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Thoratec Corporation (NASDAQ:THOR)

Q2 2012 Earnings Call

August 1, 2012 4:30 p.m. ET

Executives

Taylor Harris - Senior Director, Investor Relations and Business Development

Gerhard Burbach - President and Chief Executive Officer

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

Analysts

Matt Taylor - Barclays Capital

Thomas Gunderson - Piper Jaffray

Jayson Bedford - Raymond James

Cameron Hansen - Goldman Sachs

Larry Biegelsen - Wells Fargo

Spencer Nam - ThinkEquity

Christopher Pasquale - JPMorgan

Danielle Antalffy - Leerink Swann

Jason Mills - Canaccord Genuity

Rajeev Jashnani - UBS

Bob Hopkins - Bank of America

Steven Lichtman - Oppenheimer & Company

Operator

Good day and welcome to the Thoratec Corporation Earnings Conference Call. Today’s conference is being recorded. After the presentation we will be conducting a question-and-answer session. (Operator Instructions) At this time, I’d like to turn the conference over to Mr. Taylor Harris. You may begin, sir.

Taylor Harris

Thanks, Brian. Good afternoon and thank you for joining us today. With me today are Gary Burbach, President and Chief Executive Officer; and Roxanne Oulman, the company’s Interim Chief Financial Officer. Gary will discuss highlights from the second quarter of 2012 and then turn the call over to Roxanne, who 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 obligation to update or correct any forward-looking statements. Gary?

Gerhard Burbach

Thank you, Taylor, and good afternoon. Thoratec generated solid results in the second quarter of 2012, capping off the strongest six months financial performance in the company's history. We continue to experience broad-based momentum in the global VAD market driven by strong performance from HeartMate II. On a year-over-year basis HeartMate II units grew 22% during the first six months of 2012. And in the second quarter which I would note is our most challenging quarterly comparison this year, units grew 13%.

We have realized strong performance across all key areas of our HeartMate II business, but the most significant growth drivers continue to be the ongoing development of the destination therapy indication, along with a strong contribution from emerging transplant programs and open-heart centers in the United States as well as broad-based strength internationally.

Meanwhile our acute support product line including CentriMag and PediMag, is also performing well with revenues expanding nearly 20% in the first half of 2012, excluding the impact of the Levitronix Medical acquisition. These strong results from both HeartMate II and CentriMag have more than offset a weak first half of the year for our PVAD and IVAD franchise, where revenues have declined 36% year-to-date.

During the second quarter this decline was somewhat more pronounced with revenues falling 50% or almost $4 million year-over-year. In aggregate though, we were incredibly pleased with the company's performance in the second quarter and year-to-date. During the first half of 2012, we have achieved revenue growth of 16% versus the same period last year. Increased non-GAAP earnings per share by 25% and made significant strides in both our market development and product development efforts, which should support strong performance for many years to come.

With respect to our financial results for the second quarter, Thoratec generated revenues of $118.6 million, a 7% increase over revenues of $111.2 million in the second quarter of 2011. In terms of geographic breakdown we recorded revenues of $97.1 million in the United States versus $93 million in the prior year, while international revenues were $21.5 million versus $18.2 million a year ago. Relative to the second quarter of 2011, foreign exchange fluctuation detracted $1.2 million from Q2 2012 revenues. While the acquisition of the CentriMag and PediMag product lines added $2.5 million, of which $2.2 million was recorded outside the United States.

Turning to our results for the first half of 2012, revenues were $245.4 million representing an increase of 16% versus the first half of 2011, or 15% excluding the impact of foreign exchange and acquisitions. During the first half of the year, our performance was driven by HeartMate revenue growth of 18%, which more than offset the 36% decline in our PVAD franchise, which I mentioned previously. Growth in this period was relatively balanced across geographies with domestic revenues increasing 15% and international revenues increasing 18% excluding foreign exchange and acquisitions.

Earnings on non-GAAP basis were $0.96 per share during the first six months of 2012, an increase of 25%. Unit growth of HeartMate II has been quite encouraging and has driven our overall financial performance, both in the second quarter and the first six months of 2012. For Q2, HeartMate II units grew 13% year-over-year against a very strong prior year quarter. In the U.S. where the quarterly comparison was the most difficult, HeartMate II unit growth was 8%, while internationally we achieved 32% growth for the second quarter in a row.

This performance brought first half unit growth for HeartMate II to 19% domestically and 22% on a worldwide basis. It is the destination therapy indication that has driven HeartMate II growth in recent periods, and the past two quarters have been no exception with DT implants rising to over 45% of our domestic HeartMate II sales in the first half of the year. Looking forward, we continue to expect the DT indication to account for the vast majority of growth in the VAD market.

