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Thoratec Corporation (NASDAQ:THOR)

Q1 2012 Earnings Call

May 1, 2012 4:30 pm ET

Executives

Taylor Harris – Senior Director, Investor Relations and Business Development

Gerhard F. Burbach – President and Chief Executive Officer

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

Analysts

Robert A. Hopkins – Bank of America Corporation

Christopher Pasquale – JPMorgan

Steven Lichtman – Oppenheimer & Company

Rajeev Jashnani – UBS Securities Co., Ltd.

Jason Mills – Canaccord Genuity

Bruce Nudell – Credit Suisse

Thomas Gunderson – Piper Jaffray

Matt Taylor – Barclays Capital

Suraj Kalia – Rodman & Renshaw

Jayson Bedford – Raymond James

Spencer Nam – ThinkEquity LLC

Danielle Antalffy – Leerink Swann LLC

Lawrence H. Biegelsen – Wells Fargo Securities, LLC

David Roman – Goldman Sachs

Derek Winters – Wunderlich Securities Inc.

Operator

Good day, and welcome to the Thoratec Corporation Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Taylor Harris. Please go ahead, sir.

Taylor Harris

Thanks Camille. 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 highlights from the first quarter of 2012 and then turn the call over to Roxanne, who will review the financial results for the quarter and provide an update on guidance for 2012. 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 obligation to update or correct any forward-looking statements. Gary?

Gerhard F. Burbach

Thank you, Taylor, and good afternoon. Thoratec achieved a strong start to 2012 reflecting a healthy underlying market for LVAD therapy, particularly the destination therapy indication and continued progress in our worldwide market development and market leadership efforts for HeartMate II.

Our first quarter results highlighted by a 27% revenue increase were generated through strong performance across both HeartMate II and CentriMag, driven by all major segments of implanting centers in both the United States and Europe. But we don’t expect the same magnitude of growth to occur every quarter. We do believe that our first quarter results again point to a significant opportunity ahead in Destination Therapy. We remain firmly committed do investing in the development of this market as well as in our pipeline of exciting technologies to support strong growth from many years to come.

With respect to our financial results for the first quarter, Thoratec generated revenues of $126.8 million, a 27% increase over revenues of $99.5 million in the first quarter of 2011. In terms of geographic breakdown, we quarter revenues of $103.9 million in the U.S. versus $82.5 million in the prior year, an increase of 26%, while international revenues were $22.9 million versus $17 million a year-ago representing an increase of 35%.

Excluding the effects of foreign exchange, which was unfavorable by $0.5 million as well as acquisition related revenues, year-over-year international revenue growth was 23%. Earnings on a non-GAAP basis were $0.51 per share an increase of 50%. HeartMate revenues in the quarter were $111.7 million versus $87.3 million a year-ago, an increase of 28%. Strength in our HeartMate II franchise was balanced across all key geographies and I’ll provide more detail on the underlying drivers of this strength momentarily.

Revenues from our acute support line, which includes CentriMag and PediMag were $8.7 million compared with $4.4 million a year-ago, an increase of over 90%. We’re certainly pleased with the continued momentum in this product line, which include a growth in the core U.S. CentriMag business of 34% as well as approximately $2.7 million of incremental revenues recorded as a result of the Levitronix Medical transaction, over 90% of which were generate outside the U.S.

Lastly, revenues from the Thoratec product line, the PVAD and IVAD were 5.8 million versus 7.3 million a year ago, a decrease of 21%. We recorded strong year-over-year unit growth in the quarter selling 1,057 pumps, an increase of 23% versus 859 pumps in the first quarter a year ago. In the U.S. market, we shipped 838 pumps representing a 24% year-over-year increase, while internationally pump volume increased 20% in the first quarter of 2012 to 219 units. HeartMate unit volume expanded by 32% in both the U.S. and international markets, offsetting a significant decline in PVAD and IVAD units.

Internationally HeartMate II showed particular strength in both France and Germany, while in the U.S. we achieved strong growth in both the bridge-to-transplant and destination therapy indications. We have seen encouraging development of the referral process facilitated by our market development efforts in conjunction with the outreach efforts of many of our implanting centers, and we’re seeing clear evidence that our D.C. market development strategy is bearing fruit.

Going forward we will continue to focus our investment on this large and sustainable growth opportunity. An important growth driver during the quarter was the continued adoption of HeartMate II by our Group III implanting centers, which consists of smaller transplant and open heart centers. While we achieved HeartMate II unit growth in excess of 20% across each major group of centers. The most rapid growth continues to come from this third group, where volume roughly doubled year-over-year. This group now include 19 transplant centers and 48 open heart centers and during the first quarter contributed close to 20% of our U.S. HeartMate II unit sales.

We anticipate that the adoption at open heart centers will continue to be a significant driver of HeartMate II performance in the U.S. for a few reasons.

First and foremost, clinical outcomes at open heart centers have been strong as evidenced by a presentation at ISHLT this year, which I'll discuss in greater detail later. Second, this group of centers is still early in its DT outreach efforts; so far only 19 open heart centers have received DT certification from the Joint Commission. Last, we anticipate that the vast majority of new VAD program development will come from open heart centers. For all these reasons, we’re excited about the growth prospects from the segments.

That said, I would note that many of these centers are early in their adoption of the therapy and we therefore expect performance to have some variability from quarter-to-quarter.

Turning to new center development, we added five HeartMate II centers in the U.S. and one internationally during the first quarter, bringing the total number of HeartMate II centers to 154 domestically and 145 internationally. In the U.S., there are currently 109 centers that have received destination therapy certification from the Joint Commission.

With respect to reimbursement, we are pleased to see that CMS is proposing an increase of approximately 8% in DRG1, the most commonly [code] for chronic implantable VAD procedures for fiscal year 2013. If this proposal has made final in the fall, it would bring the average Medicare payment for DRG1 at DT certified centers to approximately $200,000.

An important contributor to our growth in the first quarter and beyond is the attention and resources being devoted to continued development of the market for LVADs. In the fourth quarter earnings call, I’ve spent some time detailing the various initiatives both planned and underway aimed at expanding the use of mechanical circulatory support. And in the first quarter of 2012, we continued to make important progress with these initiatives. For example, we held our European Users Meeting as well as the two-day event for over 40 of our MCS fellows including both surgeons and cardiologist. Additionally, we hosted over 140 attendees at our latest educational summit for community-based clinicians, also known as our advanced heart failure therapies forum. Based on the success of this event, we have decided to add a third such program to our 2012 outreach calendar.

Another important aspect of our market development strategy is continued expansion in international markets. We have made solid progress in Japan and we anticipate regulatory approval in Japan in this summer, with the commercial launch in the fall following initial reimbursement approval. Notably, all six of our confirmatory clinical trial patients in Japan are still ongoing with over two years of support on HeartMate II.

The body of clinical data supporting HeartMate II continue to expand with several important data presentations at this years ISHLT annual meeting held in Prague several weeks ago; initial results from the DT post-approval study were presented by Dr. Ulrich Jorde from Columbia University, showing encouraging trends toward improvement since the clinical trial. The DT post-approval study includes the first 247 destination therapy patients enrolled into INTERMACS from 61 U.S. centers following FDA approval. The study is still ongoing and will reach full two-year follow-up for all patients this fall.

