forms the cornerstone of our acute product strategy, complementing our leading HeartMate II franchise for chronic support and in some cases, serving as our entry point for relationships with these customers, particularly within the open-heart center community.

Levitronix Medical also provides us with an acute pediatric surgical support system called PediMag in the U.S. and PediVAS internationally. We view this capability as strategically important, as many of our customers have both adult and pediatric programs. Through this acquisition, we will also bring in-house significant intellectual property and expertise in full magnetic levitation, one of the core technology elements of HeartMate III, as well as other potential product development opportunities in circulatory and respiratory assist.

The acute surgical market is small relative to the opportunity for our chronic VAD business in Destination Therapy, but we believe that it provides a solid growth opportunity. We estimate that on a combined basis, Thoratec and Levitronix Medical will generate $27 million, $28 million in acute product sales in 2011. We see that figure compounding annually in the 10% to 15% range through 2015. Looking ahead, the CentriMag and PediMag acute surgical offering will also complement PHP, our planned offering for acute percutaneous support.

Financially, the acquisition provides 2 primary benefits. First, it secures our U.S. sales of CentriMag at a gross margin of approximately 75%, which represents an increase versus the former distribution agreement. Second, it provides incremental sales of CentriMag and PediMag on a global basis, which totaled approximately $8 million under Levitronix in 2010.

Relative to the prospect of relinquishing U.S. CentriMag rights which were set to expire under the distribution agreement, we expect the acquisition to be accretive to earnings in 2012 on both a GAAP and a non-GAAP basis. When compared to a scenario in which Thoratec maintains U.S. CentriMag distribution rights, the transaction should still be modestly accretive in 2012 on a non-GAAP basis, but dilutive on a GAAP basis. Beyond 2012, the earnings accretion profile of the transaction should become increasingly favorable.

In summary, I'm pleased with the progress we've made in 2011 in advancing the broader LVAD market, and I'm confident that we have the right products and strategies to continue doing so in the future. HeartMate II's clinical performance, flexibility and the rigor with which it has been tested remain unrivaled. Our market development and clinical support efforts are gaining increased traction, and our broad product development pipeline continues to progress. And strengthened by today's acquisition, Thoratec is well positioned as the leading full-line provider of mechanical circulatory support solutions to continue advancing our mission of serving the broad heart failure population.

In closing, I also want to acknowledge the many contributions that David Smith made while at Thoratec, and we wish him the best of luck in his future endeavors. We have initiated a search for David's replacement, and we'll update you on that process as appropriate.

I'll now turn the call over to Roxanne for a more detailed review of our financial results. Roxanne?

Roxanne Oulman

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 intangibles, share-based compensation expense, transaction cost related to the Levitronix Medical acquisition and the accounting for convertible debt instruments that may be settled in cash. You will find a reconciliation between our GAAP and non-GAAP results in our earnings press release at thoratec.com.

Revenues for the second quarter of 2011 were $111.2 million compared to revenues of $95.1 million in the second quarter a year ago. This brought revenues for the first 6 months of 2011 to $210.7 million versus $194.4 million in the first 6 months of 2010.

Non-GAAP gross margin for the quarter was 71.2% versus 68.2% in the second quarter a year ago. Factors impacting gross margin versus the prior year included lower inventory reserves, volume-based efficiencies and a favorable pump to non-pump mix, partially reflective of last year's external peripheral conversion.

Non-GAAP operating expenses in the quarter were $37.5 million versus $30.2 million in the second quarter a year ago. Factors impacting the increase in operating expenses year-over-year included increased spending on product and market development initiative, including the continued expansion of our research and development and field organization and continued investment in our next-generation pump platforms, which includes HeartMate III, PHP and HeartMate X, as well as our fully implantable system.

Non-GAAP operating margin in the quarter was 37.5% versus 36.5% a year ago. On a non-GAAP basis, the company's effective tax rate for the quarter was 34.2% versus 35.4% last year, reflecting our inability last year to recognize the federal research and development credit due to the absence of the enacted legislation.