We also expect that emerging VAD programs at smaller transplant and open-heart centers will grow at a strong pace and contribute an increasing percentage of our overall HeartMate II business. For the first half of 2012, this group of centers generated approximately 70% growth in HeartMate II units and accounted for almost 20% of HeartMate II unit sales. During the second quarter we shipped 985 HeartMate II, PVAD and IVAD units, including 773 in the U.S. and 212 internationally. For the first half of the year, we shipped 2042 pumps, representing growth of 13% versus the first half of 2011, including 1611 in the U.S., and 431 internationally.

Before turning to operational highlights, it’s worth discussing the performance of our PVAD and IVAD business, where we face close to a $4 million revenue headwind year-over-year during the second quarter. As we have discussed before, we have been expecting erosion of this product line overtime, albeit not at the pace that we have seen year-to-date and in the second quarter in particular. We believe that PVAD remains the best option for many challenging biventricular failure patients. And we continue to disseminate knowledge of the strong results PVAD has generated in this population.

However, at this point we are not anticipating a meaningful improvement in performance of the product lines through the balance of the year. Beyond 2012, any further erosion in PVAD and IVAD should have a more muted impact on overall performance, since this product line now represents just 3% of total revenues as of the second quarter. I would like to turn now to our continuing market development efforts beginning with new center development.

We added four HeartMate II centers in the U.S. and six internationally during the second quarter, bringing the total number of HeartMate II centers to 158 domestically and 151 internationally. In the U.S. there are currently 112 centers that have received destination therapy certification from the joint commission, up from 103 at the end of 2011. During the second quarter, CMS proposed a reimbursement increase for fiscal year 2013 of approximately 8% for DRG1, the most commonly used code for chronic implantable VAD procedures. We anticipate publication of the final rule later this summer with rates going into effect on October 1.

Notably an 8% increase in DRG1 would bring the average Medicare payment for DRG1 at DT certified centers to approximately $200,000, representing roughly $15,000 increase from the current reimbursement level. Outside the U.S. we are making progress in a range of new geographies and we anticipate regulatory approval in Japan in the next few months with a commercial launch by year-end, following initial reimbursement approval. As a reminder, we estimate that the number of new patients entering the Class 4 heart failure population annually in Japan is roughly 15% to 20% of that in the U.S. market, making Japan one of the largest market opportunities for VAD therapy outside of the United States.

We are currently finalizing plans for make entry in Japan. There are nine transplant centers in Japan and a total of 12 hospitals accredited to perform VAD implant procedures. And our initial launch will target these 12 institutions. Our distributor will have dedicated personal in the field, trained on HeartMate II to provide sales, marketing and clinical support for the launch, while Thoratec will supplement these activities with additional resources.

Thoratec employees will also conduct all initial surgical training in order to ensure proper and consistent education. Similar to the U.S. market, there are hundreds of hospitals in Japan that perform open-heart surgery, and over time we plan to broaden the universe of HeartMate II accounts. A foundational component of our market development efforts both in the U.S. and abroad is our continued work with the relevant medical societies to establish LVAD therapy as the standard of care for advanced heart failure patients.

We were therefore encouraged this quarter by the recently updated heart failure treatment guidelines issued by the European Society of Cardiology. The new guidelines published in May in the European Heart Journal continued to recommend LVAD for the bridge-to-transplantation population. And importantly they increased the class of recommendation for destination therapy from class IIb to class IIa, which indicates that the weight of evidence and opinion is in favor of the therapies usefulness and efficacy.

The guidelines state that ventricular assist devices may ultimately become a more general alternative to transplantation, as current two to three year survival rates in carefully selected patients, receiving the latest continuous flow devices are much better than with medical therapy only. In order to build additional evidence to support the use of LVAD as a standard of care, we are investing in an array of post-marker studies for HeartMate II. On this front, our Roadmap study continues to progress. As a reminder, Roadmap is designed to study ambulatory advanced heart failure patients who meet HeartMate II’s existing FDA approved indication for destination therapy but are not being referred for LVAD therapy in meaningful numbers. We anticipate that Roadmap will eventually include approximately 50 sites and 200 ambulatory NYHA Class 3B and 4 patients. We are not dependent on continuous inotropic support or those typically classified as INTERMACS categories 4,5 and 6.

We continued gaining momentum with the study and have 29 patients enrolled from 16 centers as of late July. In addition to Roadmap, we have commenced enrollment in a range of other post-market initiatives include Trace and SSI. The Trace study is examining reduced anticoagulation and antiplatelet therapy for patients implanted with HeartMate II. The study seeks to enroll 200 patients in both North America and Europe, with the patients being managed either on aspirin alone, warfarin alone or with no anticoagulation or antiplatelet agents. And the primary endpoint is the rate of thromboembolic and hemorrhagic events.

The SSI registry is examining alternative approach to driveline implantation aimed at reducing the rate of driveline infection. All patients in the registry will have the lower portion of the HeartMate II driveline buried under the skin. There have been several single center reports of dramatic reductions in driveline infection rates using this technique. And SSI is intended to determine whether these results can be achieved across multiple centers.