One-year survival for these patients reached 75%, demonstrating continuing improvement relative to the published results from the pivotal trial cohort as well as the DT CAP. In terms of critical adverse events, HeartMate II continued to demonstrate a low level of thromboembolic complications, while length of stay, bleeding, and infection are all showing favorable trends relative to the clinical trial. The DT post-approval study also showed a trend toward even better clinical outcomes with LASIK patients. While a presentation from Dr. Akman of the University of Minnesota described favorable economic outcomes for that group as well.

Dr. Akman’a presentation compared 86 patients in INTERMACS 4 to 6 with 39 patients in INTERMACS profiles 1 to 3, all treated at the University of Minnesota. The data showed a 45% reduction in length of stay and a 19% reduction in medium direct cost associated with the earlier stage patient group. And the presentation concluded that evolution of implant criteria and timing is likely to have a major impact on determining the cost effectiveness of continuous slow devices.

In another presentation, Dr. Katz from Bon Secours St. Mary's Hospital presented the clinical outcomes of 130 patients treated at 23 open heart centers. Although based of a relatively small number of patients the results are nonetheless highly encouraging as they demonstrated comparable outcomes to those achieved by heart transplant centers.

The presentation concluded that with proper training, patient selection, and patient management open heart centers can deliver excellent clinical results. These results validate the discipline manner with which Thoratec has helped disseminate all that technology into the broader community.

And they reinforce our confidence in the opportunity ahead for the open heart center segment of our HeartMate II franchise. ISHLT also featured a number of presentations supporting the use of our VADs in the elderly patient population. For example Dr. Calver from the University of Michigan presented an analysis of HeartMate II clinical trial patients over the age of 65 stratified in the low, medium and high risk groups based on the HeartMate II risks for.

The average age of these patients was 71 and 84% were destination therapy. The analysis showed that the low and medium risk groups achieved one year survival rates of 92% and 81% respectively. This analysis from the clinical trial in conjunction with other single center presentations at ISHLT suggested age in and out itself should not be considered a counter indication for LVAD therapy and the proper patient selection can lead to excellent outcomes for HeartMate II in the elderly patient population.

Lastly there were a number of interesting presentations examining strategies to further improve the overall adverse event experience with HeartMate II. Dr. Adamson from Sharp Memorial Hospital present a data showing the DT patients, who did not receive post operative heparin experienced a significant reduction in short term bleeding events with no impact on stroke or thrombosis.

Meanwhile Dr. Jeevanadam, from the University of Chicago showed there are modified driveline technique, which only the silicon portion of the driveline is externalized resulted in a 4% incidents of driveline infection as compared to 44% in patients in whom the lower portion of the driveline was externalized. We believe that most of our implanting centers have shifted to this modified technique and may therefore be realizing the benefit demonstrated by the University of Chicago.

Lastly Dr. Gregoric presented Texas Heart data on their positive experience with HearMate II sealed grafts. Patients treated with sealed grafts at Texas Heart have experienced less bleeding and required significantly less blood product transfusions with no increased risk of other adverse events compared to patients implant with unsealed grafts. [Even though other] presentations indicate the positive degree to which the clinical community continue to optimize the performance of HeartMate II in the commercial environment.

We continue to advance mechanical circulatory support therapy, a critically important component of our market development and market leadership strategy in the portfolio of programs and services that we offer to support our centers, clinicians, and patients. We are now identifying this broad platform as Thoratec 360, which includes its program designed to elevate program excellence, facilitate program growth and enhance the development of the MCS markets. For example, current offerings under the Thoratec 360 umbrella include a broad array of training and education programs, reimbursement education, Joint Commission certification of systems, a clinical and economic benchmarking program known as foundations, community cardiology education, [sellers’] education and training, site-specific clinical improvement initiatives and broader clinical work groups.

During the summer, we plan to launch a new Thoratec 360 offering called Thoratec Connect. Thoratec Connect is a unique Internet based mechanical circulatory support program management system designed to meet critical center needs including implant and equipment tracking for Thoratec products, product incident reporting and follow-ups, research mapping for patients planning to travel and learning management.

Thoratec Connect has been developed with multiple rounds of user testing in our initial data size have reported that the system enabled them to improve their efficiency in handling a number of important program management responsibilities. This uses have characterized the program as an MCS practice builder. We think if it is a cost-effective way to enable centers to dedicate more clinician time to patient care. In addition to meeting critical needs when the program is launched, we expect Thoratec Connect to be an important platform, which will enable us to deliver additional service enhancements and resources in the future.

Turning now to our product pipeline. We remain on track to launch the pocket controller for HeartMate II by the end of the year. As a reminder, the pocket controller is smaller and lighter than currently available controllers with an easy use interface, the ability to be stored in the patient’s pocket in a backup battery, which can support the patient for a short period of time in the event of a disconnection from other power sources. As such, we believe the pocket controller will both improve patient quality of life and enhance patient safety.

We also continue to be highly encouraged by our progress with HeartMate III, our next-generation fully magnetically levitated pump platform. Last year, we completed a series of pre-GLP animal studies that demonstrated robust performance of the device and confirmed our confidence in its blood handling characteristics, which we expect will be best-in-class.

Moreover, we have also grown increasingly optimistic with respect to the potential of HeartMate III’s pulsatility mode. On this point, I would note that while many pumps have the ability to induce some degree of pulsatility that is the full magnetic levitation technology, which serves as the foundation of the HeartMate III pump platform that enables us to generate a near physiologic artificial pulse.

Based on our findings to date as well as feedback from clinicians, we’ve decided to move forward to the clinical trial process with HeartMate III running in pulsatile mode. We've also made solid progress on the regulatory front including the receipt of written feedback from the FDA following our pre-IDE meeting earlier this year.

Outside the U.S., we have begun discussions with potential clinical sites and we reviewed trial options with our notified body. Our plan now involves moving directly into a pivotal CE Mark clinical trial studying HeartMate III in pulsatile mode, but we anticipate starting that trial towards the middle part of 2013.

In the U.S., we have enjoyed a very productive dialog with the FDA and based on those conversations as well as the agency’s written feedback, we currently planned to begin the U.S. trial shortly after the initiation of our OUS study likely prior to the end of 2013. We have previously mentioned several innovative trial design features, and our discussions with the FDA have given us increased confidence in the potential for these features to significantly speed the clinical and regulatory cycle time for HeartMate III.

Lastly, with respect to our Percutaneous Heart Pump for Acute Circulatory support known as PHP. Our preclinical testing continues to point toward a highly attractive product design. When they can deliver over four liters of blood flow per minute through a low profile catheter system with minimal risk of hemolysis. We are also working our regulatory strategy and we’ve had recent meetings with both the FDA and our Notified Body in the EU. Internationally, we plan to initiate a pivotal CE Mark study at the beginning of 2013, and we anticipate approval and commercial launch of PHP outside of the U.S. during 2014.

