HeartWare International CEO Discusses Q2 2013 Results - Earnings Call Transcript

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HeartWare International Inc. (NASDAQ:HTWR) Q2 2013 Earnings Call August 8, 2013 8:00 AM ET


Chris Taylor - IR

Doug Godshall - President and CEO

Peter McAree - SVP and CFO


Mike Weinstein - JPMorgan

Matthew Taylor - Barclays

Jason Mills - Canaccord Genuity

Danielle Antalffy - Leerink Swann

Larry Biegelsen - Wells Fargo

Bruce Nudell - Credit Suisse

Steven Lichtman - Oppenheimer & Company

Suraj Kalia - Northland Securities


Ladies and gentleman thank you for standing by. Welcome to the HeartWare 2013 Second Quarter and Six Months Results conference call. At this time all participants are in a listen-only mode. Following the presentation will conduct a question and answer session and instructions will be provided at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, August 8, 2013. And I will turn the conference over to the Company. Please go ahead.

Chris Taylor

Thank you, Operator, and thank you all for joining us for the HeartWare International conference call and webcast to review results for the second quarter of 2013. During the course of this conference call the company will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, development pipeline and business trends. These statements are neither promises nor guarantees but involve risks and uncertainties that could cause actual results to differ materially from forward-looking statements.

A detailed discussion of the risks and uncertainties that affect the Company’s business and qualify the forward-looking statements made on this call is contained within HeartWare’s filings with the SEC, particularly under the heading Risk Factors described in the company’s Annual Report on Form 10-K and contained within other filings that the company makes from time to time with the SEC.

Copies of HeartWare's SEC filings and the news release for this earnings call are available online from the SEC or by clicking on Investor Relations on the HeartWare website. Any forward-looking statements are based on judgment, assumptions, estimates and other factors that are subject to change and therefore these statements speak only as of the date they are given. The company does not undertake an obligation to update any forward-looking statements.

Participating on our call today are HeartWare’s CEO and President, Doug Godshall; and our Chief Financial Officer, Peter McAree. Each will provide commentary on the Company’s second quarter financial results as well as a corporate update. Those prepared comments will be followed by a Q&A session.

And now I’d like to turn the call over to Doug Godshall. Good morning Doug.

Doug Godshall

Thanks Chris and good morning everyone. It's a pleasure to be speaking with you to discuss HeartWare’s financial results for the second quarter of 2013, the second full calendar quarter of the commercial launch of our HVAD system in the United States. During the second quarter we sold a record 523 HVADs, more than the 318 units we sold during the second quarter of 2012 and better than the 482 units sold in the first quarter of this year.

Notably we sold 288 units internationally which exceeded the extraordinary second quarter of 2012 when we sold 276. We are pleasantly surprised by the international growth we have observed in the first half of this year outside the United States.

Driving our U.S. launch is our highest current commercial priority. So it's quite encouraging to witness a roughly 15% increase in HVAD procedures in the second quarter over the first, which we see by normalizing for stocking orders and BiVADs. Perhaps as importantly healthy aggregate VAD market growth provides the platform for our success over the long term.

It is reassuring to look at the global VAD volume in the second quarter and note that the market appears to be solidly on track with the results reconfirming our expectations for growth in the mid-teens as a percentage.

As always, we caution ourselves and others not to get too carried away with quarters above or below the trend line, but it's best to step back and look at the longer term pattern, and this past quarter certainly tracks to our expectations for the market.

Before turning the call to Peter, I would like to cover few other highlights. As noted in our news release this morning, revenue for the second quarter came in at $50.8 million, representing 75% increase over the second quarter 2012. First half 2013 revenues of $100 million are already approaching our full year 2012 revenues of a $111 million.

Our international growth was accomplished by adding four new international sites in the second quarter within our range of expectations, but significantly lower than the 13 new site starts and accompanying stocking orders in the second quarter of 2012. It is worth noting that seven of 13 new international sites added year-to-date are new to HVAD and VADs in general hospitals; a positive indicator for future market growth.

In the U.S. we have trained 33 new sites between approval at the end of the second quarter including a few pediatric sites which continue to express strong interest and ask for a smaller device. That brings us to 83 sites trained at the end of June. And when we used the second quarter to fill the pipeline with the next wave of sites which are now lined up for training in the next few months. We feel confident that we will attain our goal of 100 sites trained by years end.

I would also like to give our operations team lead by Andres Toledo credit for the positive gross margin progression we have observed in the past several quarters. Our team has worked diligently to identify opportunities to enhance gross margins above and beyond the benefit we received from increased volume.

The team in Miami Lakes also achieved a major milestone when the FDA and our notified body passed our new facility with no 43s or observations and ahead of schedule, a tremendous accomplishment that puts us in a position to close out the old facility and begin production in September in our new clean room.

Overall, the launch of the HeartWare ventricular assist system in the U.S. seems to be progressing quite nicely and it is gratifying to see such interest among our long standing clinical trial sites as well as new site that have been trained since FDA approval. In a few minutes I will touch on other aspects of our business, but first I will turn the call over to Peter to discuss our second quarter financials in more detail.

Peter McAree

Thank you Doug. We are pleased to report results for such a second quarter and to reach the mid-point of 2013 in strong fashion. As Doug noted, we achieved record revenue of $50.8 million in the second quarter on the strength of commercial launch revenues in the United States, which resulted in 75% total revenue growth compared to the second quarter of 2012. Currency fluctuations were immaterial when compared to the second quarter of last year.

Starting with our U.S. performance, we sold 235 systems resulting in U.S. revenue $25.1 million in the second quarter of 2013, up 498% from $4.2 million in Q2 of 2012. With nine new U.S. sites coming on board during the quarter we estimate about 15 to 20 stocking units embedded within our growth, compared to Q1 ’13 when we estimated 40 to 50 stocking units associated with 18 new sites, and conversion of a handful of sites from consignment to direct bill.

Our revenue per HVAD system sold in the U.S. during the second quarter was approximately $107,000 which is in line with the $100,000 to $110,000 range we discussed during our first quarter call. International revenue in the second quarter was $25.7 million, representing an increase of 11% compared to international revenue of $23.1 million in the first quarter of 2013 and a 4% gain over the impressive second quarter of last year.

Our revenue per HVAD system sold internationally during the second quarter was approximately $89,000 which is slightly below the $90,000 average estimate we have discussed in the past. Similar to what we observed in the U.S., the mix of non-systems sales such as monitors and patient peripherals create some variability in this calculation from quarter to quarter. We sold 288 systems outside the U.S, an increase from 244 systems in the first quarter of 2013 and compared to 276 systems in second quarter 2012.

As we noted in our last earnings call, we anticipated that our international unit growth would be more challenging over the first half of the year, as a result of high volume of new international sites which came online over the first half of last year. As of June 30th, we had a total of 120 hospital sites outside the U.S., having added four new sites during the second quarter of 2013.