Lastly, this fall we plan to enroll the first patients in CE heart failure, a European study that aims to involve cardiologists and implant centers in evaluating and implanting HeartMate II in a slightly less sick patient population. As we continue to advance MCS therapy, a critically important component of our market development and market leadership strategy is the portfolio of programs and services that we offer to support our centers, clinicians and patients.

During the second quarter of 2012, we held our North American MCS Conference, which attracted approximately 320 attendees from well over 100 hospitals and provided an excellent forum for customers to interact with their peers, review the latest data and share best practices. Additionally, we hosted an educational summit for over 100 community-based clinicians, also known as our advanced heart failure therapies forum. This event was added to the 2012 calendar to satisfy the demand we have seen within the referring community.

Lastly, we also hosted a patient ambassador event at Thoratec headquarters which drew approximately 25 patients and caregivers. As a reminder, we plan to have 100 patient ambassadors by year-end. We also announced the launch of Thoratec Connect during the second quarter. Thoratec Connect is a unique subscription based internal portal designed to ease the burden that VAD teams face in providing care to the growing population of MCS patients. By streamlining the administrative aspects of ongoing patient management, and making information and resources quickly and easily accessible, Thoratec Connect should enable VAD teams to manage their programs more efficiently and apply a greater percentage of their time to direct patient care. Early feedback pilot sites have been highly encouraging and we plan to broaden the launch of this system through the balance of the year.

Turning now to our product pipeline. We are actively preparing for the launch of the pocket controller later this year. As well as the initiation of pivotal trials for both HeartMate III and HeartMate PHP during 2013. As a reminder the pocket controller is smaller and lighter than currently available controllers with an easy user interface, the ability to be stored in the patient’s pocket, and a backup battery that 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.

During the second quarter we completed both our U.S. and European regulatory submission and we remain on track for launch by year-end. As for HeartMate III and HeartMate PHP, we are in the advanced stages of development with each product and continue to be highly encouraged by the capabilities and performance we are seeing. We continue to target the imitation of a pivotal CE Mark study for HeartMate PHP in early 2013, and for HeartMate III in the middle part of 2013.

Before turning the call over to Roxanne, I would like to reiterate how pleased we are with the strength of the MCS market and the performance of our business in the first half of 2012. As well as how excited we are about the future for Thoratec. The destination therapy market continues to expand at a rapid pace supported by the investments we are making in educating the broader cardiology community and developing implant center capacity. These investments should continue to support the strong DT adoption of our HeartMate II franchise, given its position as the only pump approved and proven for destination therapy.

At the same time we continue to strengthen Thoratec’s competitive position. We believe that the weight of the clinical evidence highlighted by excellent survival, low rates of critical adverse events and impressive functional outcomes across thousands of patients, points to HeartMate II as the clear choice for managing advanced heart failure. On top of that we believe that the portfolio of services that we provide to support VAD program excellence in growth, which we are branding as Thoratec 360, are unrivalled in their quality and scope and will provide Thoratec with a compelling competitive advantage for years to come.

Lastly, we have made encouraging strides with our product pipeline and we are looking forward to the upcoming launch of the pocket controller at the end of 2012, and the initiation of pivotal trials for two major platform technologies, HeartMate III and HeartMate PHP, in 2013.

Thank you again for joining us today and I look forward to speaking with you during the Q&A session. I will 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 the tax affected impact of amortization of intangibles, share-based compensation expense, transaction cost 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 second quarter of 2012 were $118.6 million compared to revenues of $111.2 million in the second quarter of 2011. Non-GAAP gross margins for the quarter were 72.1% versus 71.2% in the second quarter a year ago. Factors impacting gross margin versus the prior year, include volume based efficiencies and the contribution from the acquisition of Levitronix Medical, partially offset by unfavorable foreign exchange. Non-GAAP operating expenses for the second quarter were $46.1 million versus $37.5 million in the second quarter a year ago. Factors impacting the increase in operating expenses year-over-year include spending on product and market development initiatives as well as incremental operating expenses related to the acquisition of Levitronix Medical, including a onetime incurred this quarter.

On a non-GAAP basis, the company's effective tax rate for the second quarter was 32.2 % versus 34.2% last year. Contributing to the lower tax rate was a greater percentage of earnings generated in lower tax jurisdictions, a function of the acquisition of Levitronix Medical. This was in part offset by the inability to recognize federal research and development credits in the absence of an active legislation. Non-GAAP earnings per diluted share in the second quarter were $0.45 compared to $0.44 a year ago, or an increase of 2%.

Weighted average diluted shares outstanding for the quarter were 59.5 million, versus 63.3 million a year ago. Contributing to the share count reduction was share repurchase activity and the extinguishment of the convertible debt that occurred in 2011. With respect to the balance sheet, we ended the second quarter with $279.8 million in cash and investment. This compares to $247.5 million at the end of the first quarter, and $209.5 million at the end of 2011.