In the U.S. market, our strategy is to provide compelling justification over time for the benefit of PHP in a series of clinical settings. We have begun discussing clinical trial options with the FDA and anticipate additional feedback over the next two quarters with respect to our strategy and regulatory pathway. Based on our growing interaction with clinicians, we are increasingly excited about the market potential for PHP, and look forward to initial clinical utilization of the device late this year.

Before turning the call over to Roxanne, I’d like to highlight a significant milestone for our HeartMate II franchise. The implant of our 10,000 patients and on behalf of Thoratec, I’d like to congratulate and thank all the members of the medical community who are participated in this achievement. HeartMate II is the most widely utilized and extensively studied LVAD in history. And this milestone serves as the nice reminder of the magnitude of the real-world impact, the devices had in the lives of patients suffering from advanced heart failure.

As we prepare for the possibility of additional competition later this year, we have great confidence in the strength of the HeartMate II franchise driven by the rigor of the clinical research that support its use the favorable efficacy and safety profile, the pump has demonstrated even in highly challenging patient population and the experience level of the Thoratec team, which is providing unrival support in planning centers as well as the broader VAD community.

In closing, let me reiterate how encouraged I am by our performance during the first quarter in particular by the breadth of participation across our implanting center Universe as well as the ongoing development of the destination therapy market. We also excited to begin delivering on our technology development roadmap, including the planned launches this year of our Thoratec connect IT platform and our pocket controller for HeartMate II followed by the initiation of clinical trials for PHP and HeartMate III, both of which we believe have the potential to provide best-in-class solutions for patients in acute and chronic heart failure.

As for HeartMate II, we continue to realize the benefits of our market development efforts and as we move forward, we will continue to refine our strategy. We invest in programs and personnel and redouble our energy in the areas that are providing the most attractive returns.

Thank you again for joining us today, and I look forward to speaking with you during the Q&A session. I’ll now turn the call over to Roxanne.

Roxanne Oulman

Thank you, Gary. Before reviewing our results, I want to remind you that non-GAAP net income excludes for tax affected impact of amortization of intangibles, share-based compensation expense, transaction costs, and inventory fair market adjustments related to the Levitronix Medical acquisition and the accounting for convertible debt instruments that maybe settled in cash. You can find a reconciliation between our GAAP and non-GAAP results in our press release at thoratec.com.

Revenues for the first quarter of 2012 were $126.8 million, compared to revenues of 99.5 million in the first quarter a year ago. Non-GAAP gross margins for the quarter was 71.6% versus 70.5% in the first quarter a year ago. Factors impacting gross margin versus the prior year include volume based deficiencies and a contribution from the acquisition of Levitronix Medical.

Non-GAAP operating expenses for the quarter were $45.7 million versus $36.8 million in the first quarter a year ago. Factors impacting the increase in operating expenses year-over-year include the inclusion of Levitronix Medical, as well as increased spending on product and market development initiatives, including continued expansion of our research and development and field organization.

As we continue to invest in growing the destination therapy market and advancing our next generation mechanical circulatory support platforms. Non-GAAP operating margin in the quarter was 35.5% versus 33.5% a year ago. On a non-GAAP basis, the company’s effective tax rate for the quarter was 33.1% versus 34.1% last year.

Contributing to the lower tax rate was a greater percentage of earnings generated in lower tax jurisdiction, a function of the acquisition of Levitronix Medical. This was in part offset by the inability to recognize federal research and development credit in the absence of an active legislation.

Non-GAAP earnings per diluted share in the quarter was $0.51 compared to $0.34 a year or an increase of 50%. Weighted average diluted shares outstanding for the quarter were $59.4 million versus $66.1 million a year ago. Contributing to the share reductions was the repurchase, the share repurchase activity and extinguishment of convertible debt that occurred in 2011.

With respect to the balance sheet, we ended the quarter with $247.5 million in cash and investment. This compares to $209.5 million at the end of the fourth quarter and $438 million at the end of the first quarter of 2011. in terms of guidance for 2012, we expect that our revenues will be in the range of $452 million to $467 million dollars; this represents an increase from our prior guidance, which reflects our strong first quarter performance as well as our optimism surrounding continued momentum in the destination therapy market driven by our market development initiatives.

Non-GAAP gross margin is expected to be in the range of 71% to 71.5%, an increase of 50 basis points versus our previous guidance driven primarily by the manufacturing efficiencies that we are achieving at higher volume level.

Lastly, non-GAAP earnings per diluted share are expected to be in the range of $1.62 to $1.72 per share, an increase of $0.04 per share relative to our previous guidance range. Embedded in our revised earnings guidance is our intent to reinvest a portion of our revenue and gross margin upside into product and market development initiatives. On a GAAP basis, we have increased our guidance range to $1.24 to $1.34 per share.

Thank you again for joining us today. We will now open the call to your questions. In interest of time, please limit your questions to one and a follow-up. Operator, we are now ready to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from Bob Hopkins with Bank of America.

Robert A. Hopkins – Bank of America Corporation

Thanks very much. Can you hear me, okay?

Gerhard F. Burbach

Yes.

Robert A. Hopkins – Bank of America Corporation

Great, and congratulations on another great first quarter.

Gerhard F. Burbach

Thank you.

Robert A. Hopkins – Bank of America Corporation

It reminds me where we were I think two years ago, when you reported a very surprising first quarter. So I guess my first question is really, can you just help us explain a little bit about what really went on this quarter and why you don’t think it’s going to be sustained, because obviously your revenue guidance would suggest a deceleration in the remaining nine months of the year. And then I also want to ask about the new spending programs, and exactly how much money you’re spending on those and what they really encompass? Thank you.

Gerhard F. Burbach

Sure. Yeah, I mean in terms of guidance, obviously, we’re only a quarter into the year. So we did want to obviously raising guidance was very appropriate. But we didn’t feel like after one quarter, we wanted to kind of too far up in terms of that initial the raise in the guidance. In terms of the drivers really it was kind of success across a very broad base of areas domestic, as well as international.

So internationally, very much driven by HeartMate II and strong growth in terms of implant activity, particularly in some of our core markets like Germany and France. In the U.S., we saw strong continued growth in destination therapy. Those are factors that we expect to continue to drive forward and really be the basis of growth during the year.

We did see stronger than expected growth in bridge-to-transplant. As you know, that’s an area that’s been kind of lumpier historically. And kind of part of that was, I think based on HeartWare not having a CAP during the quarter. But part of it was also just even without that we saw some stronger bridge growth kind of high single-digits percentage versus last year we were kind of close to flat in terms of what we’re seeing in the bridge market.

And so there we obviously want to be more cautious in terms of expectations of that being a dynamic that continues as we go forward. So we expect that fundamental DOWNTURN market growth focused to be key driver going forward. And so in terms of spending, certainly expansion – continued expansion in the programs that are focused on driving that DT market development would be one and then second would be continued expansion in investment in our product development portfolio. Those are really kind of those two areas are really the key focus areas for spending.

Robert A. Hopkins – Bank of America Corporation

And what’s the incremental spend in terms of dollars that you’re anticipating in the back half?

