Thoratec Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 1.12 | About: Thoratec Corporation (THOR)

Thoratec (NASDAQ:THOR)

Q3 2012 Earnings Call

November 01, 2012 4:30 pm ET

Executives

Taylor C. Harris - Chief Financial Officer and Vice President

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

Analysts

Danielle Antalffy - Leerink Swann LLC, Research Division

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

Jason R. Mills - Canaccord Genuity, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Narendra Nayak - Crédit Suisse AG, Research Division

Daniel Sollof - Barclays Capital, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Operator

Good day, and welcome to the Thoratec Corporation Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Taylor Harris, Chief Financial Officer. You may begin.

Taylor C. Harris

Thanks, Matt. Good afternoon, and thank you for joining us. With me today are Gary Burbach, President and Chief Executive Officer; and Roxanne Oulman, Vice President of Finance. Gary will discuss highlights from the third quarter of 2012, and I will review the financial results for the quarter in more detail. 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 continued to generate excellent financial and operational results in the third quarter, highlighted once again by Heartmate II, where we achieved year-over-year unit growth of 27% during the third quarter and 23% for the first 9 months of 2012.

We remain encouraged by the overall strength of the mechanical circulatory support market, both in the U.S. and abroad, and we continue to drive forward our market development activities, targeted sustainable long-term growth of the Destination Therapy indication.

While we continue to focus energy on supporting the competitive position and market opportunities for Heartmate II, we're also making solid progress with our product pipeline, where we remain on track to begin pivotal CE Mark clinical trials for both HeartMate III and PHP during 2013.

With respect to our financial results for the third quarter, Thoratec generated revenues of $117.8 million, a 15% increase over revenues of $102.6 million in the third quarter of 2011. Overall revenue growth was led by robust performance in the HeartMate product line, which grew 21% during the third quarter, offset by the continued decline of the PVAD and IVAD franchise.

In terms of geographic breakdown, we recorded revenues of $97.5 million in the U.S. versus $83.9 million in the prior year, an increase of 16%, while international revenues were $20.3 million versus $18.7 million a year ago, representing an increase of 9%.

Excluding the effect of foreign exchange, which was unfavorable by $2 million, as well as acquisition-related revenue, year-over-year international revenue growth was 15%.

Earnings on a non-GAAP basis were $0.49 per share, an increase of 19%. Through the first 9 months of the year, results have been similarly strong. Worldwide revenues of $363.2 million have grown 16% versus the net first 9 months of 2011, or 15% excluding the impact of foreign exchange and acquisitions.

Our HeartMate product line has driven a strong performance, with year-to-date growth of 19%, offsetting a 39% decline in our PVAD franchise.

We've also been pleased with the CentriMag business, which has grown 7%, excluding the impact of the acquisition of Levitronix Medical, which reached its 1 year anniversary during the third quarter.

Overall, revenue growth from this period was relatively balanced across geographies, with U.S. revenues increasing 15% and international revenues increasing 17%, excluding foreign exchange and acquisitions.

Earnings on a non-GAAP basis were $1.45 per share during the first 9 months of 2012, an increase of 23%. Unit growth of Heartmate II has remained strong, driving our overall financial performance, both in the third quarter and the first 9 months of 2012.

For Q3, we had a less challenging year-over-year comparison than we faced last quarter, and Heartmate II unit growth rebounded to an impressive 27%, comprised of 25% growth in the U.S. and 36% growth internationally.

This performance brought worldwide unit growth for Heartmate II on a year-to-date basis to 23%, including 21% domestically and 33% internationally.

Outside the U.S., Heartmate II and the VAD market as a whole have continued to enjoy a robust growth through the first 3 quarters of 2012, as new markets have layered additional growth opportunities on top of solid ongoing performance in Western Europe.

In the U.S., the Destination Therapy indication has driven HeartMate II's result in recent periods, with DT implants currently approaching 50% of our domestic HeartMate II sales.

Looking forward, we continue to expect the DT indication to account for the vast majority of growth in the VAD market, and 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.

During the third quarter, we shipped 989 HeartMate II, PVAD and IVAD units, including 781 in the U.S. and 208 internationally.

For the first 9 months of the year, we shipped 3,031 pumps, representing growth of 14% versus the first 9 months of 2011, including 2,392 in the U.S. and 639 internationally.

As for our acute surgical product line, CentriMag and PediMag, we reached the 1 year anniversary of our acquisition of Levitronix Medical during the third quarter, and we've been encouraged by the continued strong performance of the business, particularly with respect to pump unit growth.

In the U.S. market, we've achieved strong organic pump unit growth during 2012, including 19% for the third quarter and 27% year-to-date. This uptick in unit volume is translated into strong pump-related revenue growth, but that has been offset somewhat by a reduction in nonpump revenue, related primarily to fewer new center openings so far this year.

We have a very strong performance in terms of new center activity for CentriMag during 2011, so the comparison this year has been challenging.

That said, we have a good pipeline of potential new centers, and as a result, we expect the growth in U.S. nonpump CentriMag revenue will stabilize going forward.

We also expect continued growth of CentriMag and PediMag outside the U.S.

As a reminder, the vast majority of the acquired revenue benefits in this product line over the past year has come from international market, as we have previously distributed CentriMag in the United States.

During the third quarter, that benefit was approximately $900,000. Going forward, we anticipate continued adoption of CentriMag and PediMag outside the U.S., as well as our more field team gains more experience with the product line.