Non-GAAP earnings per diluted share in the quarter were $0.44 compared to $0.34 a year ago. Weighted average diluted shares outstanding for the quarter were 63.3 million versus 66.8 million a year ago. Factors impacting our diluted shares outstanding included the reduction of shares associated with our convertible debt, which I will address in a minute, and the full quarter impact of the 1.8 million shares repurchased in the first quarter.

With respect to the balance sheet, we ended the second quarter with $298.5 million in cash and investments. This compares to $438 million at the end of the first quarter of 2011 and $469.5 million at year-end 2010. As a reminder, our cash balance at the end of the quarter does not reflect the impact of the $110 million payment related to the Levitronix transaction announced today.

The reduction in our cash balance during the quarter was attributable to the retirement of all of our outstanding convertible debt, for which we paid $164.4 million in cash and issued 2.4 million shares of common stock. As a result of this transaction, the company's diluted share count, which previously included 7.2 million shares attributable to the convertible debt, was reduced by 4.8 million shares. On a weighted average basis, our share count was reduced by approximately 2 million shares in Q2 due to the timing of the transaction, but it will be fully reflected in future quarters.

In terms of guidance for 2011, we expect that our revenues will be in the range of $422 million to $430 million. This represents an increase from prior guidance and reflects the contribution from the first half of the year and our expectation of ongoing growth in the second half of the year, along with $4 million in incremental revenues attributable to the acquisition of Levitronix Medical and the associated international sales of CentriMag and worldwide sales at PediMag and PediVAS.

Non-GAAP gross margin is expected to be in the range of 69% to 70%. We have experienced a strong gross margin performance during the first half of 2011, but our expectation is for a moderation in the back half of the year. During the first half of the year, we built implant kit inventory in support of our HeartMate II sealed grafts that were introduced commercially late in the first quarter. As a result, we experienced favorable absorption variances that will not persist as we progress through the second half of 2011.

Non-GAAP operating expenses are expected to increase 15% to 17% over 2010. Operating expenses will be higher in the second half of the year as we continue our market development initiatives and advance our product development pipeline. In addition, our guidance includes operating expenses from the acquired Levitronix Medical business for the remainder of the year.

Lastly, non-GAAP earnings per diluted share are expected to be in the range of $1.40 to $1.50 per share, reflecting increased operating leverage, continued investment in our business and the neutral impact from the Levitronix Medical acquisition.

On a GAAP basis, we have increased our guidance to a $1.05 to $1.15. I would note that this range includes transaction costs related to the acquisition of Levitronix Medical, but does not reflect any income statement impact related to the purchase price allocation for this transaction, which has not yet been finalized.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Tom Gunderson with Piper Jaffray.

Thomas Gunderson - Piper Jaffray Companies

I guess I'll start with the most obvious one, and that is, that was a surprisingly big gap up in pump sales worldwide. If we focus just on the U.S. and on group 1, I know you don't want to break it out by DT and BTT, but can you give us a sense of was Bridge-to-Transplant in Q4, Q1, Q2 relatively steady? Did it go up a little bit? Did it go down in Q2? I'm trying to -- if you can give us a little bit more color just on the big jump up in Q2, that would help.

Gary Burbach

Yes. So certainly, the substantial majority of the growth was based on Destination Therapy. But we did see continued growth in Bridge-to-Transplant as well in kind of the mid-single digit percentage range.

Thomas Gunderson - Piper Jaffray Companies

But was it disproportional in group 1?

Gary Burbach

That, I don't know. I can't break that down for you on a group-by-group basis, just overall.

Thomas Gunderson - Piper Jaffray Companies

Okay. And then I guess I'll stick with the same theme knowing others will pick up on the other questions, and that is any thoughts on why group 1, which was relatively flat in Q1, kind of kicked in here? Was there more -- does your marketing development focus more on those centers or gain more from those centers, or was it just a catch up from Q1?

Gary Burbach

Yes. I think part of those factors that you described. Certainly, we had significant market development resources focused on working with those centers to reach out to referring physicians, drive those channels. And so I think there was an increasing level of success on that front. And those centers had not grown as rapidly as some of the other centers over kind of the previous year or so. So I think that there was a bit of kind of increased traction with those centers. I would also speculate that we probably gained some competitive share in those centers. Those tend to be the HeartWare trial centers. So while I believe the substantial majority of the growth that was posted in the quarter was based on market growth in those particular centers, there may have also been some share gain.