Gerhard F. Burbach

Yeah, so we didn’t provide a specific number on that but obviously if you take the guidance that we provided in terms of the revenue and the gross margin and the EPS, you can back into that and it’s a few points higher than we did provide guidance at the beginning of the year in terms of operating expense, if you do that you’ll see that it’s a few points higher than what we had provided at the beginning of the year.

Robert A. Hopkins – Bank of America Corporation

And then just lastly, on the bridge-to-transplant being up high single digits, but you haven’t seen that in a long time, is there besides the cap any explanation that would help us understand why that increased so much or should we just continue to model, I mean there is no reason why we should be modeling anything other than sort of zero to 1% to 2% growth for BTT going forward, correct?

Gerhard F. Burbach

Yeah, there isn’t something that we can point to and say, hey; there is a kind of change in the dynamic in the marketplace. So as we look forward, our expectation would be for lower growth in that BTT segment.

Robert A. Hopkins – Bank of America Corporation

Great, thank you.

Gerhard F. Burbach

Thank you.

Operator

Our next question comes from Chris Pasquale with JPMorgan.

Christopher Pasquale – JPMorgan

Thanks. Can you hear me okay?

Gerhard F. Burbach

Yes.

Christopher Pasquale – JPMorgan

So I just want to circle back on Bob’s question and the upside this quarter, anyway you could quantify how much you think you benefited from the HVAC CAP not being there and any other sort of one-time items that may have helped you this quarter?

Gerhard F. Burbach

Yeah. In terms of the HVAD CAP, kind of our best estimate would be probably a little over $3 million and I would give there just looking at kind of what was their implant trajectory as you looked at the previous couple of quarters in 2011, were they did have a CAP. Other than that, there is not any other kind of one-time events, there’s obviously the bridge market that was more robust in Q1 that we already talked about that during the Q&A with Bob. so I won’t go over that again. but there's nothing else I would characterize as one-time other than just reminding people that the Levitronix medical acquisition that occurred at the beginning of August of last year and we highlighted that in the comments there were $2.7 million benefit that we realized in Q1 versus Q1 of last year will fill out benefit from that in Q2 and part of Q3, but then that will be equalized as well as have that asset after that.

Christopher Pasquale – JPMorgan

Right. On the HeartMate III clinical pathway, did I hear you correctly that you now expect to move directly into a pivotal CE Mark studies, you’re sort of foregoing that first demand kind of leading trial, but that are you pushing back to beginning of the program now to mid-2013 versus year-end 2012. Is that right – could you just talk about what changed there, what’s the thinking?

Gerhard F. Burbach

Yes. You did hear that correctly. So as we continue to work through that regulatory and clinical process, we felt like kind of focusing our energies on the actual regulatory and approval process, kind of where is the key. It’s not so much about kind of when does the first implant happen. It’s obviously about when do you getting an approval and do you have a very successful device in terms of your clinical outcomes when you get through that clinical trial.

So we feel very good about the HeartMate III program on those fronts in terms of both what we’re seeing, both in animals and on the [bench] and the performance they were seeing from the system. We are, in the time frame, also making some kind of refinements to the system to really again optimize the pathway to success as we move into the clinical trial and regulatory process. And so, we felt like this was the optimal process to move forward on. And then, as I mentioned, we are very encouraged by the dialog with the FDA and the likelihood that we’ll be able to drive a more aggressive, faster cycle time trial and approval process with the HeartMate III.

Christopher Pasquale – JPMorgan

Okay, great. And just quickly, I may have missed this, but what percentage of U.S. HeartMate II pumps this quarter were for DT?

Gerhard F. Burbach

Yeah, it was around 40%

Christopher Pasquale – JPMorgan

Okay, great. Thank you.

Gerhard F. Burbach

Thank you.

Operator

Our next question comes from Steve Lichtman with Oppenheimer & Company

Steven Lichtman – Oppenheimer & Company

Thanks. Hi, guys. Just a clarification on the HeartMate III pathway, so versus your prior expectation in terms of [go in] first demand going direct to the pivotal in Europe now and next year, is that a faster overall pathway, about in line, just want to get clarification on that. And then, anything more you can talk about relative to your discussions with the FDA, and you talked about potentially speeding up the pathway here in the U.S.?

Gerhard F. Burbach

Right. Yeah, and I think in terms of Europe that I described but it’s inline in terms of the U.S. I think we have the opportunity to accelerate the pathway kind of based on that trial and regulatory approach. At this point we really don’t want to get into specifics there is obviously some competitive aspects, we feel like we have quite unique approach that we are in dialog with the FDA on I mentioned that we do have written feedback from them at this point. So we’re feeling quite good about the ability to pursue an approach that we’ll lead to that kind of a more accelerate pathway.

Steven Lichtman – Oppenheimer & Company

Okay. And then, just a couple of clarifications on the BTT growth this quarter, you talked about high single digit, was that width of the benefit of HeartWare not having the cap or is that conclusive of that?

Gerhard F. Burbach

Right, that’s exclusive of that.

Steven Lichtman – Oppenheimer & Company

So even exclusive you think if BTT grew in the upper single digits.

Gerhard F. Burbach

That’s correct.

Steven Lichtman – Oppenheimer & Company

Okay. And then just lastly on the guidance the last quarter you talked specifically about assuming HeartWare comes to market mid years, is that still embedded or push it out a little bit, what’s in the above what’s an expectation.

Gerhard F. Burbach

Yeah, we have not changed our expectations relative to the HeartWare timings.

Steven Lichtman – Oppenheimer & Company

Okay, great. All right, thanks guys.

Gerhard F. Burbach

Thank you.

Operator

Our next question comes from Rajeev Jashnani from UBS.

Rajeev Jashnani – UBS Securities Co., Ltd.

Hi, good afternoon.

Gerhard F. Burbach

Hello.

Rajeev Jashnani – UBS Securities Co., Ltd.

Hello, my question is just going back to the guidance I think we had a solid first quarter, but if I’m looking at my numbers correctly you’re implying about 3% to 5% growth across the balance of the year. And I just wondering obviously the competitive dynamics involved obviously we’ve seen this market can be lumpy quarter-over-quarter, but maybe talk a little bit more about what you’re expecting for market growth particularly the U.S. DT market for the rest of the year? Thanks.

Gerhard F. Burbach

Yeah, so I mean we’re obviously looking at the year end total, and so for the year in total with this new guidance, we’ve raised our market growth expectations for the year by a couple of points. And in terms of the competitive dynamics, as I mentioned we haven’t changed our expectations in terms of the timing. I’ve mentioned before that we expect to maintain a strong leadership position when HeartWare assuming that they receive FDA approval for bridge transplant.

I’d say we feel more confident about that than ever after the HeartWare panel where they had not demonstrated improvements in clinical outcomes in some of the key areas that were concerns, stroke rate, thromboembolic, event rates even to the point that the FDA commented in their panel pack that the pump failure thrombosis rates and neurological event rates are unlikely to substantially decrease, which we view it is as a pretty strong statement from the FDA.