I'd like to focus now on a few highlights from our efforts to develop the VAD market. As a reminder, our market development strategy incorporates several key elements, including referral development, implant center expansion, clinical data generation and publication and global expansion. We've executed well against these strategic priorities during 2012, and we believe that our investments in these areas that are a significant contributor to the robust VAD market growth that we continue to experience.

To support all of these activities, we have continued to expand the investment in our highly experienced field teams, which we view as a key driver of growth in the VAD market, as well as an important source of competitive advantage for Thoratec.

Our worldwide field team now includes approximately 150 individuals. The majority of them are focused on market development and customer facing clinical support activities, and we continue to view this team as a primary area for investment as we move into 2013.

In terms of referral development, our primary investment is our team of marketing development specialists, which focuses on educating the broader cardiology community regarding the potential benefit of MCS therapy with Heartmate II. This team is on track to drive a meaningful increase in referral activity during 2012, roughly correlated with the pace of growth for the Destination Therapy indication. And we've also made strong progress with a range of programs that compliment this team's effort.

For example, we've held 3 highly successful advanced heart failure therapy forums so far this year. For our third event, which was held in late October, there was on oversubscribed level of interest from the cardiology community.

We hosted more than 150 clinicians at this event. Over 100 of whom attended a pre-conference session, focused on best practices for building a heart failure program.

We're also planning to proceed with our direct-to-consumer pilot program during the fourth quarter. We've selected 2 markets in which to run the campaign, and 2 centers with whom to partner.

We'll work with these partners centers to evaluate best practices and to measure and monitor the success of these pilot programs in order to inform our decisions regarding direct-to-consumer activity in 2013 and beyond.

Another core component of our market development strategy is center expansion, both in terms of new centers startups, as well as program development at existing VAD centers.

During the third quarter, we added 2 HeartMate II centers in the U.S. and 5 internationally, bringing the total number of Heartmate II centers to 160 domestically, and 156 internationally.

On a year-to-date basis, we've added 11 centers in the U.S. and 12 internationally. We also continue to make progress with assisting centers in achieving Destination Therapy certifications from the joint commission.

In the U.S., there are currently 117 DT-certified centers, up from 103 at the end of 2011. With respect to both new center and DT certification activity, we are on track to meet or exceed our full year 2012 target.

In addition to new center activity, we remain focused on VAD program development at existing centers. Our goal in this area is to partner with VAD centers to support their ability to achieve excellent clinical and economic outcomes with HeartMate II, which fosters an environment in which their VAD programs can thrive.

Central to this effort is the broad array of programs and services that we offer to support our centers, clinicians and patients, called Thoratec 360. Thoratec 360 includes programs designed to increase program performance, facilitate program growth and enhance the development of the MCS market.

Current offerings under the Thoratec 360 umbrella include comprehensive clinical support services, a range of training and education program, joint commission certification assistance, reimbursement education and support, community cardiology education, clinical research and publication support, a clinical and economic benchmarking program and our most recently-added customer resource, Thoratec Connect, which launched over the summer.

As a reminder, Thoratec Connect is a unique Internet-based MCS program management system designed to meet critical center needs, including implants and equipment tracking for Thoratec products, product incident reporting and follow-ups, research mapping for patients planning to travel and learning management.

We believe it is a cost-effective way to enable centers to dedicate more clinicians time to patient care.

During the quarter, we also hosted a highly successful VAD economic summit, which brought together approximately 130 participants from over 100 programs to discuss and share best practices with respect to a range of topics that affect the overall economic health of VAD programs.

Feedback on the event was very positive and it was encouraging to hear a presentation from a broad range of centers that are managing financially successful VAD programs. I would note that this should be further supported by the new Medicare reimbursement rate that went into effect on October 1, including an 8% increase for DRG1, the most commonly used code for chronic and plantable VAD procedure.

With this increase, the average fiscal year 2013 Medicare payment for DRG1 at DT-certified centers will be approximately $200,000, representing an increase of roughly $15,000.

We also continue to increase our investment in clinical data generation and can report additional progress with our broad range of post-market studies during the third quarter. We've gained strong traction in the ROADMAP study, in which we have now enrolled 63 patients at 27 sites.

As a reminder, ROADMAP is a post-market study involving ambulatory advanced heart failure patients who meet Heartmate II's existing FDA approved indications for Destination Therapy, but who are not being referred for LVAD therapy in meaningful numbers.

We anticipate that ROADMAP will eventually include up to 50 sites and 200 ambulatory NYHA Class IIIB and IV patients who are not dependent and inotropic support or those typically classified as INTERMACS 4, 5, and 6 where we think there is a substantial unmet needs for treatment options.

In addition to ROADMAP, we've made significant progress in the trace study, which is evaluating reduced anticoagulation and antiplatelet therapy for HeartMate II patients. Today, we have enrolled 80 out of 200 patients in the trace study from centers in both North America and Europe.

As for of the SSI registry, which is studying new techniques to reduce drive line infection, enrollment has increased to 133 out of a targeted 400 patients.

Lastly, later this year, we plan to enroll the first patients in CHF, a European study that aims to involve cardiologists and implant centers in evaluating and implanting HeartMate II in a slightly less sick patient population.