Operator

And next, we'll go to Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC

Gary, if we could start with the guidance. I think in the first half, you did $211 million. Excluding Levitronix, I think it's $422 million for the full year or $211 million for the second half of 2011. Why are you expected to be flat sequentially? And I think in the last call, you said you expected the third quarter to be down sequentially from the second quarter, but the fourth quarter to be your largest quarter. Can you talk a little bit about that? And what's your assumption for HeartWare's U.S. launch? I think the past, you said you expected it in the fourth quarter.

Gary Burbach

Right. We obviously provided a range of revenue guidance, from $418 million to $426 million, exclusive of that $4 million add-on that comes with the Levitronix acquisition here for the last 5 months of the year. And that range encompasses -- second half, it looks similar to the first half, also a second half that had some upside to the first half. We do expect some of the non-HeartMate II product activity to be slightly softer in the second half. The PVAD line was above expectations. As you know, that tends to be a bit lumpy. So we're not expecting that same kind of performance in that line in the back half of the year. We certainly expect Q3 to be seasonally down and maybe a little more so this year than last year if you look at kind of a year-over-year basis, just given kind of how dramatically strong Q2 was. In setting the guidance, as you know, we tend to look at a little broader time horizon than just one quarter. So we're really looking at the first half of the year and then kind of using that to kind of affect our guidance for the balance of the year. And then relative to HeartWare's approval, based on kind of what we're hearing, kind of in their commentary around their process, our current assumption would be that, that approval is likely pushed into the early part of 2012.

Larry Biegelsen - Wells Fargo Securities, LLC

Gary, the fourth quarter, do you still expect that to be the largest quarter? And then just lastly for me, Destination Therapy at 40% in the second quarter. Where do you think that can go over the next, say, 2 to 3 years?

Gary Burbach

Okay. Yes, I won't comment on kind of Q4 specifically. Obviously, we've given you a direction around Q3 being seasonally down. Obviously, we'd expect Q4 to be up from there and kind of you have a Q2 range that we've provided. So I think those parameters give you a pretty good view to our expectation for the back half of the year. And what was the -- yes. So DT, if you look at a 2- to 3-year kind of time horizon as you've described, I'd expect that DT would be the majority of the market at that point. Certainly, we're on a very nice trajectory if you look at what's happened here at the first 18 months post-approval.

Operator

We'll now go to Jason Mills with Canaccord Genuity.

Jason Mills - Canaccord Genuity

19% pump growth in the second quarter comes off of pretty good sequential growth in the first quarter off the fourth, and your guidance, Larry, went into it a bit. But it still seems to assume double-digit growth year-on-year for pumps in the second half of the year. So broadly speaking, this market, globally, seems to continue to be quite robust. As we think about sort of the next couple of years, how are you strategically thinking about growth in your end market, both in the U.S. and globally? Would love just, I guess, a broader perspective as it stands now after 2 pretty good quarters.

Gary Burbach

Yes. So I'd say that it very much reinforces the longer-term kind of expectation that we described in our call back at the beginning of the year. We talked about the last 5 years, from 2005 to 2010, going from 2,000 to 4,000 worldwide. And an expectation here as we go forward to 2015, to move to a market of 10,000 pumps on a worldwide basis. And the first half of this year is very much in line with that expectation and the guidance that we provided for the full year as well.

Jason Mills - Canaccord Genuity

Okay. So you're still sticking with the 10,000. It's good to know.

Gary Burbach

Yes.

Jason Mills - Canaccord Genuity

And so obviously, part of that, to get to that level, you've talked about center recruitment and referral patterns, both of which seemed to be fairly strong in the quarter. Could you give us a feel for -- from your field organization, how new center activity will play out sort of in the back half of the year, as well as sort of as you look out a couple of years specifically into the open-heart centers, given presumably you're in most of the transplant centers at this point. What kind of growth in new centers are you expecting over a medium-term period of time?