For the second quarter gross margin was 63%, compared to 56% in the second quarter of 2012 and reflective of a 1 point sequential improvement compared to the first quarter due to manufacturing efficiencies. The 7 point gross margin improvement year-over-year reflects the impact of FDA approval and commercial pricing, as well as other cost improvements and manufacturing efficiencies that we have attained in the past year.

We're pleased with this 52% gross margin we achieved over the first half of 2013, yet we remain cautious about increasing second half expectations as we refine our forecasting and planning in response to our commercial growth. Total operating expenses for the second quarter of 2013 were $41.4 million, up $7.2 million or 21% compared with the second quarter 2012, as a result of our commercial expansion and considerable R&D pipeline initiative.

Total operating expenses increased by approximately 7% on a sequential quarter basis compared to $32.7 million in the first quarter of 2013. The breakdown is as follows; SG&A expenses increased by approximately $700,000 to $17.2 million in the second quarter, from $16.5 million in the first quarter of 2013. This sequential increase with spread among increased employee cost, marketing and general corporate expenses. We expect SG&A expense to continue trending higher in the second half of 2013, in line with supporting our growth.

Research and development expense increased by approximately $2.1 million to $24.2 million in the second quarter, from $22.1 million in the first quarter of 2013. This increase reflects the ongoing effort behind MVAD and PAL controller development, as we prepare for first demand in the commencement of CE Mark trials. We expect R&D expense will continue to trend higher in the second half of 2013, as we plan for the initiation of clinical trial activity.

During the second quarter we recorded net other expense of $3.7 million, comprised primarily of interest expense of $3 million related to our convertible notes and a $600,000 foreign exchange loss. Net loss for the second quarter was $12.9 million or $0.79 per share, as compared to a net loss of $22.8 million or $1.61 per share in the second quarter of 2012.

There were approximately $16.4 million weighted average shares outstanding during the second quarter, reflecting the issuance of new shares in connection with the equity financing that we completed in March 2013.

As of June 30th we have approximately $222 million in cash and investments, which includes net proceeds from our common stock offering in the first quarter. Net cash used during Q2 was approximately $6.5 million, which compared to net cash usage of approximately $15 million during Q1 of this year. The sequential improvement resulted primarily from AR collection timing, as well as bonus payments which occurred during the first quarter.

Summing up the quarter, we were pleased by our overall revenue momentum, including the commercial progress we achieved in the U.S., and even more encouraged by our sequential and year-on-year international performance, especially in light of the first strong half that we had intentionally during 2012. While satisfied overall; we realize that ongoing growth will be more difficult each quarter as a result of market dynamics.

We anticipate that overall revenue should modestly increase in second half compared to the first half, and the increase will be weighted towards the fourth quarter as we regain traction with DT patient implants. We also recognize that the third quarter can be less predictable due to potential summer activity slowdown in international markets.

Our progress on gross margin improvement was nice to see during first half of the year, and we are incrementally confident we can further improve gross margins over the long term but we are cautious in setting higher gross margin expectations for the second half of this year, given the early stages of our U.S. commercial launch. Finally the financing we completed during the end of the first quarter enables us to invest confidently as we position ourselves for sustained growth and expanded global commercialization.

Thank you for your time this morning. I welcome your questions when we move to Q&A. Back to you Doug.

Doug Godshall

Thanks Peter. Before we open for questions there are few other items, on which I would like to briefly comment. Our pipeline has made good progress year-to-date with our most recent TETS systems implants going extremely well and setting us up for our year end chronic implants on schedule, with many substantial improvements having been incorporated since our last round of longer term implants.

Our PAL controller for HVAD is moving ahead very crisply now that the team has completed tests on the MVAD controller and is able to more fully focus on the HVAD version, which puts us in a position to launch this revolutionary design in the first half of next year.

Regarding MVAD, we were making preparations for our first human implants and as we assessed our test and manufacturing data, we determined that the system would have enhanced safety profile to replace the ceramic tube assembly with a titanium tube we have been developing over the past year. We’ve conducted multiple confirmatory tests giving us confidence that this will be a safer, more reliable structure that will also be far easier to assemble.

We still have some additional testing to do but believe we have eliminated the potential risk we were concerned about with this change. Once we decided to make this tube change, we evaluated all the other potential upgrades we could consider incorporating at this time. The one that jumped up the page at us was a new low share impeller we have been experimenting with, which has the potential to deliver exceptional blood handling characteristics.

While we wish we were implanting now, we feel it is essential to incorporate these enhancements into the device as we believe the MVAD platform has the potential to redefine the treatment of end stage heart failure for years to come through its less invasive implant requirement, pulse utility, advanced algorithms and design versatility. Combine these features with a potential for the significant clinical benefits of improved hemodynamics with the new impeller and it strikes us it will be well worth the wait. We expect that our first implant of the enhanced MVAD system will appear in the clinic in early 2014.

On the subject of destination therapy we announced in mid-June that the FDA granted conditional approval to a supplemental protocol designed to confirm observations from prior trial experience. At sights it’s hearing to more regular monitoring and management of patient’s blood pressure witnessed in notably lower incidents of neurologic events.

The conditionally approved protocol called for enrollment of up to an additional 240 HVAD patients, as well as up to an additional 120 control patients using a two-to-one random physician scheme and patients would be followed for 12 months post implant.

We intend to incorporate the data from this new cohort into an anticipated premarket approval application, seeking approval of the HeartWare System for destination therapy education. This new cohort will be integrated with the ENDURANCE study data when it comes time for submission.

Patient enrollment in the supplemental cohort can commence at the 50 centers participating in the ENDURANCE clinical trial, following the protocol as prescribed by FDA and IRB approvals at each of the centers.

Last month we submitted an edited protocol to FDA seeking full approval and look forward to hearing back from the agency soon. We are confident that the results from this enhanced pressure management strategy will have a positive impact on outcomes and further support DT approval.

Another source of data for HVAD will be our bridge transplant post approval study which continues to roll forward. As a reminder, this is 1,200 patient trial, 600 HVAD and 600 controlled patients followed to six months. Given the pace of our implants, we may be fully enroll it this quarter and this study should create a very interesting and valuable data set for customers and regulators alike. It will also provide a leading indicator that the training and education we have been doing around things like blood pressure management have had the desired effect.

Depending on the rate of enrollment and data delivery by INTERMACS, the post approval study should provide the next new dataset we are able to share publicly. However, we are just now beginning to get visibility into the data flow from INTERMACS, so it is too soon to predict precisely when we will be able to present this data. Based on the enthusiasm our sites are showing for the results they are experiencing with the HVAD, we certainly hope we are able to present some data early next year.