On the topic of clinical data, we are highly encouraged that the American Heart Association recently published updated guidelines for the use of mechanical circulatory support, reflecting the improvements in clinical outcome that have been reported with Heartmate II. These guidelines now include the strongest recommendation ever published for VAD, in terms of both classification and level of evidence. The AHA now considers both Bridge-to-Transplantation and Destination Therapy to be Class 1 therapies, with the level of evidence rating of B.

Also for the first time, the AHA acknowledged the trend toward treatment of less sick heart failure patients or elective DT patients and assigned a Class IIa, level of evidence B, to the use of VAD for that patient population.

We look forward to highlighting the strong statement from the AHA, as we continue to reach out to the broader cardiology community.

As we continue to expand the base of clinical evidence supporting Heartmate II, we remain focused on developing new global market opportunities for VAD therapy. For example, in October, we hosted a users meeting targeted at the Asia-Pacific region. The meeting was well-attended, including representatives from 19 centers in 10 countries.

Several of the attendees came from Japan, where we believe Heartmate II should receive MHLW approval before year end, followed shortly by device-specific reimbursement and a full commercial launch.

While we are still early in our market development efforts in Asia, we are encouraged by the longer-term possibility due in large part to the excellent clinical outcome that clinicians in the region have been achieving with Heartmate II. In fact, their analysis of an initial group of over 50 patients implanted with Heartmate II in the Asia-Pacific region showed estimated Kaplan-Meier survival of over 85% at the 2-year mark. We look forward to building upon this solid clinical foundation in the years to come.

Before turning to our product development pipeline, I'd like to briefly discuss the upcoming meeting of the Medicare Evidence Development & Coverage Advisory Committee, or MEDCAC. On November 14, CMS will convene a panel to review available evidence on the use of ventricular-assist devices. The meeting will focus on how outcomes can be optimized for patients with heart failure, with speakers discussing patients selection criteria for VAD therapy, as well as the facility and operator characteristics that may best predict improved health outcomes for patients receiving a VAD.

Over the last few months, we have actively engaged with clinicians and the appropriate medical society to review and disseminate the extensive clinical evidence that has been generated on Heartmate II.

With over 200 peer-reviewed publications, the Heartmate II is the most extensively studied LVAD. And in our view, the data clearly supports its utilization across a full range of patients, currently indicated for both Bridge-to-Transplantation and Destination Therapy, as well as the ability of a broad range of centers to achieve excellent outcomes.

Moreover, we continue to invest significant resources in additional post-market research in an effort to further expand the body of evidence supporting Heartmate II. We have high confidence in the clinical benefits provided by Heartmate II for our patient population that, for years, has been underserved with medical management, and we look forward to a productive review of the data at the MEDCAC meeting.

I'd like to turn now to our product development pipeline where we continue to make solid progress. In August, we received CE Mark for the Pocket Controller, and have initiated our European market lunch on a targeted basis. To date, the new controller has been utilized at 10 centers, and feedback from both physicians and patients has been highly encouraging. We expect to expand to a number of additional sites in Europe over the balance of this year and to complete a worldwide commercial launch in early 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 a patient's pocket and a backup battery, which can support the patient for a short period of time in the event of a disconnection from other power sources. The Pocket Controller should have a clear positive impact on both patient quality of life, as well the safety.

With respect to our catheter-based HeartMate PHP development program, we're completing our late stage preclinical work this year and are preparing for a first in-man utilization of PHP in early 2013, followed by a pivotal CE Mark trial beginning by the middle of the year.

At the TCT meeting last month in Miami, Dr. Juan Granada from New York-Presbyterian Hospital provided a review of the PHP technology and highlights of the milestones achieved today, including encouraging bench and animal data.

Based on our confidence in the outlook for PHP, we have began building the infrastructure to guide and support our clinical, regulatory and commercial strategies. We're also making solid progress with HeartMate III, where we're in the final stages of product development.

We are currently conducting our GLP animal work, as well as validation and verification testing. We've been highly encouraged by the performance of the system, and we remain on track to initiate a pivotal CE Mark trial for HeartMate III in the middle part of 2013.

In closing, I'd like to reiterate how encouraged I am by the company's solid performance in the third quarter, and through the first 9 months of 2012. More importantly, though, I'm excited about the outlook for Thoratec in the coming years.

We're realizing strong returns on our investments and market development and will continue to increase these investments and sharpen our focus on expanding the market for HeartMate II, in close partnership with our implanting center customers, with a particular focus on penetrating the substantial opportunities for Destination Therapy.

Additionally, we continue to make encouraging strides with our product development pipeline. We look forward to launching the Pocket Controller in the coming months, initiating pivotal clinical trials for both HeartMate III and PHP during 2013, and driving forward a range of other important new technologies, including a fully implantable system.

Before turning the call over to Taylor, I'd like to congratulate him on his recent appointment to the position of Chief Financial Officer. I would also like to thank Roxanne Oulman, who served our interim CFO since June 2011, for her strong stewardship of the financial functions of the company. Roxanne and Taylor have contributed significantly to Thoratec's success in recent years, and we look forward to a continued high level of performance from the finance organization under Taylor's leadership.

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 Taylor.

Taylor C. Harris

Thank you, Gary. Before reviewing our results, I want to remind you that non-GAAP net income excludes the tax effected impact of amortization of intangibles, share-based compensation expense, transaction costs and inventory fair market adjustments, related to the Levitronix Medical acquisition, as well as the accounting for convertible debt instruments that may be settled in cash.