Gary Burbach

So in terms of the balance of this year, we've set an expectation for the year of 15 new centers in the U.S., and we've added 5 in the first half. We have a solid pipeline where we continue to expect to be at that overall number for the year. And as we look at a little longer time horizon, you look at this 5-year horizon, we're talking right now about 99 Destination Therapy certified centers. Moving towards 200 centers in that 5-year time horizon, I think, is a reasonable expectation.

Jason Mills - Canaccord Genuity

Over the 5-year time horizon? Okay.

Gary Burbach

Correct.

Operator

Our next question comes from Bob Hopkins from Bank of America.

Robert Hopkins

So just to be clear on the HeartWare guidance. So for your 2011 guidance that you just laid out on the revenue side, you don't assume that HeartWare enters the market, just to be clear?

Gary Burbach

In the United States, that's correct. We are assuming, just to add to that, France obviously, they received reimbursement. So we are assuming they will begin to make some progress in France.

Robert Hopkins

Okay. And then given the really strong results here globally and especially in the United States and your comments on good success at some of your larger centers, can you just talk in a little bit more detail about what you're hearing from those centers, and maybe what are the 1 or 2 things that are really resonating as to the drivers of the uptick this quarter and last, especially in the U.S. in your larger centers?

Gary Burbach

Yes. I think it's really very much around this referring physician channel process that we've been talking about for a while and really starting to get some critical mass. We obviously have a wide range of initiatives. We've been building our MDM team to where we have kind of larger group there, where we expect to have 40 people by the end of the year. We have over 30 people currently in that group. So I think there is kind of a critical mass of activity that's starting to have more impact on that referring channel and getting some of the -- more of those physicians to change their behaviors, refer more physician -- more patients, potential patients to these centers.

Robert Hopkins

And then just lastly on your earlier comment about share gain. I just wanted to make sure that I was clear on what you were referring to. Were you talking about U.S. centers, o U.S. centers or both? And just if you could be more a little specific about what gives you some of the confidence that you're taking share.

Gary Burbach

I don't know if we are. We'll find out obviously tomorrow when HeartWare reports their results. But I was primarily referring to the U.S. trial centers, although I think that we may have taken a little bit of share internationally as well. But again, I think that's secondary to market growth. I do believe the bulk of the growth that we're seeing here is market-based and that kind of overall, when you put the whole market together, that we'll have similarly robust growth for the quarter and the half.

Robert Hopkins

Sorry, and just the rationale for the share gain, too.

Gary Burbach

The rationale for the share gain in...

Robert Hopkins

Just why you think you're gaining share? What are the reasons that are allowing you to get a little bit of momentum?

Gary Burbach

Well certainly, we've talked about kind of our proactive efforts, messaging around HeartMate II's benefits, the service portfolio, et cetera. Certainly, additionally, some of the concerns around results that were presented for the HeartWare pump at the ISHLT, I think, has resonated with some clinicians, particularly in the U.S.

Operator

We'll now go to Rick Wise from Leerink.

Frederick Wise - Leerink Swann LLC

My first question is about a question -- a phrase we have been sort of focused on a little bit. Is the momentum we're seeing in your results, and frankly, that we're hearing from doctors, sustainable? I mean, here's a market that's been lumpy in the past. Or are we at an more of an inflection point? Is this now more credible to believe that we're in an inflection point? And maybe talk about some of the roadblocks ahead. I mean, I don't know, are the new centers going to get maxed out? And so in the major centers maxed out, so you won't be able to see this kind of excellent upsurge in a given quarter?

Gary Burbach

Yes, obviously, we believe that it's sustainable. Now that doesn't mean sequentially, every quarter is up from the prior quarter. We just talked about Q3 is a seasonal quarter. But when you're talking about kind of year-over-year kind of solid, sustainable growth, we definitely believe that's the case. Look at the last 3 years. Since April of 2008, we've demonstrated kind of consistent year-over-year, very strong growth. And obviously, we wouldn't be putting a 10,000-unit number in 2015 out there if we didn't believe that there was a lot of runway ahead of us. So we definitely feel good about the pathway ahead.

Frederick Wise - Leerink Swann LLC

Back to gross margins. You talked about some of the short-term factors, but with the Levitronix deal and the volumes growing, would you be a little more comfortable perhaps talking about how we could think about long-term margin profile for Thoratec and sort of a more, again, kind of longer-term aspirational goal?