In other clinical development news, we remain on track for the initiation of our clinical trial in Japan this year and have scheduled an investigator’s meeting for the early fall. We have previously conducted roughly a dozen special access cases in Japan and we have confirmed with the authorities that the size of our Japan study will be six patients.

Last week CMS published a draft decision memo regarding the open National Coverage Determination on VADs. As we expected, there was no real change in CMS’s listing requirement for BTT patients covered by Medicare. The physicians are generally frustrated by this requirement and we anticipate that ACC, ISHLT as well as opinion leaders will provide feedback to this effect during the current comment period. We expect to hear final decision from the CMS later in the fall but again do not anticipate any significant change from status quo.

There has been a lot of speculation as to how the affirmation of the listing requirement for Medicare patients would affect HeartWare specifically. It is worth noting that the average age of our bridge to transplant clinical trial patients was 54 and that commercially the average age is actually about two years younger. Roughly 18% of the commercial HVAD patients to date are 65 years or older, and given the prior requirement for listing, it is our understanding that the vast majority of those patients were listed for transplant when they receive the HVAD.

Despite some of the comments in this draft decision memo that run counter to the best interest of Medicare beneficiaries in our opinion, we do not expect that this position will have a material impact on how physicians treat their patients in the U.S. Medicare has not been aligned with a vast majority of the private payers for a number of years and those private payers have continued to drift away from the listing requirement.

We will be holding our North American users meeting at the end of this month, bringing together hundreds of surgeons, cardiologists and VAD coordinators. The meeting is designed for sharing of experiences, innovative techniques and discussions of best practices, all intended to further enhance implant procedure, optimize patient care and ultimately improve patient outcomes. This will also give us an opportunity to outline upcoming trials such as MVAD and thoracotomy for HVAD. We are very much looking forward to getting everyone together for the first time since our approval. As always, the fall is a busy time for medical conferences and we know HVAD will be well represented at many of the key events such as HFSA, ISRBP, EX (ph) and the AHA.

In summary, we have a tremendous opportunity that is beginning to play out in the U.S. as it has internationally since 2009. We are delighted to finally re-executing our HVAD launch and to have an even more compelling next generation offering with MVAD right around the corner. With our longer term projects such as Longhorn and TETS and the continued expansion of the VAD market to both existing and new populations, we feel very well positioned for the future.

That concludes our prepared quarterly comments. Let’s open the call to questions.

Question-and-Answer Session


(Operator Instructions). And your first question will come from the line of Mr. Mike Weinstein from JPMorgan. Please go ahead.

Mike Weinstein - JPMorgan

Let me start with the U.S. launch and part of the questions I have had this morning is really had a view to stocking implants that occurred in the first quarter. There were 45 units that were stocked in the first quarter. How should we view those and do you have a sense of that 45 which were recognized in revenues in the first quarter. How many of those might have got implanted in the second quarter.

Doug Godshall

So, of the 45, how many got implanted, probably, a reasonably high percentage. Sites don’t generally bring product in if they are not planning on doing cases. So I'd have to go back and look at new sites from Q1, how many implanted in Q2 which is not an analysis that we have done.

If they tend to then get replaced however really do they use one and only leave one on the shelf, with the exception may be of some pediatric centers where they are not expecting to do another implant for a while, they may only keep one and not replace the original one.

Mike Weinstein - JPMorgan

So, you understand what I am trying to get Doug, is try to get actually a real sense of kind of what underlying growth was sequentially. You made it, in your comments saying that you thought procedures, HVAD procedures were up 15% sequentially. So that’s you are looking at what you think procedures were irrespective of stocking. How do you come up with that 15%?

Peter McAree

So Mike this is Peter. Just to add what Doug was saying. So what we don’t report on implant procedures explicitly in the data sometimes, little tough to come by in terms of how the implants are reported in terms of the timing. What we did see clearly as a trend where the implant rates conversed closer to the shipment rates overall. So you could see that there was a wider differential between the two and it narrows. So that obviously suggests that there were more implantations that caught up. And then underlying that trend both with newer sites as well as older sites we saw favorable improvement in the implant trends on a site-by-site basis. So again just showing that the rate of implants are actually turning worth.

Doug Godshall

And just to tie that off, what we did to calculate the implant as we looked at that circa 45 stocking units net of that off of, think it was 238 in the first quarter, total units sold. We have more BiVADs in the first quarter. So we have sort of a double counting the units to go into BiVADs. So that further reduced the procedure number. We still collected revenue obviously, but the incremental six or seven BiVADs in the first quarter above the BiVADs in the second quarter resulted in a delta of our procedure volume of 15% more procedures with HVAD in the second quarter than in the first quarter.

Mike Weinstein - JPMorgan

Just from the math this morning I think people are seeing a total pump number when there was less stocking this quarter, less new centers trained this quarter that people were expecting but the math on procedures and implants is that actual procedures would have been better than people were expecting. There is a bit of delta there versus what were the people models.

Let me come to the MVAD and kind of delays on MVAD, could you just talk a bit more about the issues, because obviously kind of continue delay of MVAD is a bit of frustration for people and why the decision to replace the tube and why to change the impeller as well.

Doug Godshall

Sure so two different motivations, although ultimately both patient safety enhancements. We have been working for some time over here on an alternative tube to the ceramic structure. And obviously we wouldn't have been working on that if we were totally satisfied with that ceramic tube. Ceramic works great in the HVAD. It's just a flat disk and it's easy to fix to the housing.

When trying to get a ceramic tube to mate with the titanium housing, it has proven incredibly complex, and while we felt confident that had a solution, we also had a very low level, but concerning failure here and there on some of our more aggressive tests, that struck us as probably an unacceptable potential for hermeticity failure.

We stayed with the ceramic, because to get ceramic to work we had to mate ceramic to a metal ring and then weld the metal ring to the titanium housing and that joint of the ceramic to the metal ring proved difficult to verify and validate and the outside chance that that seal could be broken and cause blood to seep into the motor system was not just acceptable. Particularly when were able to replicate that risk on the bench.

So fortunately we had been frustrated with the manufacturing process of ceramic for long time, which led us to work on the titanium in the first place. And we didn't go with titanium in the first instance just because we were looking for a system that was hard enough that it could avoid scratching and we had uncovered a way to coat the inside of the titanium tube to make it as hard, harder than ceramic.

So we have a really scratch resistant surface now, very easy to assemble and one that it's easy to weld et cetera, so it doesn't have that hermeticity breach risk. So that struck us as they must do as god forbid we do a case and the patient has a terrible outcome, because the pump fails due to a hermeticity leak. So that one was obvious and we really didn't feel we had an alternative.

In parallel really since the acquisition of World Heart when we looked at their portfolio of pumps, we acquired some great intellectual property and looked at some of the design principles of their MiFlow pump that was in development and while a lot of people view things like Maglev as an answer, what Maglev is in theory is just a means of rotating an impeller that might yield lower shear stresses.