You can find a reconciliation between our GAAP and non-GAAP results in our earnings press release at www.thoratec.com.

Revenues for the third quarter of 2012 were $117.8 million compared to revenues of $102.6 million in the third quarter of 2011.

Non-GAAP gross margin for the quarter was 71.4% versus 71.6% in the third quarter a year ago. The decrease in non-GAAP gross margin was due primarily to unfavorable currency fluctuation, partially offset by volume-based efficiency.

Non-GAAP operating expenses for the third quarter were $43.2 million versus $36.3 million in the third quarter a year ago, with the increase being driven by ongoing investment and product and market development initiatives.

Non-GAAP operating margin in the third quarter was 34.8% versus 36.2% a year ago. On a non-GAAP basis, the company's effective tax rate for the third quarter was 29.6% versus 32.9% last year. The tax rate during the third quarter was lower than our anticipated full-year rate due primarily to favorable return to provision adjustment.

Non-GAAP earnings per diluted share in the third quarter were $0.49, compared with $0.41 a year ago, or an increase of 19%.

Weighted average diluted shares outstanding for the quarter were 59.7 million versus 60.7 million a year ago, with the decrease related to share repurchase activity conducted in both 2011 and 2012.

With respect to the balance sheet, we ended the third quarter with $307.9 million in cash and investments. This compares to $279.8 million at the end of the second quarter of 2012, and $209.5 million at the end of 2011.

In terms of guidance for 2012, we now expect that our full-year revenues will be in the range of $477 million to $483 million, an increase relative to our previous guidance of $460 million to $470 million.

Driving this increase is the continued adoption of the Heartmate II in the U.S. Destination Therapy indication, as well as robust performance of the international VAD market.

Earnings per diluted share are expected to be in the range of $1.79 to $1.83 on a non-GAAP basis, and $1.40 to $1.44 on a GAAP basis.

As for operating expenses, I would note that our guidance does imply an uptick in both R&D and SG&A during the fourth quarter. Approximately $5 million of this sequential quarterly increase is due to onetime project-related payments to third parties, primarily in product development.

The balance of the increase reflects the combination of seasonal variations and spending levels, as well as continued investment in both product and market development initiatives.

For 2013, we continue to anticipate a deceleration in spending growth. However, given our optimism for key product pipeline initiatives, such as HeartMate III, PHP and our fully implantable system, we plan to continue pushing forward with increases in product development investment.

On our fourth quarter earnings call, we plan to highlight and quantify these forces of investment in greater detail in order to get shareholders additional visibility into our plan.

Balancing these investments should be our continued sharp focus on efficiencies in our manufacturing operations and G&A infrastructure, as well as the potential for additional share repurchase activity. As a final note, I would point out that we plan to account for the Medical Device tax in our cost of goods line starting in 2013.

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

Question-and-Answer Session

Operator

[Operator Instructions] At this time, we will take the first question from Danielle Antalffy with Leerink Swann.

Danielle Antalffy - Leerink Swann LLC, Research Division

Just a quick question on U.S. growth. I mean, you came in about 100 comps ahead of our estimate. Just curious if you can quantify the impact. Obviously, your competitors still have not come to market here. Any way to quantify the impact from them not coming to market, number one, and also they don't have their DT cap yet.

Gerhard F. Burbach

Right. Yes. Certainly, I mean, I don't know what your model assumed, but obviously, there's some time period there where I'm guessing you had an assumption around their entry into the market. And the DT, the cap, I think that's a relatively modest number. Just given it was clear, I think, in the quarter that, that approval wasn't likely to happen until late in the quarter at best, given what HeartWare had indicated in their call. So I think that would be fairly modest. Interesting, as we look at the growth and how that occurred across the universe of centers, the growth in the non-HVAD trial centers is actually stronger than in the HVAD trials, the centers that were in the HVAD trial. So from that perspective, again, I'd say that it wasn't the major factor driving the strong growth that we saw in the quarter.

Danielle Antalffy - Leerink Swann LLC, Research Division

Okay, great. And then on the international market, I mean, another really strong quarter. I guess, could you give any clarity on how sustainable this really strong growth it is in international market, and any sense of market share dynamics this quarter?

Gerhard F. Burbach

Sure. I think our view on the international market is consistent in terms of -- we do expect there to be continued solid growth, but not at the pace that we've seen here the first 9 months of this year. The part that I think is more sustainable is kind of very strong double-digit growth that we've seen in kind of the traditional for Western European market. The part that has been, I think, kind of a little bit extraordinary this year has been some of the new country entries that we've seen in places like Turkey. They kind of have jumped up in a pretty dramatic fashion. We'd expect to see those kind of countries continue to grow, but at a more kind of sustained, kind of a rate, versus the kind of dramatic, kind of pop-up that we saw this year. So we've kind of guided to this kind of around 20% growth rate over a multiyear horizon. So that, I think, is a more reasonable kind of range to be thinking about than what we've seen in the first 9 months of this year.

Operator

At this time, we'll go to David Roman with Goldman Sachs.

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

I was hoping you could come back to somebody squaring up some of the quantitative comments you made regarding spending, what was -- sort of how SG&A and R&D is tracking on the income statement. You're talked a lot about new projects, sort of market stimulation and market development. But SG&A dollars looks roughly flat sequentially from -- is this sort of the right run rate on a quarterly basis or should we expect to see that number move up materially?