Gary Burbach

Yes. I mean, certainly as you look longer term, our expectation is that there is continued upside opportunity relative to gross margin, where I think that we can become consistently north of 70% in terms of our gross margin.

Frederick Wise - Leerink Swann LLC

Just last quickly, Gary. Can you talk a little bit about any feedback you've heard so far about center profitability? We're hearing some mixed comments from some of our conversations. And given all the pressures and events in Washington and possible cuts to Medicare, what's your strategy? Or are you concerned, are you more concerned about centers achieving and sustaining profitability and expanding LVAD programs?

Gary Burbach

Sure, yes. Based on our interactions, we believe that substantial majority of centers have solid economic performance with their programs. We certainly work with the programs to help them achieve not only clinical success, but also economic success. And those generally go hand-in-hand, so that as you choose patients better, implant patients slightly earlier, you have better clinical outcomes, you also have substantially better economic outcomes. Those patients are out of the hospital more quickly and require much less resource and expense. So that's definitely an area of focus, and there are certainly hospitals out there that have challenges today, and we definitely work with them actively to help them get into a better situation.

Operator

Our next question will come from Rajeev Jashnani from UBS.

Rajeev Jashnani - UBS Investment Bank

I was just trying to kind of get a handle on PVAD, IVAD and HeartMate II x U.S. and I was wondering if you could help me out in terms of HeartMate II volume growth on a sequential basis.

Gary Burbach

Yes. So HeartMate II growth on a sequential basis. So HeartMate II, excluding Canada, grew sequentially 12%. Canada, we had a very large quarter in Q1, and there was a bit of a softer quarter in Q2. But if you look at the rest of the world, which is predominantly Europe, we saw a 12% sequential HeartMate II growth, unit growth.

Rajeev Jashnani - UBS Investment Bank

Okay. And I mean, maybe you could talk a little bit about your projections, forward-looking, in terms of market share. Obviously, the company's goal, I'm sure, is to gain share. But what -- do you expect share to be relatively static going forward? Or maybe any comments you could provide, forward-looking, would be helpful.

Gary Burbach

Yes. I mean, we're not expecting dramatic changes in share. We certainly are focused on improving our competitive position, both driving the market growth, which is kind of most important. But secondly, also continue to improve our competitive position. We believe we've had some success internationally on that front in the first half, and we'll look to continue to drive that forward.

Operator

We now go to Chris Pasquale from JPMorgan.

Christopher Pasquale - JP Morgan Chase & Co

Gary, first on the new sales guidance, you're raising the range by $12 million on the low end and $5 million on the high end. You beat consensus this quarter by about $7 million, and you're picking up $4 million in additional CentriMag sales. And on top of that, you're no longer assuming the U.S. HVAD launch until early next year. So it seems like all those make it sort of a wash. What are you looking in the back half of the year that tells you that the strength you saw here isn't going to continue or that range shouldn't be higher?

Gary Burbach

Well, we are expecting to see strength continue. So if you look at the range of guidance at the upper end of the range, the second half of the year would be north of the first half of the year. And that would be driven by HeartMate II, given -- I expect the other product line, particularly PVAD, will be down a little bit versus what we saw in the first half. So we do expect to see continued strength in the second half.

Christopher Pasquale - JP Morgan Chase & Co

Okay. So there's nothing about this quarter that you think was onetime in nature.

Gary Burbach

No, we don't think it was. There wasn't any kind of particular onetime event there.

Christopher Pasquale - JP Morgan Chase & Co

Okay. And then secondly, just a clarification on Japan. Is the approval that you're seeking there for bridge or Destination Therapy?

Gary Burbach

Bridge. So yes, Destination Therapy would be a future strategy. Bridge is the first step.

Christopher Pasquale - JP Morgan Chase & Co

Given the fact that there isn't much of a transplant market there, I would think that the bridge opportunity would be pretty small. What are your plans to broaden that to include DT?

Gary Burbach

Yes, that's definitely the next step. So now that we have the bridge application in, the team is working on exactly that plan in terms of how do we go forward to try to get to a DT approval as quickly as possible. So we'll have more on that in the future.