So that challenged our engineers to think about well, Maglev is just a means to an end. Is there a different means to an end in a more simplified lower energy consumption system like MVAD? And so they took some of the design principles of the World Heart teams and looked for ways to modify the MVAD impeller to see if we might have a chance to have an improvement.

What I don’t think we anticipated was a multifold reduction in shear stresses that were seeing with this new impeller. And while it’s impossible to prove on the bench, when you think about the effect of shear, people talked about GI bleeding and von Willebrand factor impairment with continuous flow pumps which is likely shear related. And shear also can exacerbate thromboembolic risks.

So if we think about the two sort of biggest adverse event categories of thromboembolic and bleeding risks if we have an impeller that might be, I don’t know, three, four times better than the one that we were pursuing, it, in terms of that shear effect, it’s almost like an ethical imperative, particularly if you’re already taking the time to implement the new tube and the new impeller only looks like it probably impacts the project by another month or two, it’s a no-brainer and likely sets us up for a materially better performance, both clinically and commercially with the system.

Mike Weinstein - JPMorgan

Let me just clarify one item. The comment about the additional DT protocol is that you submitted an edit protocol to the FDA; So, one, can you just explain what the resubmission was, and two, should we assume that just based on FDA timing as you probably won’t see any implants in the third quarter under that protocol? Thanks.

Doug Godshall

Sure, we took the FDA comments in the conditional approval letter, and as I think we’ve commented before, some of those were around the analysis plan that we put forth for the study or for the arm of the study. And so we attempted to address the questions that they had in that comment letter in the resubmission.

Some sites are willing to implant under conditional approval. Most sites aren’t willing to implant under conditional approval. And the prospect of submitting a conditional approval and doing IRB and then a month later hopefully submitting the new protocol to the IRB didn’t strike us as prudent.

So it seemed better to lock down and confirm that with this revised analysis plan that the FDA is satisfied and we’re able to go forward with an unconditional approval or at least a conditional approval that doesn’t have any nuance openings in the analysis plan because that could just cause IRBs to cycle in a do-loop.

In terms of the quarter, it’s conceivable we could have an implant this quarter but it would require a good alignment of FDA approval, IRB timing, submission to the IRB, et cetera. So, we are not modeling any implants this quarter.


And your next question comes from the line of Mr. Matthew Taylor from Barclays. Please go ahead.

Matthew Taylor - Barclays

So, first question I wanted to ask was around some of the U.S. dynamics. Could you talk a little bit about pricing in the quarter? And if you could give us any anecdotal color on implants by centers, what kind of trends did you see quarter-over-quarter and how are you holding share in some of the centers that you trained now? Would you characterize the share is pretty even or skewed one way or the other. Could you give us any kind of a map of U.S. share?

Doug Godshall

So pricing seems pretty stable. We have some variability in pricing, sort of old IDE sites that had contracts and we shifted price up versus new sites, and but not a huge range and we are not seeing prices being a determinant for getting new sites going. We see more of a hurdle on things like, o shoot, I just brought a SynCardia system for a several hundred thousand dollars and I've got to go back to my finance committee and they don’t want me to talk about another pump. So finding creative ways to circumnavigate the logistical process of getting new product on the shelf in hospitals, which we didn’t really rely to in the first quarter because most of those sites already had the product budgeted in the second quarter.

We saw more sites looking for how do I stage this and get it through the internal approval process, which was informative for us as we would look at, finding creative ways to help them get access to the HVADs sooner rather than later.

In terms of share, it’s a little tricky to say, here’s exactly our share because I can think of few sites where we did extraordinary volume in the first quarter, and okay volume in the second quarter. Now did we lose share? I doesn’t work like it, because in the first quarter they had a predominant bridge to transplant volume and in the second quarter they had a predominant destination, can't call that virtual transplant volume.

So if we did just picking for example, only our specific sites volume but 10 in the first quarter, three in the second quarter, and the other company did three in the first quarter and 10 in the second quarter; did we quote unquote lose share? I think the math would say we did, but the reality is we didn’t in at least the segment of the market that we participated.

And we certainly saw a reasonable confluence of sort of clustering of high shift to DT for a segment of the quarter, not the full quarter, but enough to say okay, by pure just VAD to VAD math we had less share in whatever June, but there is no structural change in terms of the expected utilization at those sites.

So we feel really good about the support and stability of the planed utilization, both the sites that are currently using the device, sites that are just getting up and running and using the device. We're not seeing, hey let me use it a few times and then figure out if I am going to use it in the future. It seems much more leaning forward optimistic in terms of future utilization of the HVAD as component of their clinical armamentarium.

Matthew Taylor - Barclays

And maybe just one follow up on the market. Obviously there is a lot of lumpiness at this stage in the market, but could you talk about the quarter-over-quarter dynamics a little bit more. Do you think some of the same store weakness in the first quarter was comp and calendar based? Do you think there has been any real change in trends now that there is two pumps in the U. S. market, anything that you are seeing with actual clinical trends would be helpful?


I have cut the line because it was creating too much feedback. Do you want to re-queue up or did you want to go to the next question?

Doug Godshall

Assuming everyone else is still on the line, Peter and I will address it the best as we can; the question. So it was a same store sales question, quarter-to-quarter lumpiness. We certainly saw what should now be the norm and expectation which is ebbs and flows where we saw unbelievably strong weeks and weeks like ISHLT where understandably, all the doctors were in Montreal and therefore implants all but operated.

So we saw ebbs and flows, some that we could explain and some that we couldn’t explain. I think on balance in a sort of breaking my rule of looking at the micro versus the macro, in a quarter-to-quarter basis we saw healthy VAD volume same store. We saw mixed variability in terms of heavy DTE one quarter, heavy VTT another quarter, and it really varied by site. So it doesn’t appear to be a systemic migration one way or the other. It's just steady growth really of both segments as far as we can tell.

And within that, as sites come on board, they try to figure out how am I going to decide where I use the HVAD. Some sites just say we were going to give all BTT to HVAD. Some sites say let the patient decide upon the BTT segment, some sites are predominately BTT to begin with and then it all depends on their enthusiasm for our device which has always been our view. The more enthusiastic you’re the more results you’re getting with HVAD, the more patients you see look they would benefit from the HVAD.

So, next question.


Your next question comes from the line of Mr. Jason Mills from Canaccord Genuity. Please go ahead.

Jason Mills - Canaccord Genuity

As usual Doug, a lot to react to. Never a dull moment in VAD land. I want to go back to some of the questions or some of the commentary you had first on the proposed NCD and in the last question your commentary about quarter-to-quarter variability BTT, one quarter DT another quarter sort of goes to the heart, I think of some of the concerns that folks have with respect to the segmentation of the market. I think in the past you’ve commented to questions asked to you about sort of what percentage of the market your current label allows you to participate in?