Taylor C. Harris

Yes, David, I'll take the question. So I think when you look at SG&A sequentially, there was actually a pullback in the third quarter. So really, we weren't making comment about the third quarter, specifically, because there can be quarter-to-quarter fluctuation. But as we look into the fourth quarter, there are some specific factors that we called out and we incorporated into our guidance. And those come across both SG&A, as well as R&D. The fourth quarter factors are actually heavier in the product development portion of the P&L. So we do expect an uptick in the fourth quarter. I think the big picture is that we have been investing both in product development and in market development, and you've seen that if you look at the first 9 months of the year, the year-over-year increase there. And the plan, certainly, on the product development side is to continue pushing ahead. We're reaching more mature phases of the cycle, with both HeartMate III, PHP fully-implantable system. And of the market development front, we do see continued opportunities that we can be more opportunistic with respect to.

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

Okay. And then, Gary, in the response to Danielle's question, you said in the non-HeartWare -- HVAD trial centers, you're obviously doing better. Can you maybe give us some perspective on how things are trending in the HVAD trial centers, and maybe how that's progressed? I mean, do they -- do you see -- is their share going down? Is it leveled off? Did you see a quick pop there as their trials get started and then you've kind of regained ground? Can you maybe give us some perspective on how that's gone, and if you think that's a reasonable barometer for what things will look like when they're commercially viable?

Gerhard F. Burbach

So yes, I mean, I guess it -- kind of overview level, we did see -- while the growth in the non-HVAD centers was stronger, we did also see solid growth in the HVAD centers. So there was definitely solid growth universally. It was consistent with previous quarters, strongest in the smaller centers. So the -- and those smaller centers are not in the HVAD trial, so that's also kind of an element to be thinking about. So that group, through the first 9 months of the year, has run at about a 60% rate over the first 9 months of last year. That kind of group that we've referred to as group 3. But we have seen double-digit growth across all of those groups, kind of from the largest centers through to the smaller centers. So -- and I don't think that the trial experience is really a good barometer for commercial experience, because centers have certain dynamics at play when they're in a clinical trial that are different from commercial decision. So I don't think you can really make a kind of strong translation there.

Operator

And this time, we'll move to Jason Mills with Canaccord Genuity.

Jason R. Mills - Canaccord Genuity, Research Division

And I apologize, Gary, if I'm asking a question for a second time. I bouncing a few -- between a few calls. But first question is just -- a really strong quarter. And I wanted to get your thoughts on what this means going forward in your mind as we think about market growth for MCS, not only in the U.S. but internationally. Because before this quarter year-to-date, obviously, against a difficult comp in '11 and an even more difficult comp in '10, we were seeing slower overall unit growth, and you obviously have turned that around here in the third quarter. So as you look out to next year, without having given your specific guidance, just curious to your thoughts -- updated thoughts on market growth.

Gerhard F. Burbach

Yes. I mean, I think it's -- and I'd really look at the first 9 months. We always caution investors to not focus on a quarter in isolation. So I think looking at the year-to-date, those numbers are much more meaningful, and I think they're very positive. I think it's an indicator that our focus is having an impact in terms of driving Destination Therapy adoption in the United States. We're seeing that across a broad range of centers. We see it in the number of centers that have moved through the process to become DT-certified continue to grow. That's up to 117. So the base of participants that are kind of very actively involved in building this therapy continues to grow. And then on the international side, we've talked about the globalization, the broadening of the platform beyond the United States, and we're seeing that very strongly this year. We have cautioned people not to expect the pace of growth that we've seen this year internationally to continue forward into next year, that we do have some factors that are, we think, a little bit of extraordinary benefit. But that there is kind of a very strong platform for growth internationally, both in places like Western Europe, that have been involved for a longer time period like the U.S., but also very excitingly, places like Turkey and newer market, newer countries that are just getting involved in the therapy and really adopting it in a quite aggressive way. Places like Japan that are typically a mature market, in this case, are not going to really start to come online, we hope, in a meaningful way in 2013. So to me, it's really the most important thing here is, I think, kind of another year of a strong indication that this is a therapy that has some real legs to it and lots of opportunity for growth.

Jason R. Mills - Canaccord Genuity, Research Division

Great. And as a follow-up to that, in the past, you've talked about 15% to 20% growth on a compound basis going forward. Just wanted your sense relative to those previous comments. And then also, your comments about international markets. I was wondering if you could give us a sense, because many other medtech companies this quarter and even last quarter has -- have demonstrated some weakness as it relates to Europe, and we're just not seeing that out of these results. So I wanted to see if you could give us maybe your perspective on the dynamics, specific to that LVAD market that's sort of driving a bucking of that trend. And lastly, in Japan. Have you started to look at the market opportunity? And are you ready at this point to give us a sense for what you think you can be doing in Japan sort of within the first couple of years? And I'll get back in queue, Gary.

Gerhard F. Burbach

Sure. So you have that 15% to 20% kind of longer-term kind of growth expectation. We set that stake out there through 2015. That continues to be our view. I think this year, certainly, is a kind of strong data point supporting that view. In terms of Europe, yes, we're really not seeing some of the dynamics, I think, that some of the other medical device areas are seeing. I think that does relate to this being an earlier-stage therapy that is a life-sustaining therapy. Also that we really haven't had a lot of activity, historically, in countries that have been most significantly impacted, places like Greece and Spain. Those are just not markets that have really have had any volume of activity in our space. So all those factors, I think, have helped us to not see that same kind of impact. And then Japan, with the devices that have been available to date, we think it's kind of on the order of a 40 to 50 VAD per year market. So that's what we're looking to penetrate quickly as we enter that market. Our expectation is to take a solid leadership position fairly quickly and then, next year, to start to build that market from there.