Christopher Pasquale - JP Morgan Chase & Co

Do you think it's going to require a brand new trial which would put it a couple of years away, or is there maybe a shortcut?

Gary Burbach

Yes. It's too early to say, but we're certainly looking to try to find a non-trial-based approach given the broad base of data that exists on Destination Therapy and kind of having a small set, small confirmatory bridge trial there that shows the device can be effectively utilized in Japan. We think those 2 data points together should be sufficient to realize an approval. But obviously, we'll have to go through a process with the regulatory authorities there.

Operator

We'll now go to a question from Suraj Kalia from Rodman & Renshaw.

Suraj Kalia - Rodman & Renshaw, LLC

Gary, let me follow up on Rick's question with a twist. And again, beyond getting very strong signals right now, but nonetheless, let me ask. One of the rumblings in our due diligence that we come across or have recently come across is, whether it's lobbyists, whether it's docs, there is some thought out there, "Hey, what if we bundle BTT and heart transplant into one composite rate?" Now I know there's been pushback from some leading surgeons. I'd love to get your thoughts on that, especially from a profitability perspective, whether it's even -- whether based on your due diligence, or if you care to talk about it, it's even feasible or not.

Gary Burbach

So I'm not sure if I follow your question. So today, there is one DRG -- I meant DRG1, which is utilized both for bridge VADs as well as DT VADs, I mean, for all VADs, implanted VADs. And that's also used for heart transplant. So there is a kind of one DRG that spans those today. From a reimbursement perspective, there may be an opportunity going forward to split those into separate DRGs and realize higher reimbursement for VADs versus transplant because obviously you don't have the cost of a device with transplant, so you have a lower cost basis there. So I think there's an opportunity there potentially. Obviously, you have to go through a whole reimbursement process to realize that, but I think what you ask is consistent with the status of reimbursement today.

Suraj Kalia - Rodman & Renshaw, LLC

No, what I meant, or at least my understanding is when you do a transplant, for example, after a BTT, you get paid separately. And at least the way I understood it is there is some thought that "Hey, up front, you do the device implant, downstream you do the heart transplant, maybe not bill it again under the same cord, develop some sort of a composite rate." But what I'm hearing is really -- at least, what I'm hearing from you is it doesn't seem like it's going to be going down that route.

Gary Burbach

I haven't heard anything like that. It would be totally different from the way the whole DRG system works today, and you have a fair number of patients, as you know, that get implanted upfront taking they're a bridge, they don't turn out to be a bridge. We have some patients that get implanted thinking they're going to be long-term DT support that end up getting transplanted. So logistically, I can't even imagine how that would be workable.

Suraj Kalia - Rodman & Renshaw, LLC

Fair enough. Gary, maybe I missed it. Can you guys shed some color on the growth in the different tiers, at least the last 2 quarters, you have specifically laid out growth in the clinical sides and second tier and third tier. I got the 17% growth number, at least that's what I heard on the clinical sides. Did you mention anything on the second tier and third tier?

Gary Burbach

Yes. We mentioned that on a year-over-year basis that the second and third tier were actually the strongest drivers of growth. And I can't remember now the percentage. I don't think -- yes, we didn't provide a specific percentage on that, Suraj, but we did see very robust growth on a year-over-year basis in those Tier 2 and Tier 3 centers.

Suraj Kalia - Rodman & Renshaw, LLC

Was the level higher than Q1?

Gary Burbach

In those Tier 2, Tier 3 centers?

Suraj Kalia - Rodman & Renshaw, LLC

Yes.

Gary Burbach

Yes. We saw sequential growth in those centers as well.

Suraj Kalia - Rodman & Renshaw, LLC

Okay. I guess the last question, Gary, just from a macro perspective. We know now World Heart is out of the market. This is the second product in LVADs to "die", not to sound disrespectful, but. And our understanding from the field is there are 10 to 20 patients on Levacor. With Ventracor out of the picture, we know there are issues with another pump on the market. Have your sales guys come to you and said the sales cycle is getting smaller, or has it been shortened, or is it too early to tell?