In terms for guidance for 2012, we now expect that our full year revenues will be in the range of $460 million to $470 million. This is above our previous guidance range of $452 million to $467 million. Driving this change is an increase in our full year outlook for HeartMate II of $10 million to $15 million, which is partially offset by a $7 million impact from the combination of a reduction in expectations for the PVAD and IVAD product line and foreign currency fluctuation.

The increase in our 2012 outlook for HeartMate II, reflects the strong first half performance coupled with our optimism surrounding continued momentum in the destination therapy market, as well as HeartMate IIs competitive position. Non-GAAP gross margin is expected to be approximately 71.5% representing the upper end of our previous guidance range, driven primarily by manufacturing efficiency as we are achieving a higher volume level. On a GAAP basis, we expect our gross margin to be approximately 69%. We now expect our GAAP and non-GAAP tax rate to be in the range of 32% to 33%.

Lastly, earnings per diluted share are expected to be in the range of $1.67 to $1.73, on a non-GAAP basis, and $1.28 to $1.34 on a GAAP basis.

Thank you again for joining us today. We will now open the call to your questions. In the 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 we will take our first question from Matthew Taylor with Barclays.

Matt Taylor - Barclays Capital

I was wondering if you could clarify on the guidance, in terms of the raise of HeartMate II. Can you talk about what's behind some of the assumptions in terms of the market dynamics and also competitive entry later in the year potential.

Gerhard Burbach

Sure. Really the key factors that are behind in terms of market dynamics are expectation for continued solid growth in destination therapy as well as international markets. You know bridge-to-transplant which was strong in Q1, we really saw that moderate with a bit of a downturn in Q2. So the kind of the first half on the bridge side was roughly kind of neutral in terms of growth. So second half of the year we expect that to be fairly similar as it was in the first half. So really DT and international being the drivers there. In terms of competitive dynamics, we are expecting HeartWare to receive an approval sometime here in the third quarter.

Matt Taylor - Barclays Capital

Great. And then you mentioned a couple of times HeartMate III and PHP, any update in terms of their timelines or if you could characterize how those submissions might look based on conversations with FDA.

Gerhard Burbach

So we continue to be encouraged by the progress in terms of development on those programs. The discussions with regulatory agencies both in the U.S. and Europe continue to be positive. So those timelines continue to be on track with what we discussed last time in terms of a CE trial in early 2013 for the HeartMate PHP, and then followed mid-year by a CE trial for HeartMate III.

Operator

And we will take our next question from Tom Gunderson with Piper Jaffray.

Thomas Gunderson – Piper Jaffray

I think you said units up O U.S. 32%. Can you talk about that a little bit relative to maybe same store sales versus adding new countries or territories versus converting competitor accounts?

Gerhard Burbach

So one, I just want to make sure, the 32% international growth is for HeartMate II, specifically PVAD was down. So that was obviously an offset. But the growth there was broad based. We saw continued growth in the, kind of what we would describe as the historical, core Western European countries. But we also in Q2 a stronger contribution from some of the distributor territories versus what we saw in Q1.

Thomas Gunderson – Piper Jaffray

And then on Japan, it seems like it’s drifted a couple of months. Is that just normal regulatory slow down kinds of things, or was there a particular issue that needed to be addressed?

Gerhard Burbach

Yeah. No, that’s correct. It did push out by two months and that was really just a part of the normal regulatory process. Unfortunately, they didn’t get it into their queue, the regulatory agency in Japan for the review that initially they anticipated. Though it got moved to a subsequent review that should occur here at the end of August. And so that was the push of two months. There wasn’t any specific issue or any additional follow-up information or questions that they had for us. It was just a matter of their process.

Operator

And we will take our next question from Jayson Bedford with Raymond James.

Jayson Bedford – Raymond James

Anything specific that’s driving down PVAD and IVAD sales? Meaning, it seemed relatively constant in 2011.

Gerhard Burbach

Yes. So we have obviously anticipated -- we have seen, if we look at the last few years, a decline in the PVAD line with factors, key factors there having been the HeartMate II and patients being implanted earlier in their disease progression being one of the dynamics that had been going on historically. Also then more recently, over the past couple of years we saw CentriMag being used for some of the shorter term patients that were being in managed in the hospital versus taking them straight to a PVAD, which is a more invasive as well as a more expensive device.

So I think we had some moderation of that dynamic. In the first half of this year I think we saw some more of that as well as there is the kind of bridge market, and in Q2 in particular I think we had just some additional slowness in the bridge market, generally. So while we expect the second half to be down more than we had forecasted at the beginning of the year, we do expect it to up a little bit from what we saw in Q2. And then there are some other dynamics that we have seen more recently.

In certain countries we have seen [Acmo] used more broadly for some of these patients. There is also potentially the [syncardia] device which has a driver. That the patient can be discharged from home in certain geographies. So there is kind of a variety of factors that certainly have kind of continued to erode that franchise. As I mentioned, it’s now really down to 3% of the overall product line. So it should kind of relatively insignificant part of the story going forward.