Operator

And moving forward, we will hear from Larry Biegelsen with Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Gary, if I could start with the fully implantable VAD. It's been a while since you've given us an update on that. I think if memory serves me correct, you had expected to start the first demand by year-end 2013. Could you give us an update on that, please? And I just have one quick follow-up.

Gerhard F. Burbach

Okay, yes. We haven't updated that. We do continue to make good progress on that program and expect that we'll provide you some additional details on the program milestones as we go forward into 2013.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then let me just ask a question that was asked earlier a different way. The increase in the guidance, being $17 million at the low-end, $30 million at the high-end, can you tease out for us how much that was due to the delay in HeartWare based on your prior assumption and just kind of underlying strength? And what is your current guidance as to -- what is your current guidance for the approval of HeartWare?

Taylor C. Harris

Sure, Larry, so the -- our current guidance does assume that HeartWare will get an approval for Bridge by the end of the year, so sometime between now and the end of the year. It's hard to -- since we're working in ranges, it's hard to quantify the exact impact. Certainly, their absence from the market is part of the increase, but there are ranges that we give that reflect varying assumptions on market growth. And I'd say we continue to be pleased, certainly, with where market growth has come in, both in the U.S. but perhaps, even more so, outside the U.S. So that was a factor as well.

Operator

And at this time, we'll take a question from Chris Pasquale with JPMorgan.

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

Gary, you talked about the European timeline for PHP but not the U.S., so a couple of questions there. Is it still your intention to pursue a 510k pathway for that product? Would that require another clinical study on top of the CE Mark trial? And if so, when do you think a U.S. trial could begin?

Gerhard F. Burbach

Yes. So our intent is to pursue a 510k path, although we have mentioned previously that there is some uncertainty relative to that. That's something that we have had some discussions with the FDA on. We continue to work on clarifying that and, hopefully, getting some certainty that we can communicate. And obviously, the trial path will depend quite significantly on which course we're on. If we are on a 510k path, that may be addressable with OUS data. We may have to include some U.S. data. That's also not certain at this point. In either case, we'd certainly expect to conduct some level of U.S. trial, either as a part of that application process or post to move to stronger indication for use after getting that initial approval. And so we don't yet, Chris, have a firm timeline to give you. We want to try to get a little further into this process. I'm hopeful that at our Q4 call, that we'd be able to provide you some more clarity on that and an expectation around timing on entry of that U.S. trial.

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

Okay. And then -- so with this medtech panel now only a couple of weeks away, do you have any better sense what the impetus for the meeting was? What they're really looking to accomplish? And is there any risk that the results is some pushback, either on indication, which I think you said, you feel very good about, but maybe on the number of centers who are performing the procedures today, which is, obviously, particularly important since small sites are driving so much of the growth?

Gerhard F. Burbach

Yes. So there's not any additional specific information we have gotten in terms of what was the genesis of this panel being called. It's certainly kind of on the face of it, fairly reasonable. It's been about a decade since the original national coverage decision. Obviously, a lot of evolution has occurred in the field. The level of utilization has gone up quite significantly with the HeartMate II. So from that perspective, it certainly seems like a reasonable topic for them to take a look at and want to understand kind of where is the clinical data at today. We do feel very good about the quality of the data, and we feel good about these risks that you described being relatively low. We don't see any patient populations within Bridge or Destination Therapy, any subsets where outcomes are substandard or questionable. So we'd be very surprised if there was an issue that came up on that front. And in terms of centers, recently, there's quite positive data that's come out, showing equivalent results at these newer, small non-transplant centers. They're seeing very similar survival, very similar adverse event rates and very similar profile patient population in terms of INTERMACS categorization and the other kind of baseline characteristics of the patient. So all of that, I think, should point to a positive meeting. We've been working closely with a range of the key opinion leaders, the medical society to make sure that they have all of the latest HeartMate II data, all the appropriate clinical data that should demonstrate to the panel the very positive performance of the therapy and the HeartMate II, in particular.

Operator

Next question will be from Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So just a couple of quick things. First, on the new guidance on the revenue side for this year. If you look midpoint-to-midpoint, it's a pretty clean $15 million increase. And so just to touch a little bit on that, is the HVAD delay any more than $5 million of that? I'm just trying to get a sense for -- rough sense for how much that's contributing.

Taylor C. Harris

Yes. It's a little more than $5 million.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. But is more than half of it just the help of the market and what's going on in Europe?

Taylor C. Harris

Yes. I think that's kind of a reasonable -- it's probably kind of roughly 50-50 between the kind of 2 sides of the equation.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay, that's helpful. And then just thinking about the operating margin of the company now. If I just look at what's been reported the first 3 quarters, it looks like for the first 9 months of the year, you're roughly at 34% operating margin. So if we kind of put aside the medical device tax for a second and think about some of your comments about slowing spend rates, should I interpret that to say that you should have underlying operating margin in 2013 kind of -- relative to the trends you're seeing right now, excluding the medtech tax? So do you expect to drive leverage as you go forward?