And then in addition to add, they were some new opportunities for us really that kind of came up that really hadn’t kind of been seen in the data previously. They have high perioperative infection rates. They’re functional outcomes in terms of six minute walk. We’re substantially lower than we’ve seen with the HeartMate II at six months. So we’re feeling very good about that competitive dynamic ones that occurs.

Rajeev Jashnani – UBS Securities Co., Ltd.

I appreciate that, but I mean the guidance still implies a deceleration here markedly in the back half – the underlying market are you expecting, I guess what's driving your view there?

Gerhard F. Burbach

As I mentioned, we are really looking at the guidance on a full-year basis and so kind of our market, the market growth for the year were raising that expectation versus the expectation that we said a few months ago here at the beginning of the year.

Rajeev Jashnani – UBS Securities Co., Ltd.

Okay, thank you.

Gerhard F. Burbach

Thank you.

Operator

Our next question is from Jason Mills with Canaccord.

Jason Mills – Canaccord Genuity

Thank you Gary, for taking the question and congrats on a great quarter.

Gerhard F. Burbach

Sure, thanks Jason.

Jason Mills – Canaccord Genuity

So let me ask you the market growth question different way and looking back at the last three years as sort of a proxy 2009, 2010 US unit volume was over 20% and you guys being the preeminent leader in the market looks (inaudible) last year, just with respect to the unit growth in the U.S. and survey, we recently saw what seem to be somewhat of inflection point here entering the first quarter results and clearly delivered even better than what we were expecting. So I’m wondering if you could sort of tie end from our prepared remarks some of the key aspects that you see in the U.S. markets, it's really seemingly driving sort of change in slope in the growth relative to last year and I guess from an overall margins per unit growth perspective, is there any reason to believe that the market can accelerate from last year, is it easier comp and perhaps could we see 20% type growth again in 2012 for the overall market.

Gerhard F. Burbach

Well, so let me first hit the first part of your question in terms of the growth drivers, and I think that's the most important takeaway probably from this call is that we did see a very broad-based kind of foundation for growth or expand the full universe of centers, the trial centers, the other larger transplant centers as well as the newer predominantly open heart centers, all of those groups grew by over 20% on a year-over-year basis in terms of their HeartMate II volume. And then the last group to open heart centers in particular grew by about 100% on a year-over-year basis. So we saw kind of a dramatic step up in that group.

As I mentioned, we really think that as you look forward that becomes a more and more important aspect of our growth. And kind of with all of those DT being kind of our core foundation of growth, I did mention that the bridge aspect has obviously kind of a lumpier part of the dynamic, but in terms of DT we feel very good about kind of a sustained dynamic of growth kind of is the foundation for success going forward.

At this point, we’re obviously; we put our guidance out there. So in terms of kind of the specific numbers, those are the numbers that we feel comfortable with today, where one quarter into the year was a very good quarter that I think that kind of foundation elements are very strong, not just for today. But as you look at a multiyear kind of a time horizon, we think there is tremendous ongoing upside and we certainly did see strong enthusiasm in the marketplace kind of stronger than we’ve seen the past kind of across that broad range of implanting centers as well as more enthusiasm within the referral community. So I think that’s a sign of traction that we’re seeing from our market development outreach educational efforts.

Steven Lichtman – Oppenheimer & Company

Perfect, that’s very helpful. As a follow-up, outside the U.S., you guys are clearly in about two times a number of centers outside the U.S. is HeartWare, my sense is as you talk to and go to these international meetings, the enthusiasm amongst international surgeons may be growing as well. If you could comment on that and perhaps quantify what your opportunity for new center expansion is outside the U.S. clearly Japan as part of that I presume? And then in the U.S., also on the new center activity, can you put a finer point to maybe what do you expect to see in terms of new centers ads out of all-in across all of your categories in 2012? And I’ll get back in queue. Thanks, Gary.

Gerhard F. Burbach

Okay, sure. In terms of new center growth outside the U.S., it’s highly variable market-to-market. There is some markets where in the near-term might expect a little new center growth places like UK, where they’ve got kind of hard structural impediments to the based on the governmental reimbursing authorities.

In other markets like Germany, there is much more opportunity that similar to U.S. to get open heart centers engaged in the therapy, certainly Japan as you pointed out, I think it is kind of the most fundamental, new opportunity that bring new centers, a significant new population of patients into the therapy over the next few years. And then, other market like Turkey is the market that’s kind of recently opened up and we’re starting to see activity and there is new risk market like that that we expect we will start to develop over the course of the coming quarters and years.

And then relative to the U.S., we set an expectation for 15 new open heart centers. This year, we added five in the first quarter. So we’re obviously kind of well on track to that objective probably a little bit ahead of track and relative to the DT certification, which is the important second step. We had a target kind of 110 to 115, were to 109, we answered that here; I believe it 99 or 100. So again we’re very solidly on track to meet that expectation as well.

Steven Lichtman – Oppenheimer & Company

Thank you.

Gerhard F. Burbach

Thank you.

Operator

Next from Credit Suisse, we have Bruce Nudell.

Bruce Nudell – Credit Suisse

Hi, thank you gentlemen. Gary, just to be explicit, what is your overall U.S. market assumption for growth this year across blended DT and BTT?

Gerhard F. Burbach

Yeah, we’ve provided an expectation for double-digit growth. So we haven’t given an exact percentage number. But we have given a double-digit expectation. So obviously in Q1, we pretty solidly outperformed the expectation that we entered the year with.

Bruce Nudell – Credit Suisse

Okay. So it doesn’t sound as though you’ve reached the point where you feel that patient selection and medical management optimization has created a sea change where we’ve reached an inflection point or do you feel that we’re actually aren’t getting there?

Gerhard F. Burbach

Well, I think we’ve always tried kind of move people away from that phraseology inflection point, which may characterize sudden kind of 50% year-over-year growth. We’ve set a multi-year kind of expectation out there that has tied to it high teens in average annual growth rate. We continue to believe in that kind of expectation, so and certainly all the indicators that we’ve had since launching for DT at the beginning of 2010 were kind of nine quarters into that process now are very positive. There is a little bit of lumpiness or kind of it’s not a straight-line quarter-to-quarter to quarter, but if you look at it on more of a year-over-year over year basis, I think we’re on a positive track for 2012 to be another kind of strong year similar to 2010 and 2011.

Bruce Nudell – Credit Suisse

I guess one, my last question is at the panel clearly the FDA itself there were some unanswered safety questions with HeartWare, which presumably don’t be able to optimize over time. But to the extent that the agency (inaudible) is over deep into Q4, I mean what does that do with your guidance, it were just dramatically – if the upside kind of falls into your lab, will that be reinvested or is that the kind of saying where you’ll let the things flow through? Thank you.

Gerhard F. Burbach

Okay, sure. Yeah, I appreciate that question. And I’d maybe just back up one step and point two. There is really two sources of potential upside to our guidance kind of fundamentally. One is stronger market growth then it is have underlined the current guidance. So that’s obviously a potential upside opportunity. And then the second would be what you’re pointing to is the HeartWare approval process dragged out, happened later in the year or outside of the year. Clearly that creates an upside opportunity for us as well. If either or both of those occur, my expectation would be that we will take some of that incremental earnings opportunity and invest it, kind of reinvested in market development, as well as product development in kind of these two key focus areas. But then we will also have part of that that flows through to the bottom line, which is consistent whether if you look at Q1 that’s essentially what we did. We added $0.04 to our bottom line guidance and we will be investing a significant amount of that into some of these key strategic activities.