Jayson Bedford – Raymond James

Okay. And just secondly if I look at the second half guidance, it’s kind of low to mid-single digit growth. What's assumed in terms of DT and international growth in that guidance?

Gerhard Burbach

So we are expecting to see continued solid growth both in terms of DT as well as international. The overall market growth rate, we are projecting to be down slightly from what we saw in the first half. We has some greater strength in the first half then what we had anticipated at the beginning of the year. So kind of in our forecast we have that down by a few points. And then as I mentioned earlier obviously, we are anticipating an approval here in Q3 for HeartWare.

Operator

And we will take our next call from Cameron Hansen with Goldman Sachs.

Cameron Hansen - Goldman Sachs

I was wondering if you could give us a little more color about the line between bridge-to-transplant and destination therapy. Would you say the lines are beginning to blur in the bridge to decision implant scene.

Gerhard Burbach

Yes. So that you know we really are not seeing a kind of change in that dynamic other than the DT population is growing and the bridge application is really flat. Kind of as we look at the way that we report the numbers and talk to you about them, we are incorporating what we understand to be bridge to decision patients within the numbers that we are referring to as bridge to transplant. So kind of you know that some people refer to as kind of a grey area. So we are taking the kind of conservative approach in terms of the definition of what we are calling destination therapy to not include those patients.

Cameron Hansen - Goldman Sachs

And then just continuing, can you discuss the difference between academic centers and commercial centers? And is the motivation at commercial centers to support both Thoratec and HeartWare devices?

Gerhard Burbach

So the distinction between academic centers and commercial centers, I think largely falls in line with the way we reported on these various centers in the United States. The vast majority of the tier one and tier two centers are academic centers with kind of small number of exceptions. And then the ones that fall into that group three are by and large what you refer to as commercial centers. You know non-academic centers and also pre-dominantly non-transplant centers.

And for those commercial centers, there really isn’t kind of a reason for them to bring a second device into their practice. HeartMate II, you know, those centers are predominantly focused on destination therapy. HeartMate II is and will continue to be for a number of years the only device approved for that indication. So we don’t expect that to really be a kind of competitive population of centers for quite a while to come.

Operator

And we will take our next question from Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo

Garry, let me start with the destination therapy, percentage of business. I think you said it was 40% last quarter and then you said 45% in the first half of 2012, implying obviously that it was 50% in the second quarter. But INTERMACS classified a third of patients as true DT, implying two-third of patients classified as BTT and BTD. I guess my question is, when HeartWare launches in the U.S., do you expect maybe some of the percent of patients that are DT to kind of pull back a little bit as we saw when you launched, I think HeartMate II, just because of some of the grey area and how patients are classified?

Gerhard Burbach

Can you say -- repeat the last part of your question?

Larry Biegelsen - Wells Fargo

Yeah, I mean basically you are up to 50% for DT and there are some grey areas. And I am just wondering, because HeartWare will just have a BTT indication. If people may classify more patients as BTT, so you will see a little bit of the DT as a percent of the business may pull back a little bit because we saw -- my understanding is we saw that with HeartMate II as well. Because you initially had -- when you had the BTT indication only before you got DT. In other words the physicians will, there may be the ramp in DT may not continue at the same rate. And if my question is unclear, we can take it offline. I guess I am just wondering if docs will classify more patients as BTT because that will be the only indication that HeartWare has.

Gerhard Burbach

Okay. I think I followed your question. And I think that there will be selected physicians that may pursue the kind of behavior that you are describing. But I think that they will be in the kind of severe minority. I don’t think that that will be a very common practice based on interactions that we have had with a pretty broad universe of physicians. So I don’t anticipate that that’s going to be kind of a deterrent of any significance to continue to drive DT growth. And potentially there is a small benefit in terms of bridge growth as they enter the market we have talked about that little bit before. So as you look at kind of overall market growth, I certainly wouldn’t anticipate any pullback.

Larry Biegelsen - Wells Fargo

All right. And then for my second question. You know the second half guidance implies 1% to 6% I think growth for Thoratec. And I guess I am just wondering is that how we should think about 2013 for you guys when HeartWare would be presumably in the market for a full year.

Gerhard Burbach

Right. We are obviously not going to provide 2013 guidance but we do expect to continue to growth both through the launch here in the latter part of 2012, as well as we move into 2013. We feel good, one, about the kind of international opportunities that we have both in the established market as well as the new markets like Japan, but also even within the United States. The continued growth of DT, we are certainly bullish about that. As you look at the kind of universe of centers that there will be real competitive dynamics. If not, the full universe of centers, kind of, off of the question that we just had previously, 20% of the volume currently and a growing percentage of the volume is in these kind of commercial group 3 non-transplant center hospitals. That group has in the first half of this year grown by 70%.

So our estimation is it’s only about 30% of our overall volume of activity that’s impacted by this approval in terms of kind of new competitive dynamics.