And I don’t want to put words in your mouth, but I think you’ve said somewhere in the range of over 50%, maybe 60%? I am wondering, if the proposed NCD changes at all in your mind and then as you think about the revised protocol trial for HVAD and maybe even throw in longer term the MVAD trial design and what sort of trial you would expect there, but I guess near term, just with the HVAD DT revised protocol, what percentage of the market you think you’ll be participating in in light of the proposed changes to NCD, if in fact they go to permanent?

Doug Godshall

I know there was a range of reactions to the NCD language. What we have observed when we hit the market is that a larger percentage of the sites felt that in BTT generally, not just Medicare patients that they felt they needed to list the patients for transplant prior to putting a BTT pump in, even if our label didn’t require it and even if the payer didn’t require it and payers other than Medicare by a vast majority don’t require listing. And yet they felt that was sort of complying with existing Medicare regs was better for them than trying to decide between commercial and government pay.

So that was already really in place and has been in place since our launch. So likewise, virtually all as far as we can tell, people don’t tell us, oh, this patient is listed or this patient is listed. Virtually all, probably not all, but virtually all of our sites were and are listing their Medicare patients for transplant prior to putting a VAD in because they know that Medicare’s language is different than private pay language, which isn’t to say that, again it’s not all, but our impression is almost everybody was doing that.

So, I think this language, even though Medicare reaffirmed their position and tried I think to clarify what they feel was always their position, it was also the impression the sites that that was what they were supposed to being with.

So, I don’t really think it changes anything other than reaffirms the preexisting condition and maybe there’ll be a little bit of a move where sites will now feel like okay for my DTT patients over 65, now I have to list them which I wasn’t doing before and maybe I didn’t realize I was supposed to do before. But I don’t think it’s a big change.

In terms of market, so if DTT has always been a majority of the market and DT is growing, hopefully both will continue to grow. Given what we see in sites that comply with all rules, list patients where they need to list patients, don’t list when they need to. I don’t think it really changes our view of potential market.

Might some sites have to list a few more patients if they want to use our pump? Yes, you have to be on the high urgency status when you get our pump to comply with CMS payment mode. From our understanding you don’t have to be and patients currently are not when they get our pump all the time.

So we are not persuaded at this juncture that this is going to be huge swing factor against us. Obviously, it’s not. It doesn’t change things positively like it would have if they just eliminated listing all together but we thought it was so obvious and smart for Medicare to make that change and it would have actually saved their money if they made that change. It was almost too good to be true. So it was hard to imagine the government actually would have done it, because it was just all upside to them, no downside. But I think we have a similar market opportunity as we did before this language.

Jason Mills - Canaccord Genuity

And just a follow up on that. Your commentary about, you think that you still have access to patients that aren’t necessarily immediate need of a transplant, would that suggest that you think the proposed language still would include stage B and stage 7 or stage 2 and stage 7 patients that were listed that way or have been here too for it.

Doug Godshall

Yes, you are on the list, which I as I read the language, I think what they were trying to do is clarify what there always felt was their position versus changing their position. So status 7 means you’re on the list with the procurement network. So, it’s from our read as sort of non CMS employees and the experts that we have talked to feel the same way that that’s complaint with the language in their proposed and their NCD.

Jason Mills - Canaccord Genuity

Last question, I'll get back in queue. On MVAD, at this point in time can you give us any additional color with respect to how you’re thinking about bringing that product to market, specifically in the U.S. where there has been dichotomy in indications in their fore-trials run. Outside the U.S. I think we all know the answer. It’s going to be CE Mark trial that you get indication and we see outperforms in the market subsequent to that. But in the U.S. any additional thoughts that you have with the respect to the MVAD and how you’re going to try that deceive once it’s ready to do. And perhaps also maybe timing for that, given that first demand little bit later now.

Doug Godshall

And you asked a question about once we get our trial going for DT what percent of population would have access to. So if our 50 trials sites are about 50% of the DT market and also about 50% BTT market roughly give or take, it would imply that, I guess the math would suggest we’d have access to something like 75% of the total bad patients or something one along those lines once we get the trial kicked off.

In terms of MVAD, I think we’re fairly evinced on our trial design and we have been toying with a bridge to decision kind of an indication. This latest NCD does not make us enthusiastic about trying a new quote indication, even though it’s the way a vast majority of the patients are treated. They actually put it in and see how the patient goes, so even all the DTT patients are really kind of a BTT category in many cases, other than the really young ones.

So our view is we are probably going to stick with the traditional DT and BTT split and yet we are also making some modifications based on what we learned with HVAD. That ought to make it a bit friendlier to enroll in terms of some of the inclusion criteria. So ultimately device enthusiasm is what’s going to drive enrollment and the enthusiasm for MVAD was already high. And I think once we have some additional data about this new impeller, I think it’s going to go through the roof.

Timing, if we're anticipating an international first experience in the first half of next year, than we are going to want some under our belt before we submit to the FDA. So we are probably looking at a back half IDE submission to the FDA and obviously our decision to switch to what we think is an inherently better safer, more reliable construction was a fairly recent decision. So we haven’t tightened the schedule completely and found ways to expedite some of the aspects of the schedule, but that’s a broad picture of where we think we are.


Your next question comes from the line of Mr. Jayson Bedford from Raymond James. Please go ahead.

Jayson Bedford - Raymond James.

In reference to the additional cohort, what’s entailed in the follow up? What will centers be required to do monitor blood pressure more closely?

Doug Godshall

Assuming that the FDA, the final protocol is at least what they agree to in the conditional approval, it’s really not onerous, but the patients would go home with a method or methods for tracking their own blood pressure. They would journal those pressures when, if, and hopefully it doesn’t, but if the pressure reaches a certain threshold level where the site wants them to report back n and either come in and see them or tweak their meds, they would then do so. And the protocol is really based upon the protocol that nine of our centers, we're already doing for all of their HVAD and HeartMate II patients.

And thankfully they were doing it because had they not, we wouldn’t have seen the gap between their super low neurologic event rates and the neurologic event rates of the other sites. And we wouldn’t have known sort of what is the phenomenon that is resulting in this dichotomy of results. We probably would have said well just the normal variability and site performance. But given that there is a reasonable consistency in how regularly these patients track blood pressure relative to everybody else and how quickly they are in being relative to everybody else, and what their pressures actually were in those patients when reported, which were notably lower than the other sites.

It certainly strikes us as a really clear cause effect. But it’s always more persuasive if you can do it on a perspective basis versus a retrospective basis to demonstrate your observations, or to confirm your observations which is why we are doing this cohort.

Jayson Bedford - Raymond James.