Taylor C. Harris

No. We didn't intend to make a comment on operating margin itself for 2013. So really, margin is going to depend on both what the top line is growing and what our spending is growing at. So all we said with respect to spending was that we continue to expect the pace of spending growth to decelerate in 2013 from a pretty high rate of investment growth this year in 2012, but we didn't quantify exactly where that was going to end up. We're still working through our planning cycle for 2013, and there are range of investment opportunities that we have. Some we know we're going to make, others that we're going to decide what the pace of those is going to be. So yes, but I don't think you can read anything specifically into operating margin for next year. We'll obviously have specific thoughts on that at the beginning of next year. The longer-term picture is -- the goal here is, over time, to tap what we feel like is a pretty significant market opportunity for a mechanical circulatory support. So there are going to be some years where we invest at a good pace, others where we don't have to do that, but all with an effort to reach that long-term market development goal.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay, that's helpful. And then just lastly, quickly, for you guys. I prefer to ask the question as it relates to HVAD as you look forward. And obviously, I think at some point, they'll be on the market in the relatively near term. But especially for Gary, could you just highlight from where you sit right now, what would you say are the top 2 things that give you confidence that you're going to remain the dominant share player in this market, even with those guys coming to market in the U.S. here in the relatively new future?

Gerhard F. Burbach

Sure. Well, I mean, I assume you're talking about within Bridge, since Destination Therapy is going to be quite some time. So even within Bridge, the clinical data, I think, very strongly supports the HeartMate II as the superior device. We continue to push on that message, make sure that there's an understanding of that. The scale and scope of our resources that

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services that we're bringing to bear, the value add. It's just not about a pump. It's about who's our partner that's going to help build a -- kind of continue to build a successful -- clinically successful, economically successful program. I don't think there's any question that Thoratec has, far and away, the greater capability to be that partner. So I think both the product, as well as the broader value offering, are really kind of the 2 keys to success.

Operator

Moving forward, we will hear from Jayson Bedford with Raymond James.

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

You mentioned the spending trends in 2013. Do you still expect to grow revenue in 2013?

Taylor C. Harris

Yes.

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

Okay. And then you're building a large cash

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position here. Can you just prioritize your use of cash going forward?

Gerhard F. Burbach

Sure. First priority continues to be kind of strategic opportunities to utilize that cash. So the example here the last couple of years where we've done that would be the acquisition of the PHP technology. That was a pretty modest use of cash. It's less than $10 million, but we've obviously invested a fair bit into that program the last couple of years since acquiring it and expect that to be a very significant value contributor as we go forward. Last year, just over a year ago, we acquired Levitronix Medical, which has been a very good acquisition, we believe, here over the first year, we spent a little over $100 million a year ago to acquire that asset. And the focus for us continues to be in those arenas in terms of mechanical circulatory support, advanced heart failure therapies. Those are the spaces that we believe that we have great opportunity for success. So that's certainly first. Insofar as there's excess capital beyond those strategic needs, we'll look for opportunities to return that capital to our shareholders. Over the last 1.5, 2 years, we've returned a significant amount of capital to our shareholders via the retirement of the convertible debt and a number of share repurchase programs during that time period. So that philosophy continues to be the case as we go forward.

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

Okay, that's helpful. And then just last, quickly, for me. When do you think you can start U.S. trials for HeartMate III?

Gerhard F. Burbach

Yes. So our expectation for HeartMate III in the U.S. is essentially the end of 2013.

Operator

Next question will be from Bruce Nudell with Crédit Suisse.

Narendra Nayak - Crédit Suisse AG, Research Division

This is Narendra filling in for Bruce. I apologize if you already mentioned this. Did you say what percent of units this quarter came from the non-transplant open-heart centers?

Taylor C. Harris

We didn't give a specific number on that, Narendra. It was fairly similar to what we saw last quarter, so approaching 20%. Now that would be broadly for what we've characterized as the group 3 centers, which is predominately open-heart centers, but there are some smaller transplant centers in that group as well.

Narendra Nayak - Crédit Suisse AG, Research Division

Okay, that's helpful. And then as we look towards 2013, Gary mentioned, you have an expectation of growing revenue. Could you talk to some of the elements that would help that revenue growth in 2013? I think the DT, U.S. DT market would be one obvious one. But beyond that, are there any other drivers for Thoratec, in particular, that we should be thinking about?

Gerhard F. Burbach

Yes. I mean, obviously, you pointed to the kind of first, the most important. Second would certainly be continued robust growth in the international markets with the addition of Japan kind of as a new opportunity on the international side next year. So those have been the 2 kind of key drivers in 2012, and that will continue to be the case in 2013. The other thing that should be less -- that should be a kind of a positive in 2013 versus the development of 2012 is that in 2012, non-pump revenue has grown more slowly than pump revenue because of reuse of some of the durable equipment in the HeartMate II. We should see that trend stabilize where that doesn't continue to be kind of a net negative drag on a year-over-year basis, the way that it has been in 2012.

Narendra Nayak - Crédit Suisse AG, Research Division

Great. And if I could squeeze one more in. You talked about some of the newest centers in Europe. I'm wondering if your share in those newer centers is similar to your share of the core western markets, or if perhaps, there's share capture opportunity, along with market growth, in those newer markets as well?