Bruce Nudell – Credit Suisse

Thanks so much.

Gerhard F. Burbach

Thank you.

Operator

Our next question is from Tom Gunderson with Piper Jaffray.

Thomas Gunderson – Piper Jaffray

Hi, good afternoon. Gary, I’m hearing a little bit of theme here, where we’re trying to discern the disconnect between, having a really strong quarter being on top and bottom line and you had guiding them little bit lower. There is one side that says, well that’s just the side of conservatism and you don’t want to count your chickens before they hatch kind of thing, and there is the other that’s say, dude what do they know that we don’t know that’s making them so cautious. And people have come out from different ways. All right, did you see anything in the sequence of January to February to March that would give you any pause that says this was an unusual quarter in that kind of sequencing? Is there anything you want to let us know that is giving you an extra little of caution or is it just so many in May 1 and we’ve still got ways to go?

Gerhard F. Burbach

Yeah, no there isn’t a kind of something, kind of hidden there that creates some extra caution, it is only May 1, we’re only through one quarter, I did highlight the items that I thing it’s important for investors to consider obviously the cap was a kind of unique event during Q1 that we benefited a few million dollars from, we did see a little higher bridge-to-transplant activity in terms of the level of growth that we saw in Q1, and I would not kind of at this point guide to that kind of expectation, to see that for the balance of the year, obviously we would be thrilled if we saw kind of a higher bridge-to-transplant level of activity going forward, but I don’t think after one quarter it would be wise to assume that that’s going to be an ongoing dynamic.

For those who are really kind of the two pieces that, I think it's important for investors to be mindful of as they look at Q1, and then think of the balance of the year and obviously it is a business that we regularly advice investors don't look at one quarter in isolation, you can be either overly optimistic or overly pessimistic based on that short of time horizon, I think the most important thing is as you look beyond kind of the very short term and you look at kind of the opportunity for the company not just this year but over a multiyear horizon, I think Q1 very, very strong proof point to the destination therapy market opportunity, this is real lots of potential for ongoing and broader application of this therapy.

Thomas Gunderson – Piper Jaffray

And then, you mentioned two upsides, market good grow faster than you’re planning and maybe HeartWare comes in a little later. How does Japan fit into that and could you give us a little color on that – in the prepared text you approval in summer and reimbursement in fall, but there's a lot in between summer and fall but has to happen as you know for that to overcome.

Gerhard F. Burbach

Yes. So we still have to get the approval for the PMGA and MHLW that's the process that we expect it will be finished this summer and then the reimbursement should come shortly thereafter. Our expectations that we have built into our plan at this point for this year or less than $1 million in terms of revenue in Japan, so we are reviewing that as a very, very contributor this year and then starting to expand really as we have a full year of activity in 2013.

Thomas Gunderson – Piper Jaffray

Thank you.

Operator

Our next question comes from Matt Taylor with Barclays.

Matt Taylor – Barclays Capital

Hi, thanks for taking the question.

Gerhard F. Burbach

Sure.

Matt Taylor – Barclays Capital

So, I guess my first question is in terms of the European growth, did you see anything that you’d like to call on in terms of share gains or anything this was more market growth or too early to tell.

Gerhard F. Burbach

Well, we believe that there was both market growth as well as share gains in particularly Germany, we saw a kind of strong progress a number of accounts, so we do think that we saw share gain there in or so, a combination of both of those.

Matt Taylor – Barclays Capital

Great. And then in terms of your thoughts on the accelerated timelines for HeartMate III and PHP, can you comment on your thoughts on the panel. Obviously there was a lot of talk around the use of a registry as the control arm and I know that I guess it could be a possibility for HeartMate III and you have better access to that data. So is there anything that you can tell us about that, without going into your competitive strategy?

Gerhard F. Burbach

Sure. I think that the use of registry, INTERMACS is very viable. Obviously we and everyone learned quite a bit from HeartWare, they were kind of the first ones and that’s always a kind of challenging thing to do, so there was learning by all on that front. And to your point, we have a lot more visibility beyond the data that’s actually in the registry in terms of the HeartMate II implant that are going into that registry. So that give us the ability I think to do some things kind of differently more robustly and more confidently than a party like HeartWare someone else that’s really blind to what’s going into that registry.

Matt Taylor – Barclays Capital

Okay. Thanks a lot for your time.

Gerhard F. Burbach

Thank you.

Operator

Our next question comes from Suraj Kalia with Rodman & Renshaw.

Suraj Kalia – Rodman & Renshaw

Good afternoon gentlemen.

Gerhard F. Burbach

Hello, Suraj.

Suraj Kalia – Rodman & Renshaw

Gary, congratulations on an excellent quarter.

Gerhard F. Burbach

Thank you.

Suraj Kalia – Rodman & Renshaw

A move from the numbers for a second, I’m just curious in more clinical point, with the HeartMate III in a pulsatile mode be dependent on after load and also could you share some color on the what to the extend that you can whatever and anticoagulation regimen that are seen in the GLP studies.

Gerhard F. Burbach

Yeah, so those kind of factors like after load certainly affect kind of any pump in varying ways, but certainly we believe that one of the core benefits of the system is that it would interface with the kind of normal biology of the body in a more natural way and improve on some of the kind of challenges that well continuous low pumps HeartMate II in particular been extremely successful. Obviously we’d like to see GI bleeding rates continue to go down, AI is now opportunity continue to bring that down suddenly and so far as you can continue to reduce thromboembolic complications is a big positive.

So those when we talk about the best in class blood path, those are the kind of benefits that we’re looking to realize and associated with that is certainly the potential for a lower anticoagulation regimen. Can that be lower than HeartMate II? Really can’t answer that question until you get into a clinical trial. HeartMate II is certainly (inaudible) very solid kind of bar in terms of kind of its performance on that front, but we certainly expect HeartMate III to at least match and expect in a number of ways to improve on what any pump up until now has been able to demonstrate.

Suraj Kalia – Rodman & Renshaw

Gary, how we reached the point where we can safely say look the up tick in HeartMate II thromboembolic events if I can put it in that category was more because of a change in the procedures and how the pumps are being implanted rather than anticoagulation regimen change or anything fundamentally related to the pump design. The reason I ask is, all field checks now indicate as a whole in aggregate HeartMate II events are coming down again maybe it’s because IFU change or whatever, love to get some additional color from you.

Gerhard F. Burbach

Yeah. A lot of time, I really have kind of a lot new to report on that front. last time, we did talk about some of what you’re describing working with individual centers really to kind of understand what was going on, making sure that kind of we’re fought there following best practices be that anticoagulation, be that pumping plantation. so I certainly hope that those activities are having a positive impact.