And just secondly, I don’t want to get too deep in the weeds here, but the greater number of BiVADs in the first quarter versus the second quarter; is that just kind of normal quarter-on-quarter noise here or is there a cost issue that some of these centers are kind of bumping up against, such that we will see fewer BiVADs going forward.

Doug Godshall

I don’t know. We’re not allowed to promote BiVAD. Sites are getting paid by and large and they seem to do so by prequalifying with the payer. I am going to do this because if I don’t either, A, the patient is going to die or B, I'm not going to be able to get them out of the hospital ever or whatever their conversation is with the medical director at the payer. And from what we can tell, when prequalified they always say yes. The worse patient for United or Edna or whatever is a patient who gets an LVAD and then doesn’t leave the hospital. Or a total artificial heart patient connected to the big controller for the total artificial heart who never leaves the hospital. Those are sort of circa $1 million, $2 million patients and they crush the payer and the hospital doesn’t really make money on them either, they are the worst.

So, the ability to use BiVAD to discharge patients who traditionally absorb months and months of time in the hospital is probably actually one of the most compelling economic arguments we have. But, the difference between Q1 and Q2 is sort of circa $6 million or $7 million, not like we did 31 quarter and then two in the next quarter. So, it wouldn’t surprise me. In fact I think it’s just ebb and flow. We already talked about lumpiness of VADs. When you’re talking about seven or 10 units as a quantity, then the law of small numbers really bites you. So given the enthusiasm and the great results frankly that we tend to see with our BiVAD patient I would think that we’ll see similar ebbs and flows but not just a perpetual ebb.


And your next question comes from the line of Mr. David Roman from Goldman Sachs. Please go ahead.

David Roman - Goldman Sachs

I wanted just to come back to the comments you made earlier around the balancing around DT versus BTT quarter-to-quarter and clearly that is a nature of this market given that’s still relatively low unit high average selling prices and there are going to be pretty big variances on a quarterly basis. But if you look kind of two years out or even three years out, how do you sort of see the market evolving between the two indications and where do you see HeartWare positioned and maybe just a corollary to that, do you see any of the understanding CMSs sort of laid their stake in the ground for now. What are the prospects of that potentially changing as you think about the longer term?

Doug Godshall

So we never modeled that. We would have the good fortune of practical BTT payment indication from CMS. So our assumption was always that listing would be a requirement. And sure there are some patients who are not sort of list the bull at this juncture that we certainly lose to DT even though the intention is to transplant them. And sites pre-Medicare age certainly have an easier time calling them bridge than listing somebody who is smoking, et cetera.

Now sites listing criteria tends to be internal and they’ll change them. Most sites used to have a much lower age for who they would list for example and who they would transplant. So, they used to be, whatever, 62, 64 and now sites have drifted up substantially in their routinely, many sites are routinely transplanting 70 year olds, that they never would have imagined doing 10 years ago.

So age is no longer the bright line that frankly we thought it was leading into this approval. We just figured we are going to get cut off at 70 in all likelihood and while we haven’t had any like 80 year olds that we’ve implanted to my knowledge, but there is less of a, maybe it’s the chaining effect, there is sort of less of a stealing on age which expands our potential BTT market opportunity and I don’t know that, that counterbalances the long term patients need to be listed for Medicare.

We do certainly expect that patients receiving long term VAD support, DT being the primary category will grow substantially, particularly as waiting times continue to expand. We think FDA clearly gets it that these two categories are more similar than dissimilar. If people get great results with the HVAD, I expect you will see more patients listed for transplant prior to getting a VAD at more sites.

So, if we see the kind of virtuous cycle that we have seen internationally where you start to really get a feel for the versatility and value of the smaller, efficient system, then you will find ways to comply with the regulations, both FDA and CMS and define your patients in a way that is consistent with the rules but also enable you to get access to the HVAD. So, I don’t think we have a material change. What I can’t predict is exactly how it will split in two, three or four years, what percent will be called BTT what percent will be called DT.

We already have a very large percentage of the patients in Intermax that are BTT not listed. I suspect that in the non-Medicare category that that number will grow substantially in the Medicare category. I think that category, there probably weren’t many Medicare patients who were BTT not listed to begin with. So I don’t think that’s going to change dramatically.

David Roman - Goldman Sachs

Okay and then maybe just a follow up question for Peter. He doesn’t have much play on these calls but I thought one other things that was interesting in this quarter was we are seeing the P&L profile improved pretty rapidly, particularly on the SG&A side that while you are growing that on absolute dollars, you are getting quite a bit of leverage in any operating model. Can you give us some prospective on how you see the operating margin evolving over the time and I know you are not ready to give long term guidance but is this type of delta versus top line and EBIT growth reasonable over a longer period of time or is there some sort of hyper leverage that you are realizing now that kind of dissipates over the time.

Peter McAree

Right now we are in the hyper leverage, just because of the commercial growth year-on-year but I would say the sales and marketing components over time will grow at a more rapid rate for sure. R&D will end up flattening out with time. So at this point we haven’t really spoken to long range operating margin targets. I think as quarters roll on we will come out with more guidance on that but at this point David I think we are going to sort of just give incremental guidance, soft guidance quarter-to-quarter in terms of the directional trends and really not give any more clarity beyond that. I don’t know, Doug, you want to add?

Doug Godshall

Yes, to your comment about the S side of the SG&A, our U.S. team has done an extraordinary job in the slightly more than happy post approval that we have had, that we are reporting on and we are in an interesting growth phase because we have a ton of demands from the customer which is great to provide ever increasing services to those customers, broader market development activities than we had initially modeled for and so we are simultaneously really aggressively recruiting to expand our capabilities, adding regions where we didn’t have them before, just so we don’t have 20 people reporting to one person kind of a problem, which becomes really unwieldy. So you promote somebody, you got to backfill them. So we are in a pie delta mode on the sales organization, while also trying to get better coverage and expand services, et cetera.

So really the second quarter we saw some really nice incremental growth and maturation of our sales organization. But as we sat back yesterday and looked at forecasted plan just for the back half of this year, we will continue to be in hyper growth mode on a percent basis for the sales organization.

Now, it’s not going to be a 300% sales organization, probably until we have $10 billion VAD market or $1 billion, $2 billion, maybe; $10 billion is kind of big. But we don’t except, it's such a constringed customer base and yet a complex customer base because you have so many influencers within each existing hospital. So we’re still triangulating on what the exact coverage per site for a territory manager and coverage per site for clinical specialist is when also blended with geographic coverage et cetera.

So, the S side is a great performance year-to-date. Certainly, we’ve leveraged from the tremendous performance of our international sales and clinical specialist team to help us but it is a different model in the U.S. in terms of the complexity of the sites and a number of influencers. So, I think Peter is right. We’ll probably see growth of the S side at least for the next 12 months until we reach some level of stability.


And our next question will come from the line of Danielle Antalffy from Leerink Swann. Please go ahead.