Gerhard F. Burbach

Sure. The new markets, it's been kind of a -- it's varied, kind of dependent on the market. So some of those newer markets, we've gotten to more quickly and have kind of established a leadership position. There are also some instances like Turkey where HeartWare got to that market more quickly, realized very strong growth in the first half of the year. And so there's a share gain opportunity for us to make up some ground. So it really varies quite a bit, just dependent on the specific markets.

Operator

Matthew Taylor with Barclays has the next question.

Daniel Sollof - Barclays Capital, Research Division

It's Dan stepping in for Matt. I wanted to first touch on pricing and how that's trended in Europe, and then what your expectations are for pricing in the U.S. after the competitive launch.

Gerhard F. Burbach

Yes. Pricing in Europe has been pretty stable. The things that have affected kind of what's -- what are the dollars we're realizing in Europe have really been FX most significantly. We've had a pretty significant drag this year in terms of FX on a year-over-year basis. I think it's almost $4 million that -- kind of a net negative impact this year versus last year in terms of FX. And then the other is the mix of sales in terms of direct market versus distributor markets. Obviously, in the distributor markets, our selling price is lower where we're going through a distributor, and that percentage of sales this year through distributors has been higher, given the development of some of these newer markets.

Daniel Sollof - Barclays Capital, Research Division

Great, that's helpful. And also, if I could real quick. I appreciate your comments on the ROADMAP. And I was curious if THOR would be participating in REVIVE-IT and if so how do you view that as complementing ROADMAP?

Gerhard F. Burbach

Sure. So we are as -- Keith Aaronson, who's one of the PIs of REVIVE-IT, mentioned at the TCT meeting that we are in discussions to have Thoratec and the HeartMate II step in as the device that would be studied in that trial, and Thoratec would be a co-sponsor with the NIH and our partner with the University of Michigan and the other investigators. So we're in the kind of early stage, I'd say, of discussions with them. There's a lot to work through there in terms of trial design, executional plan, level of investment requirement. We certainly were very pleased that they turned to the HeartMate II as a device that would be a good device to conduct that trial. So as those discussions continue, if that does that come together, and we do indeed move forward with that trial, we'll, of course, update you on that. And we do see it as complementary to ROADMAP in that it's a kind of, I'd say, one step earlier in terms of the patient population that's being studied from ROADMAP. So again, ROADMAP is one step from the kind of current predominant patients that are being treated. This is maybe 2 steps, just kind of another step away. And so it kind of expands the potential utilization even a bit further than we're pushing on with ROADMAP. Obviously, it is also an NIH trial, has some additional, I think, kind of credibility that's built around any trial that's an NIH-sponsored trial. So that would be a big plus in terms of our whole market development, building an increasingly strong set of clinical evidence around the expansion of the therapy.

Operator

The final question today will come from Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

I had a couple of questions around the U.S. DT market, and I was hoping to tease out some detail. Taylor, I think -- there was an early question on DT only. But can you talk about, right now, in the U.S., kind of percentage of revenue from DT? And I'm curious, how many centers you have that are DT-only as it stands? And then as we think about the growth of the DT market, say, over the next 3 years, how do you think about growth of DT in the U.S. versus Bridge? And what's a kind of potential number of centers that could be DT-only?

Taylor C. Harris

Great, Brooks. So I'll tick through those and then let Gary finish it up if there's any closing comments. But in terms of percentage of sales, so if you look at our HeartMate II business, then we're now approaching 50% of that business that is DT. HeartMate II is obviously a significant portion of the overall market. But I would just point out that, for example, our PVAD and IVAD product line is going to be a Bridge-to-Transplant product right now. So you can factor that in when you think about the overall market. At HeartMate II, which we track more closely, we're now approaching 50%. In terms of number of centers, so we have about 160 centers total in the U.S. Of those, 117 are currently DT-certified. Just to be clear, that doesn't mean that they are DT-only. It just means that they have the ability to seek Medicare reimbursement for Destination Therapy utilization. We do anticipate that, that number can grow over time. We have pointed to a center opportunity in the U.S. in the 200 to 300 range as we approach that middle part of this decade. So it leaves a room for some growth, not necessarily above the pace that we've been trending at here over the last couple of years. We're not trying to grow centers too fast. We still think that most of the growth in the market is going to come in the form of same-store sales growth as we increase referrals into existing centers. But there is some room for growth in centers. And I think -- just as you see that total base of centers tick up, you can expect to see the number of DT certifications tick up as well.

Brooks E. West - Piper Jaffray Companies, Research Division

And I guess, obviously, trying to focus on -- maybe ask in a different way. What do you think the number of centers or percentage of centers that will focus primarily on Destination Therapy might look like?

Taylor C. Harris

Yes. That is -- so if you look at the 160 centers, there's about 100 of those that are transplant centers, just over 100. And so the other 50 to 60 of the current centers really are either exclusively or very heavily Destination Therapy. They're really building their practice around Destination Therapy. And pretty much all the center -- additional centers that would come on over the coming years would be of that same type, that they would be Destination Therapy centers. There's really not an expectation that the transplant center universe would grow, not in any meaningful way, at least, maybe kind of in a handful of additional centers. But pretty much all of that center growth is Destination Therapy based.

Operator

And at this time, that will conclude the question-and-answer session. I'll turn things back over to Mr. Burbach for any additional or closing remarks.

Gerhard F. Burbach

Okay. Well , I think that's it. I appreciate all the questions, and we look forward to keeping you updated in the future.

Operator

Again, this does conclude today's conference call. Thank you all for your participation. You may now disconnect.

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