Gary Burbach

Yes. I mean, I don't think those things really affect the sales cycle in terms of -- the sales cycle here is really driven by implant activity. So that's really a mad -- the way to shorten that is driving the referral channel, getting more patients to these centers to potentially be implanted.

Operator

We'll now take a question from Spencer Nam from Madison Wiliams.

Spencer Nam - Madison Williams and Company LLC

Just a couple of questions. What is your plan on -- or what kind of expectations do you guys have on the centers that will receive DT certification? Now it looks like you are close to 100. What should we expect by the end of this year?

Gary Burbach

In terms of the number of centers?

Spencer Nam - Madison Williams and Company LLC

Yes, with the DT certification.

Gary Burbach

Yes. So our initial expectation was 100 by the end of the year. I think pretty clearly at this point, we expect to exceed that. There are 12 in the pipeline. Depending on how quickly they get audited, but I think at this point, 105 is probably a reasonable expectation. So half of those 12 get certified by the end of the year.

Spencer Nam - Madison Williams and Company LLC

Great. That's helpful. The second question is, maybe I'll ask a more direct question that was asked previously. In United States right now, how much of a issue is the pump thrombosis issue that was brought up during ISHLT? And is it affecting the usage, adoption of different pumps? And is it also affecting the adoption of HeartMate II?

Gary Burbach

Well, so I don't know what HeartWare's enrollment in their trial is. So I speculated earlier that we might have seen some share gain in those trial centers because we did see a very strong growth in those centers in Q2. So kind of our speculation is that some of that is driven by market growth, but some of it could very well be share gain as some of those centers maybe have some concerns around thrombosis in that pump. So there may be a net positive there for HeartMate II. But again, I'd emphasize that that's in the context of a belief that the substantial majority of the growth in the quarter was based on market growth.

Operator

Our next question will come from Duane Nash from Wedbush Securities.

Duane Nash - Wedbush Securities Inc.

Could you clarify how the market might break down between PHP and CentriMag? Based on my understanding, there could be some theoretical overlap. Would these devices compete with each other, or how would you differentiate them?

Gary Burbach

There could potentially be some overlap in the future, but there are distinct percutaneous and surgical applications. So the CentriMag is very much surgically based in a variety of applications, supporting VAD procedures, as an RVAD, post-cardiotomy patients that are crashing, so a variety of surgical situations. So the majority there, definitely distinct applications. But there's certainly potential, if we're very successful with PHP, that there are some patient populations where there could be some overlap.

Operator

We'll now go to Jayson Bedford from Raymond James.

Jayson Bedford - Raymond James & Associates, Inc.

Couple questions. Just international unit growth of 8%, I realize that sales were up 20% and probably benefiting from the mix shift. But I guess the 2 quickies are, do you expect international unit growth to pick up above that 8% level? And then what percent in your international business is HeartMate versus PVAD, IVAD?

Gary Burbach

Yes. So the 8%, that had HeartMate up 20% on a year-over-year basis. But PVAD, the PVAD line was down a pretty decent amount during that same time period. So that netted to that 8%. And in terms of the mix, the vast majority of our business internationally and domestically, and we provided those numbers, is HeartMate-based.

Duane Nash - Wedbush Securities Inc.

And, Gary, going forward, is kind of 8% unit growth kind of what you see, or is it faster?

Gary Burbach

Well, no. We've described stronger unit growth. So getting from the 4,000 to 10,000 in the 5-year period, that's high-teen growth to realize that kind of growth projectory over the 5 years. The PVAD, kind of the drag from that line becomes less and less as it becomes a smaller and smaller kind of aspect of the total pie.

Duane Nash - Wedbush Securities Inc.

Okay. And then just kind of a quick follow-up on CentriMag, and I realize you've been selling it in the U.S. for a while. But does the strategy change at all with Levitronix now in the fold?

Gary Burbach

Well certainly, I think we can pursue the strategy more aggressively in terms of driving that device into a broader population of open-heart centers that can, over time, become HeartMate II Destination Therapy centers, knowing that we now have this platform for the long term. There's also opportunities to innovate on that platform, continue to make it a increasingly robust solution for clinicians. So I think it's an extension of our strategy that we've had in the U.S., extending that strategy internationally where we haven't had access to that product historically.