Danielle Antalffy - Leerink Swann

So I wanted to talk about clearly new center as for this quarter, it looks like the stocking number, you actually came in in line with or better than we had expected for sure, maybe than the street But I was wondering how the slowing new center adds might impact the underlying dynamics there going forward. Can you help frame that for us?

Doug Godshall

Yes. So we certainly added at a faster clip in the first quarter, and I wouldn’t say we did a better job in the first quarter than in the second quarter, I think it’s more we had a pent up list of sites that were ready and waiting in eager, some of them like, some of the pediatrics centers sort of jumped the queue and inflated that number in the first quarter. And as we were doing that very capability expansion and build of our sales team that I just described to David in the U.S. sales force that also takes some time away from new center add.

But I think more to the point is that now that we’re at this next group of centers, they didn’t know us as well before, they didn’t have us budgeted already. Some sites have had things like, oh, the key champion who was advocating for us left and went to another hospital. So then you got to start all over again. So, there is a little bit of a shift in the kind of effort required to get these new sites up and going. It just I think took longer to get them inspired to go through the effort to bring a new device on the shelf and to find that site's individual pod buttons.

Luckily, at some of the sites that I met with very recently, the answer is sort of generally it’s not a matter of if we’re going to bring you in, it's a matter of when. And I’ve got this budgetary problem or we’ve got this staffing problem or whatever the dynamic is at that individual center and then our job is to figure out do we have no choice but to wait until the fourth quarter or January or whatever we are told or is there a way for us to short circuit the process a little bit and overcome their reason for delay.

And now that we’re getting to a point where some of our promotions are being filled and we have more concentrated coverage even than we had last quarter, you have the time to individualize the management of each center and a benefit of having 160 VAD centers in total is that you can really concrete.

I think what the other dynamics in the second quarter was, we added all those sites in the first quarter and you don’t want to then sort of say okay you are good, now I'm going to leave. So you have a balance of reaping the benefits of the conversion that you brought on board in the first quarter and make sure you have got full, systemic support for the HVAD at that center and if you spend all the effort to get on the shelf and then went five hours away to your next account, you are probably missing an opportunity to solidify your position and that’s where expanded sales presence is going to help us, because you can have even better concentration at existing sites while adding new sites.

Danielle Antalffy - Leerink Swann

And then as far as your addressable market opportunity, not get at that horse but, so obviously there is a still somewhat of a bridge to incision market. Can you talk about what the underlying growth rate is in your opinion in your addressable market, because I assume it’s a little faster than just hardcore BTT but slower than DT? What do you think that growth rate is?

Peter McAree

I think it can be at some sites and will be comparable to market growth because we see a decent number sites who are not running afoul of anybody’s rules, that a very high percentage of their patients meet the requirements for payment from CMS et cetera. So a very high percentage of their patients are getting HVADs, certainly much higher than the sort of 50% to 55% BTT total share of the aggregate market and their patients don’t look different from what we can tell to sites where we don’t have that same utilization rate.

So, to back to what we have already said, a lot will depend on how well the device works for you. If you are doing thoracotomy, getting the patients out in seven days getting phenomenal results and your team, generally cardiologist, surgeon et cetera sees the merit of our system, you will find a way to use our device more often than not. And so you will have a bigger BTD, BTT segment than sites that haven’t realized the dream yet.


Your next question will come from the line of Mr. Mat O'Brien from William Blair. Please go ahead.

Unidentified Analyst

This is (inaudible) in for Mat. Just a couple of quick one's for you. So, looking out several years, I am just curious where you expect the split will be between domestic and international revenues and I know you have touched on this a bit during the call but if you could just expand a little bit more on the international initiatives and what’s really going to drive the expansion opportunities going forward?

Doug Godshall

So, internationally have had 13 new sites added this year to date, six new countries in process and seven of the 13 had never done a VAD before, HVAD, Berlin Heart, HeartMate II anything. So we wish we were in Japan because I think that is living up to what we had expected, not for us yet but eventually well we hope. We think Japan will be the second largest VAD market to Germany in the not too distant future. And we had that impression for some time. So I think that will drive overall international growth, albeit we don’t get the benefit for a couple of years, or two or three years, whatever it’s going to take.

And yet, outside of Japan what we see in every country that is not sort of Greece in terms of its financial position is a really strong bias towards finding a solution for their end-stage heart failure patients. So it is not a U.S. or Western European and U.S. centric problem in terms of the population. So we are fortunate to have a team that is nimble enough to cover cases on continents that are far afield from where they live and we are building infrastructure to address the needs of those customers in those countries. And yet, fortunately we’re seeing and expected to see continued growth in the core markets, particularly Germany.

If Germany suddenly went backwards, it would create a hole that would be awfully hard to fill and quite contrary we see new sites coming on in Germany, old sites don’t seem to be losing volume to the new sites. So Germany seems to be in a virtuous cycle mode that spills over into the rest of the world because outside of the U.S. people look to Germany for what they should be doing. They don’t look to the U.S. for what they should be doing because Germany has access to every device out there and fortunately we do well in Germany.


Your next question comes from the line of Larry Biegelsen from Wells Fargo; please go ahead.

Larry Biegelsen - Wells Fargo

Doug, just on endurance, I guess, just curious if you have made a decision about what we are going to see in 2014; top line results, full results, or nothing until the supplemental DT cohort is completed and then I had a follow up.

Doug Godshall

So, given that this trial is now an aggregated original cohort, additional cohort with a submission of the data being coming co-mingled and sort of contingent on one another, it is not our expectation that we are going to be presenting any DT data next year. We have been asked given that the assumption underlying the structure of the trial now is that endurance would be the primary endpoint, two year primary end point of measure, we have been asked to if we would be talking about whether or not we met hat primary end point as we expect.

We will meet it, that is, and we have had some internal discussion trying to determine is that appropriate to talk about the primary endpoint and so we are not fully certain yet as to whether we would mid-year, or around this time next year describe sort of pass-fail on primary endpoint, because the performance in the additional cohort could influence the interpretation of that primary endpoint and if we get the kind of really positive confirmation out of this cohort of patients that we're anticipating, it would influence not just the regulator 's perception of the data set but also probably the rest of the world's perception of the data set. So we are not finding a significant rundown on the data from endurance next year and still undecided on primary endpoint disclosure or not.

Larry Biegelsen - Wells Fargo

Doug, just two follow-ups on that. First is that if you don’t show the data next year. Are you confident that you won’t have any kind of negative reaction from the medical community, number one? And number two, should we just assume that DT approval in the United States will be delayed until the supplemental DT cohort is completed and filed. Should that kind of become our base case which would be about 2017 approval in the U.S. for DT?