Suraj Kalia – Rodman & Renshaw

And finally, Gary, maybe this is an unfair question, but I'll still ask. one of the things we caught from the HVAD briefing documents was that the centered HVADs, the debt rates were higher, haemorrhagic stroke rates were higher, ischaemic strokes went down relative to uncentered, admittedly, there's a small patient population. But would you say that this is sort of a normal trend, I mean it just caught us by surprise, and I’m missing something into centered versus uncentered?

Gerhard F. Burbach

Yeah. I mean to your own comment, it’s a small data set. So at this point, certainly there is not a demonstration of improvement in performance, the FDA came out and said as that much kind of in their panel document. So I think at this point, we don’t see anything kind of from the little data that's out there that would indicate; this device is going to have a different kind of performance than we’ve seen in the broader data set.

Suraj Kalia – Rodman & Renshaw

Thanks guys, congrats again.

Gerhard F. Burbach

Thank you.

Operator

Our next question comes from Jayson Bedford with Raymond James.

Jayson Bedford – Raymond James

Good afternoon. Thanks for squeezing me in guys.

Gerhard F. Burbach

Sure.

Jayson Bedford – Raymond James

Just a couple of cleanup questions. I'm guessing the business wasn’t impacted in the first quarter from the fuel safety notice in late February.

Gerhard F. Burbach

Right, yes.

Jayson Bedford – Raymond James

Okay.

Gerhard F. Burbach

That's right, yeah, we indicated that we didn’t expect to see any material impact from that and that’s been going to really been a kind of, we haven't gotten much concern from centers on that front.

Jayson Bedford – Raymond James

That's fair. And I don't mean beyond grateful, but was there a benefit from an extra sales day in the quarter?

Gerhard F. Burbach

An extra sales...

Jayson Bedford – Raymond James

That doesn’t matter really, but just I’m just curious.

Gerhard F. Burbach

No, I don't think that it’s got that's not material for sure.

Jayson Bedford – Raymond James

Okay. And then I guess finally, last quarter, you did allude to some market development initiatives in Europe, obviously you put out great growth in the first quarter. so I guess I'm wondering, can you just elaborate on what you're doing there to grow the business and if indeed these initiatives helped at all?

Gerhard F. Burbach

Yeah. We are trying to carryover some of the things that we’ve been doing in the U.S. obviously being judicious in terms of recognizing the difference in those markets. So it's been predominantly focused on Germany and France, we did see very solid performance in both of those markets, and I do believe that those activities were a part of that positive progress. So an example, Jayson, we obviously has not timing to get into a lot of detail, but like our NVMs, so we have made some initial NVM investment in those markets in Europe, just as an example.

Jayson Bedford – Raymond James

Okay, thank you.

Gerhard F. Burbach

Thank you.

Operator

Our next question comes from Spencer Nam with ThinkEquity.

Spencer Nam – ThinkEquity LLC

Hi, guys. Thanks for taking my questions. Just a couple of quick questions. First one is, do you guys expect you would be facing competition from HeartWare with a centered pump initially or uncentered pump?

Gerhard F. Burbach

So as we put our guidance together, we’ve assumed that it would be with a centered pump. And that was kind of; obviously there have been a lot of commentary by HeartWare that I believe that that was not kind of a real issue. from the panel review, it sounded like it was maybe a little more of a question mark than we believed beforehand. At this point, we were sticking with kind of the current approach that we have the guidance. Obviously that process will play out. We don’t really have visibility to what’s going on there. And, so anyway at this point we are assuming that will be the centered pump.

Spencer Nam – ThinkEquity LLC

Thanks for that. And then second question is, you mentioned earlier that the percentage of the DT pumps, HeartMate II’s this quarter was 40% in the U.S.

Gerhard F. Burbach

Yeah.

Spencer Nam – ThinkEquity LLC

I was curious what do you expect in terms of the rest of the year, do you have any sense what you guys have in mind in terms of, is it going to be 50%, is it going to be 60% at the end of the year? How should we think about that? And to that extent, are there some elements that we’ve seen in the past with (inaudible) that could play into this second and third quarters of this year?

Gerhard F. Burbach

Yeah. Our expectation would be that DT would be approaching 50% at the end of the year. And I wouldn’t point to any other kind of lumpiness factors beside, what I talked about earlier in terms of the bridge cap, kind of the bridge strength that we saw in Q1. Obviously, we also have some typical or some more seasonality, but nothing unique beyond those factors.

Spencer Nam – ThinkEquity LLC

Thank you.

Gerhard F. Burbach

Thank you.

Operator

Our next question comes from Danielle Antalffy with Leerink Swann.

Danielle Antalffy – Leerink Swann LLC

Hi, guys, good afternoon, and congrats on a great quarter.

Gerhard F. Burbach

Thank you.

Danielle Antalffy – Leerink Swann LLC

Just wanted to touch on market growth again, Gary, you talked about one quarter market growth trajectory doesn’t make. But if I look back at the last four quarters taking sort of an average growth rate for HeartMate II volumes, I’m getting to a mid-to-high teens growth rate, so a lower sort of 10%, a higher sort of high 20% range. So how many quarters before a sort of double-digit number becomes sustainable and believable, and I guess that leads to the sort of volatility you talked about, what is critical math here at which point the volatilities moves out a bit quarter-to-quarter?

Gerhard F. Burbach

Yeah. So I mean certainly, as we’ve looked at a kind of multiyear horizon, we’ve set a double-digit expectation, so that certainly is our expectation on a kind of longer-term horizon. And in terms of volatility, I think as we’ve talked about as the market continues to grow, we expect that volatility to continue to be dampened. I think certainly, if you look out where we are today versus where we were five or six years ago, the volatility is not as great as it used to be. But we are still in a market with relatively smaller numbers, the bridge to transplant aspect of it in particular have more volatility. so as DT move to the 50% and then 60% and becomes really the more dominant part of the market, we’ll see continuing improvements in reducing that volatility.

Danielle Antalffy – Leerink Swann LLC

Okay, great. Thanks for that. And if I could touch on reimbursement really quickly, it came in better than we have thought sort of high single-digit growth and that's great. How could that impact market growth, I mean is that a real driver of market growth at all, first question. And then second question, it looks like CMS is not going to breakout at least for 2013, a separate LVAD code. Can you talk about your thoughts on continuing to pursue that going forward and how that could impact market growth? Thanks so much.

Gerhard F. Burbach

Sure. Yeah, that was higher than we expected as well. And certainly I think that’s a positive relative to market growth, the more profitable the procedure is across a broader range of centers, a broader range of patients, that’s definitely a positive factor relative to the kind of breaking the code, separating transplant from VADs. CMS commented that they didn’t do that, it seems like there are two kind of underlying points there, one, the procedure volume and DRG2 being too low and two, there being only one manufacturer with an approved product.

so as those two issues are addressed here, we don't expect that that proposed ruling will change in this cycle. But the good news from our perspective is sort of a couple of pretty specific kind of issues that we would expect as we go forward here, those will be eliminated. And so I think there is a pathway that we have to making that transition, won’t happen this year, we don't think, but maybe it will happen next year if not, certainly I think within a couple of years, we have a strong pathway towards that which will increase reimbursement by a pretty decent chunk when hopefully that occurs. and so that creates another I think benefit in terms of market growth.