Operator

And we will take our next question from Spencer Nam with ThinkEquity.

Spencer Nam - ThinkEquity

I just have one question. Just going back to the guidance side. Given that you guys are assuming that the HeartWare will get approved in third quarter and that the BTT market is going to stay flat. Maybe it’s just me, but your guidance may seem to indicate that you guys will actually hold off HeartWare entry into BTT market at least for the rest of the year. I was kind of curious how are you guys thinking about the competitive dynamics post HWare’s approval?

Gerhard Burbach

Well, I think it’s fair to say that we are more optimistic about those dynamics then some of the people on Wall Street. They are kind of expecting kind of very rapid kind of ramp up by HeartWare. We think there is a number of dynamics that will enable us to make that a much slower process. One, most importantly certainly being the clinical results, which we think are solidly in favor of HeartMate II. Obviously, the kind of DT market as the growth engine which we believe will continue to kind of be the one to benefit from that exclusively. Certainly beyond the device there is also the scale and scope of the services and kind of a value offering that we bring to these hospitals. And we continue to build on that. Thoratec Connect being the most recent addition that we have there, that we think is very important as they look at a growing patient population and how easy is it for them to manage those patients.

So all those factors together certainly make us bullish about our ability to accomplish a very strong competitive position. Even within bridge to transplant, not just this year but beyond.

Operator

And we will take our next question from Chris Pasquale with JPMorgan.

Christopher Pasquale - JPMorgan

Gary, you grew operating expenses 25% in the first half of the year, revenue growth was in the mid-teens. Your top line growth is presumably going to slow at least somewhat as competition comes into the U.S., but you have a number of market development and pipeline initiatives that are either ramping up or about to begin. So what's your ability to dial back on spending, if the top line growth does slow and how are you thinking about maintaining margins and profitability versus investing for future growth.

Gerhard Burbach

Yeah, certainly, we are very committed to our strategic investments, both in terms of product development as well as market development. That said, the growth rate that you referred to in the first half, that will not be as high in the second half, you know obviously you will see that growth rate come down in the second half of this year, and certainly you can expect that in 2013 the expense growth rate won't be at that same kind of pace. You know that will be at a slower pace than what we have seen in the last six months.

The product development initiatives we view are very strategic. Huge value in kind of particularly the middle and longer term. And that they are core to building the long term value of the company, so we are very committed to those. Market development is obviously something that we can moderate. You know if we are seeing that some of those initiatives aren’t having the kind of impact on market growth that are justifying making those investments then we would kind of dial back on those. As long as they are achieving of positive return and continuing to drive that market growth for HeartMate II and our products, then that’s something that we will continue to invest behind.

Christopher Pasquale - JPMorgan

Okay. You mentioned of Thoratec Connect platform and the press release talked about the administrative burden of managing VAD patients. When you think about the different hurdles to expanding the market, where does the ability of centers to keep up with this workload fall compared to some of the other challenges that are holding it back?

Gerhard Burbach

Yeah, I would say that the first and most important area continues to be the referral process. Getting the referring community to send more of these patients to implanting centers. Right behind that in line would be capacity, broadly defined. So not just the existing centers but also new centers. We talked about this group 3 which are all more recent centers, continuing to build out that universe of centers and do so effectively, where they are ramping the way that we are seeing these centers ramp currently which has been very positive.

And then facilitating the ability of the existing centers to continue to ramp their programs and build their programs. So we don’t see any kind of acute issues there that are going to moderate our potential for growth in the near term. But certainly as we look at the long term, we view tools like Thoratec Connect that make the process more efficient, as key to making this a long-term sustainable trajectory.

Operator

And we will take our next question from Danielle Antalffy with Leerink Swann.

Danielle Antalffy - Leerink Swann

First question is on the volumes in the quarter, implant volumes. I just was hoping maybe you could parse out for us, as it relates to DT, how much you benefitted from your competitor having a sort of a cap gap, not being able to enroll in their DT trial. And also kind of what was different this quarter versus last quarter as it relates to BTT, was their anything fundamentally different? Or was last quarter just an anomaly?

Gerhard Burbach

Let's see, in terms of the first quarter around the cap gap on the DT side, our best guesstimate is that that’s kind of in the range of 40 units or so. So fairly similar I think to the benefit that we saw in Q1 on the bridge side, and in Q2 it just flip-flopped from bridge to DT. So I don’t think it really was a factor as you kind of compare Q1 to Q2. And I am sorry, Danielle, I forgot the second part of your question?

Danielle Antalffy - Leerink Swann

No worries, Gary. So I was just asking about BTT, you had such a strong quarter last quarter. Obviously some of that is this benefit from the cap gap last quarter on the bridge side. Just trying to understand what was different this quarter versus last quarter. Is there some fundamental change? Was last quarter an anomaly? If you could help us understand what's going on in BTT?