Operator

Our next question will come from Bruce Nudell from Credit Suisse.

Bruce Nudell - Crédit Suisse AG

X North American units were, I think, 11% if you subtract Canada from x U.S. Where do you think the market was in the quarter on a unit growth rate? And you kind of alluded to the fact that the European doctors seem relatively insensitive to the clot issue. Could you explain -- with HVAD. Could you explain why that might be?

Gary Burbach

Yes. So I'm not sure about the 11%. So on just to kind of restate the growth rate on a year-over-year basis, HeartMate saw 20% unit growth internationally on a sequential Q1 to Q2 basis. Excluding Canada, we saw 12% growth rate internationally...

Bruce Nudell - Crédit Suisse AG

Yes, what I did was just took your x U.S. units and subtracted Canada year-over-year, and that gave you 11%.

Gary Burbach

Okay. All right. So in terms of the second question relative to the thrombosis issues with HeartWare, I think that, that hasn't had as significant an impact in Europe. One, it's U.S. data versus, there's kind of European experience. There seems to be a greater reliance on their own experience, particularly at the very large centers, and it is a highly concentrated market. So I think those very large centers tend to maybe put less weight on kind of clinical trial data than on their own experience.

Bruce Nudell - Crédit Suisse AG

I guess just following up on that. If HVAD clot rate stays at 9%, how big a problem is that competitively, or how big an advantage is that competitively to you? And if it goes to 5%, is that just a competitive advantage but not a killer advantage? If you could just kind of put a context around that.

Gary Burbach

Yes. At 9%, it would be -- if it remained at that level, it would be a huge advantage and an increasingly huge advantage, I think. If it came down, if it dropped in half from that kind of a rate, we'd still have an advantage, but it certainly wouldn't be as dramatic. And then I think it would be kind of more one of a number of factors and trade-offs that clinicians would be considering.

Bruce Nudell - Crédit Suisse AG

Perfect. And just to clarify, do you feel that the x U.S. market -- x North American market less Canada isn't -- grew in the quarter around that low double digit thing that you actually saw?

Gary Burbach

We do think that the market overall grew in a manner pretty consistent with our growth.

Operator

And our final question today will come from Steven Lichtman from Oppenheimer.

Steven Lichtman - Oppenheimer & Co. Inc.

Just a couple of last ones. On the international side, relative for your business, relative to first quarter. Was the principal improvement on the distributor markets, or is it in other markets? Just want to get any more color in terms of the improvement sequentially for you guys.

Gary Burbach

Yes, it was primarily in our direct markets.

Steven Lichtman - Oppenheimer & Co. Inc.

Okay. And then just on the program that you had mentioned in the U.S., the Shared Care program. Could you talk a bit more about that? Is that something that's going to be tried to be rolled out to all centers? And really, maybe a little bit more details about what that does for the center.

Gary Burbach

Sure. We definitely look to that to be a growing program. And it's where a kind of partner center that's referring patients to an implanting center brings in kind of some of the basic equipment that's required to be able to interrogate a HeartMate II, understand kind of how it's functioning, that it's functioning appropriately. And in so doing, they can now take over some of that follow-up care from the implanting center, become actively involved in the ongoing management of that patient. And so there's a number of benefits to doing that. For the implanting center, it's a benefit in that it offloads some of that follow-up care. As the population of ongoing patients grows, that load of follow-up care on their nurses and physicians becomes greater and greater, and so can become a barrier to growth. And so this eliminates or reduces that barrier for the implanting center. For the referring center, it brings a revenue stream to them. It brings that patient back to them. It enabled them to see how successfully that patient is now living and how well they're doing on the therapy. Creates, hopefully, a higher level of enthusiasm around the therapy and increases their likelihood of referring more patients in the future. And then for the patient, it makes their quality of life better in terms of being able to go to their local center versus having to drive further to get to the implanting center.

Yes. I was just going to say I think that's the last of our questions. I just want to thank everyone for joining us this afternoon, and we look forward to keeping you updated in the future.

Operator

That does conclude our conference for today. Thank you for your participation.

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