Danielle Antalffy – Leerink Swann LLC

Thank you so much.

Gerhard F. Burbach

Thank you.

Operator

Next from Wells Fargo, we have Larry Biegelsen.

Lawrence H. Biegelsen – Wells Fargo Securities, LLC

Thanks for putting me.

Gerhard F. Burbach

Sure.

Lawrence H. Biegelsen – Wells Fargo Securities, LLC

And congratulations, do think I mean it’s hard to – do you think the publishes around Dick Cheney helped a little, a lot, do you think it helped it at all?

Gerhard F. Burbach

I think it’s helped, I don't think that was unique to Q1, Larry. But if I look at a broader time horizon, I think he was implanted about a year and a half ago. and so like Eddie was on his book circuit tour, he had a lot of visibility kind of in – I think that was in the fall of last year and we definitely hear that from clinicians that there are patients that kind of specifically ask for the Dick Cheney pump. and so that did create a lot more visibility regarding that therapy.

Lawrence H. Biegelsen – Wells Fargo Securities, LLC

Okay. And help us understand the HeartMate III, you talked about the OUS timing, it’s no different from the prior time when you’re going to do first demand by the end of 2012 and now you’re going to do CE Mark trial mid-2013, could you help us understand why it’s a six-month delay how – what you're doing, the current plan will get you to market as quickly as the old plan, could you just give us some more granularity around that please?

Gerhard F. Burbach

Yeah. I was really not so much about when did the first implant happen, but when are you in the trial and then how rapidly are you able to accumulate the enrollment in the trial. And so based on those factors, we believe that the timeline will be largely consistent in terms of that CE process.

Lawrence H. Biegelsen – Wells Fargo Securities, LLC

Could you just remind us, last from me, Gary, just what does that CE Mark trial look like in terms of size and a follow-up and that will drop. Thanks.

Gerhard F. Burbach

Yes. So we haven't provided those specific numbers, but I’d expect that we’ll provide that kind of in the near-term, but you’re probably talking about somewhere in the range of 30 to 50 patients, so a pretty small trial.

Lawrence H. Biegelsen – Wells Fargo Securities, LLC

Thank you.

Gerhard F. Burbach

Thank you.

Operator

Our next question is from David Roman with Goldman Sachs.

David Roman – Goldman Sachs

Good evening. And I’ll echo the end of the queue here; I thank you for squeezing me in. but I was hoping you could talk a little bit more about how you expect competitive dynamics to unfolds in the U.S., when HeartWare comes to market. I can appreciate what's implied in the guidance, but how are you thinking about an additional player on the market and to what extent, do you think that actually becomes a rising tide races all both scenario versus an environment whereby there is actually more market share cannibalization and there is an incremental market growth?

Gerhard F. Burbach

Yeah. Well, certainly I think there is potential for kind of some element of the rising tide scenario, we’ve seen that very clearly in Europe when HeartWare entered in the market there. I guess that’s three years ago now and the following couple of years, we saw a strong growth in that market, I think partly based on that entry, partly based on the HeartMate II DT approval. Certainly the Q1 bridge activity, maybe a kind of positive indicator that there is that kind of potential for increased focus and growth potential in the bridge market with that kind of a triggering event.

And then relative to the competitive dynamics, we’re focused clinical outcomes, I mentioned earlier, I won’t go through it all again, we do feel like coming out of the panel that we’ll be well equipped to really kind of emphasize the benefits of HeartMate II, why it's the best-in-class product, not just for destination therapy but also for bridge-to-transplant?

David Roman – Goldman Sachs

And then maybe just to understand that pacing of expenses as we go throughout the year, R&D was both up sequentially at a very material dollar increase versus the prior year, should we think about the sort of $18 million number as a normalized run rate, are there any clinical trials that either will start or role off as we pace through the balance of 2012?

Gerhard F. Burbach

Yeah. Plus or minus, I wouldn't expect that there's going to be major changes relative to the current run rate.

David Roman – Goldman Sachs

Okay. And then lastly, on the earnings guidance, I'm assuming that the spending level stay pretty constant throughout the year, but as you get to the fourth quarter, the ratios start to look a little inflated, I assume as you see new competition is sort of a fall off in revenue, that that sort of the margin percentages start to look a little distorted, is that a fair assessment as the Q4 versus what we saw on the first quarter?

Gerhard F. Burbach

No. That's not our expectation.

David Roman – Goldman Sachs

Okay.

Gerhard F. Burbach

So...

David Roman – Goldman Sachs

Because we need to keep R&D in as $18 million run rate and get your guidance, you need something like high teens to R&D as a percentage of revenue by Q4, you’re saying that that’s not the right way to look at it?

Roxanne Oulman

We don’t provide quarterly guidance that we’ve provided on a full year basis and we feel comfortable with the operating expenses that we have guided to, implied in our EPS guidance. And one thing, I would highlight if you look at our expenses last year, you’ll see that they increased; they got at the back half of the year. so we do expect fluctuations on a quarterly basis in regards to operating expenses.

David Roman – Goldman Sachs

Okay, thank you.

Gerhard F. Burbach

Thank you.

Operator

And our last question comes from Derek Winters with Wunderlich Securities.

Derek Winters – Wunderlich Securities Inc.

Hi guys, congrats on a great quarter.

Gerhard F. Burbach

Thank you.

Derek Winters – Wunderlich Securities Inc.

Wanted to just kind of – I know we’ve tapped around the several times more on the guidance front, could you just give us a little bit more color on why the guidance seems a little cautious going forward for the rest of the year. It’s mainly just kind of a sticking point for us here. Thanks, thanks again for taking that question.

Gerhard F. Burbach

Yeah, absolutely. I guess a couple of things, I’d point to, one is, there were a couple of factors in the first quarter, the bridge cap, the strength of bridge market outside the cap that we’re not projecting forward, if you kind of look through the balance of the year. Secondly, as we look at guidance, we’re really looking at it on a kind of full year basis. So I think kind of we focus more on the full year versus the remaining quarters. the guidance has come up kind of a healthy chunk versus where we are out at the beginning of the year. we haven’t flowed through the same strength obviously through the balance of the year that we saw in Q1. we’ve only had one quarter under our belt. So we feel like the kind of increasing guidance we made was appropriate given where we’re at in the year. But again, I would emphasize that as you kind of look at the business on a macro basis, it’s definitely a very strong indicator, we believe around potential for the business, the opportunity associated with the DT market as we continue to go forward.

Derek Winters – Wunderlich Securities Inc.

All right.

Gerhard F. Burbach

Okay.

Derek Winters – Wunderlich Securities Inc.

Thanks, congrats on a great quarter, and thanks again.

Gerhard F. Burbach

Thank you. Okay. Operator, I believe that’s all the questions.

Operator

Yeah. That does conclude the question-and-answer session. I’d like to turn the call over to Gary Burbach for closing remarks.

Gerhard F. Burbach

Okay. I think we’ve covered everything. Thanks for the extensive Q&A and we look forward to keeping you updated in the future.

Operator

That does conclude our call. And we appreciate your participation.

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