Gerhard Burbach

So I would view Q1 as anomalous. We have said that at the time that, 2011, the bridge market was essentially flat and that Q1 was kind of one quarter where we saw a bit of a spike. But given the lumpiness that we have seen in that market that we wouldn’t view that all of a sudden there is change in dynamic in that market. I think Q2 bore that out, whereas you look at the first half of the year, it’s pretty consistent with what we are seeing in 2011 with the bridge market being largely flat.

So that’s I think certainly the most realistic expectation to have going forward. As I mentioned earlier, HeartWare’s entry may have a little bit of a uplift in the bridge market but I would expect that to be in the low single -digit, maybe mid-single digit range, kind of best case. But otherwise I would expect that to be a pretty flat market.

Operator

And we will take our next question from Jason Mills with Canaccord Genuity.

Jason Mills - Canaccord Genuity

Gary, as we look at the first half of the year, obviously the first quarter results were well above consensus expectations and I think $10 million plus. Second quarter was roughly inline with consensus, maybe a little bit below but for the first half it was above. And generally, given that all of us out here talking to physicians it seems like that the work that has been done had sort of projected that, what we are seeing in the third quarter. So it was kind of an interesting first half where the first quarter was so strong and then sequentially down the second quarter. And what we are seeing from our work in the third quarter is perhaps a really strong third quarter when we may expect some seasonality. I am wondering, a month in to your quarter now, if you would be willing to give us any qualitative insight into whether or not maybe we are seeing is directionally accurate or if you could talk about the seasonality sort of anomalies this year.

Gerhard Burbach

So I guess first I will just kind of echo your general thesis on the first half which I think, we have as you know, Jason consistently pointed investors to -- you have to look at at least the six month period to have a view to the market. You know that anyone quarter in isolation is just too short a time period, given the low volume nature of this therapy to have a good feel for the dynamic. So I think overall the first half is great news in terms of the continued development of this market place. In the U.S. with destination therapy, internationally in an ever increasing range of countries and institutions. So in term of sustainable growth trajectory it feels very good based on what we saw here in the first half of the year.

We haven’t commented on a kind of a month within a quarter that we are currently in. So I won't do that but certainly I will point to the second half guidance where we expect to see continued solid progress, again from those two key drivers. Destination therapy, most importantly international, continue broadening out there. But on the bridge side we are not expecting to see growth. We are expecting to see that as kind of relatively flat. And certainly in terms of kind of those fundamentals that are behind the numbers that you started to comment on, we continue to see strong enthusiasm from the implanting centers. You know a broad range of physicians that are very engaged and increasing interest from the referring physicians. We added an additional one of the symposiums where we had over a hundred clinicians back in the early part of June. So we are certainly encouraged by what we are seeing on that front.

Jason Mills - Canaccord Genuity

My second question has to do with outside of the U.S. While you haven’t given 2013 guidance and obviously aren’t going to do that as a response to my question. You are launching in Japan towards the end of this year with HeartMate II and I presume that you will have some revenue from HeartMate PHP next year. Without giving us sort of total guidance, could you help sort of frame as we build out extra rose on our revenue model. What range of expectations that might be reasonable to assume for both of those sort of areas if you will? The HeartMate PHP incremental revenue as well as Japan.

Gerhard Burbach

So HeartMate PHP, I wouldn’t be assuming revenue in 2013. You know we had indicated an expectation for approval in 2014 in Europe. So I would look to 2014 on the PHP platform. In terms of Japan, obviously we do expect to begin to realize revenue. The market as it exists we believe is somewhere in the neighborhood of 50 units. On an annual basis, we believe HeartMate II will be a major step up from the devices that have been available to date. So certainly we are going to be looking to build that market as we enter in 2012. But I wouldn’t look for it to be kind of a dramatic delta, obviously that will take a bit of time to start to ramp up that market place.

Operator

And we will take our next question from Rajeev Jashnani from UBS.

Rajeev Jashnani - UBS

I had a question on the referral base, and I was wondering if you could remind us what metrics you use to track the number of referrers and how that may be increasing, again, if there is any numbers that you could provide in terms of proportion of eligible cardiologists that are actually making referrals, things along those lines. If you could touch on that, that would be helpful. Thanks.

Gerhard Burbach

Yeah, I can't give you specific numbers but I can give you of what are some of the metrics that we are focused on in at least directionally, kind of where they are headed. So one is just tracking, as you mentioned kind of who is the universe of referring physicians that we are able to track. You know specific referral activity too. And also specific to our engagement with those physicians. So our market development team, attendance at various educational symposia to be able to verify that those investments are actually having a positive impact and at what level are they having a positive impact. And so that universe of clinicians does continue to grow. And so kind of adding new clinicians to the kind of base that understands the therapies involved in referring definitely has been a key driver.

And then also we track repeat activity by those referrers. So are they referring multiple patients and becoming what we refer to as kind of champions of the therapy. Where we have various thresholds, points in terms of number of referrals within a certain time period. And there again we are seeing very good directional progress. We have certain objectives we have set for the year in terms of the number of champions to develop that have referred greater than three patients, three or greater patients within the 12-month period. We are very well on track to accomplishing those objectives. So all the referral development objectives that we have were very much on track for the year.

Rajeev Jashnani - UBS

Thanks. And I guess the follow up question to that is, I think you mentioned -- if I heard you correctly 22% HeartMate II growth for the first half. And I was wondering in light of some of those dynamics, maybe it’s the market growth that slows down a bit, but what are you kind of looking at for global LVAD market growth over the next few years. Are you comfortable enough saying high-teens at this point or what are your thoughts there?

Gerhard Burbach

So that is the expectation that we set, I guess it was a year and a half ago now, was for the market to be approaching 10,000 implants in 2015. That kind of required high-teens growth to accomplish that. And at this point we are continuing to be on track to that expectation. So I think that is an appropriate multi-year kind of expectation. Obviously there will be some variation over time but kind of in aggregate I think that is the right way to think about it.

Operator

And we will take our next question from Bob Hopkins with Bank of America.

Bob Hopkins - Bank of America

So I apologize if this question has already been asked because I had to hop on the call just a little bit late. So I will be quick. A question on guidance for the back half. I was just curious if you have suggested, specifically when do you assume that HeartWare gets approval and specifically what bridge transplant share in the U.S. do you assume that they get in the period that they are on the market in the U.S. for 2012.

Gerhard Burbach

So we did mention that we expected them to receive approval here sometime in the balance of Q3. We didn’t comment on a specific market share expectation although directionally I commented that we are more optimistic than many people on Wall Street in terms of what that market share trajectory might look like. (inaudible) obviously.

Bob Hopkins - Bank of America

Right. But in your guidance that you provided you won't tell us what shares are you making?

Gerhard Burbach

Yeah, we didn’t provide a specific number in terms of what that market share trajectory is. I did comment that the market growth we expect to be slightly slower, still strong but a few points slower growth. So from that you can probably interpolate.

Bob Hopkins - Bank of America

Okay. And then just lastly on the same sort of question. I know you guys said 22% HeartMate II growth in the first half. Again, a question on guidance, just wondering what you are assuming in terms of HeartMate II growth in the back half in your guidance?

Gerhard Burbach

So 5% to 10% HeartMate II growth in the back half. That’s unit growth.

Operator

And we will take our next question from Bruce Nudell with Credit Suisse.

Unidentified Analyst

Hi guys, this is [Narendra] filling in for Bruce. On Europe, you had a strong quarter again, are you seeing any impact at all from the ongoing macroeconomic weakness there and is it something that we should be concerned about in the back half of the year?

Gerhard Burbach

We are not seeing any meaningful impact. Certain countries like Greece, there is not really any activity. Spain, there is not really an activity but there wasn’t historically because they have high heart availability there so there never really was much VAD activity. So it is really not meaningful to our numbers. And from what we see currently, we don’t see any indication that that’s going to become a more significant issue in the second half.

Unidentified Analyst

Great. And a quick follow up. I don’t know if you gave this metric but would be willing to share what percentage of your volumes come from the open heart centers? And is it safe to assume that these centers are almost exclusively HeartMate II DT centers?

Gerhard Burbach

So the open heart centers are in the, what we refer to as group 3. There are few transplant centers in there as well but the vast majority of that group are open heart centers. And that group in the first half accounted for about 20% of our HeartMate II sales. And that group we expect will continue to be exclusively HeartMate II centers for the foreseeable future.

Operator

And we will take our next question from Steven Lichtman with Oppenheimer & Company.

Steven Lichtman - Oppenheimer & Company

Just one follow up. On the balance sheet, obviously another good cash flow quarter, as you are approaching $300 million here in cash and no debt, can you talk Gary about how you can use that to your advantage looking forward both -- or either from a tuck-in acquisition percentage to enhance growth or stock buybacks as we look forward over the next 12 to 18 months.

Gerhard Burbach

I think those are exactly the two focus areas for cash utilization. From our balance sheet we continue to actively look for tuck-in acquisitions, you know things that fit within our core domain of mechanical circulatory support, advanced heart failure therapy. And then as we have capacity beyond that, certainly we will look to deploy that in buyback programs, stock buyback programs.

Steven Lichtman - Oppenheimer & Company

And how much stock was bought back in this quarter?

Roxanne Oulman

During the quarter we bought a minimal number of shares back. And you will see that in our filings.

Gerhard Burbach

Yeah. Operator, I think those are all the questions.

Operator

Yes, that does conclude today's question and answer session. Mr. Burbach at this time I would like to turn the conference back to you for any additional or closing remarks.

Gerhard Burbach

Okay. Thank you and I just want to thank everyone for your time today. Appreciate your questions as well and we look forward to keeping you updated.

Operator

Ladies and gentlemen that ends today's conference. We appreciate your participation.

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