Doug Godshall

It’s hard to predict exactly how long it’s going to enroll until we start enrolling and with a one year follow-up one could model 2017. I don’t know that that’s our model but it’s again hard for us, until we have a stake in the ground that says here is the date when we can start enrolling, I’m uncomfortable giving a more aggressive forecast, although certainly 2017 isn’t what we would anticipate.

But conceptually yes. Based on our discussion to date and this also assumes that the FDA aggress with our final analysis plan, this additional cohort and the initial endurance are part of an aggregated trial and dataset. So they aren’t really separable anymore, at least if it goes as planned. So that would suggest that in all likelihood we’re going to need the full one-year follow-up and all the patients for this trial as a component of our submission. So hope that answered you question.


And you next question comes the line of Bruce Nudell from Credit Suisse. Please go ahead.

Bruce Nudell - Credit Suisse

Doug just like a couple of housekeeping items. Ex-U.S. were there any units in Japan and also the stocking units, ex-U.S. ex-Japan?

Doug Godshall

Yes, so, we did not do a case in Japan, although our team spent a lot more time there in last quarter and probably before. Internationally, in the second quarter we added four sites. So generally the four sites, probably all ordered two systems. So roughly eight compared to 13 sites added in the second quarter of last year. So Circa 26 plus we added more distributors in the second quarter of last year. So certainly in retrospect, as we look at that second quarter of 2012, as eye popping as the 276 units where we also had less appreciation for stopping at that point in our lives, as we did when we launched in the U.S. when stocking became, such an obvious influencer on volumes.

So, we had certainly probably north of 30 or 40 stocking units embedded in that 276 between new sites and some large orders by distributors and the like. So it was a great quarter but as you think about what matters of how often a doctor picks up your advice and uses it on the patient, it really makes this quarter relative to last year look that much better on a year-over-year basis.

Bruce Nudell - Credit Suisse

Certainly and Doug, just the broader question that I have is, this quarter, it looks like on an implant basis, including PVAD and IVAD, excluding the net stocking of 17 that you noted, you have 22% or so implant share. Last quarter was 21% or so. And given the puts and takes of the BTT definitions, given the puts and takes of lumpiness of how many implants are BTT in any given quarter, how should we be thinking about aggregate share progression, as the year goes on and any granularity you could provide on like exiting the year, how much kind of BTT share you could have?

Doug Godshall

So I’ll go back to international because at least we have history as something of a guide. What we saw internationally and continue frankly to see, even as recent as last year we seemed to hit thresholds build stability, build infrastructure to support and then we move to the next sort of plateau, we spend little time there. If you think about last year, if you take out the stocking component in the second quarter, we are in the sort of 210 to 225ish range in utilization. If the past couple of quarters are any guide, that would suggest that we are north of that now and have reached a new threshold, both in terms of utilization and at existing sites stabilization or potential growth in utilization on a percent basis at those sites as well as the incremental contribution of new centers.

And I think over the past couple of years internationally we’ve seen much more valuable utilization at new centers, whereas in the 2009 and ’10 era, we would pick up sites in places like Poland. They would do two cases, then we'd never hear from them again. And I think we’ve done a much better job internationally of building momentum at a site before we turn them on.

And I think the same analog is true for the U.S. where I think we’re probably, as I think about the second quarter, it was I’d say both lining up new sites for training and building the next wave of new sites, as well as sort of digesting and integrating ourselves into the existing sites that we had brought onboard in the fourth and first quarter, and I think that had an effect on that incremental percent gain but not a step function percent gain quarter-to-quarter.

And I am not expecting us to use your numbers to go from 22 last quarter to 33 this quarter or anything like that because I think it’s going to be a steady progression as we add sites, unless the old sites stop using us or use us far less regularly, which we don’t expect, then the new sites by definition ought to increase the percent of devices on the market that are HVADs versus not HVADs.

And our goal is at the existing sites to make sure they get phenomenal outcomes, so that back to my earlier comment to Danielle, they look at more and more patients as HVAD patients because they get such phenomenal results they want to find the ways to use it.

So we’re not at this juncture giving an end of year guidance on percent with HVADs in the total VAD category. But as we’ve said before, we would be unpleasantly surprised if we ended the year with the same percent of devices in the December as we had in January. That would suggest to us that something didn’t go quite as planned.


And your next question comes from the line of Steven Lichtman from Oppenheimer & Company. Please go ahead.

Steven Lichtman - Oppenheimer & Company

Doug, just to clarify on MVAD and the pathway here, you mentioned early 2014 clinical experience, should we assume that that is animal work initially? And if so, what could we be thinking about first demand MVAD?

Doug Godshall

No, animal experience is veterinary clinical. So we expect a human clinical experience in the early part of next year. And again we’re trying to tighten up the supply chain. So what we do in the next month and half, two months, has a huge influence on what months we’re implanting in next year.

So thankfully I think what we’re going to have is a huge yield improvement and supply chain improvement on MVAD. So we’re not going to be hand-to-mouth in terms of devices, both, frankly for the clinic as well as for development projects like Longhorn because this ceramic tube was torture to deal with, and we keep thinking we had it licked and ultimately realized, it just wasn’t going to cut it long term and better to rip the band aid off now than cross your fingers and hope you could figure it out in the future. So, that’s the MVAD status.

Steven Lichtman - Oppenheimer & Company

And then Peter, as we think about the (inaudible) the additional cohort, when that starts getting going, what ASP should we be thinking about for the implant there? Will it be for the pricing we have been currently or is it going to be at lower price?

Peter McAree

Same price.


Your next question comes from the line of Suraj Kalia from Northland Securities. Please go ahead.

Suraj Kalia - Northland Securities

So Doug, forgive me, I jumped a little late on the call, in case you have already mentioned this, forgive me on that. So going back to the MVAD, a lot of questions have been asked about the forward-looking and when, if, and, and so and so forth, I just want to look in the rear-view mirror. If I remember correctly you'll acquired World Heart in early 2012 and as of last quarter, the MVAD, if I remember correctly from the transcript, they were pretty glowing, your views of the MVAD. What point did you'll realize something had to be changed and what was the rationale for World Heart acquisition in early ’12? I am just trying to connect the dots here.

Doug Godshall

It was fortuitous. What motivated World Heart was we wanted to have a couple of things from them. First of all they had some really smart engineers who we have retained but they also had an intellectual property portfolio that dwarfed ours and had some particularly interesting patents and even more importantly a patent application or two that was potentially extremely important for us to have in our portfolio, and that application which is looking encouraging would have justified twice the price of what we have paid for the company probably.

But we also saw that, we know we have got a brilliant pump designers and at yet, our pump designs tended to be leveraging the hydrodynamic bearings and passive magnetic suspension system of the HVAD and MVAD but we didn’t have an alternative in-house and what intrigued us about World Heart, based on the Levacor data and our understand of the MiFlow and PediaFlow is that they did appear to have a lower shear system than other products on the market and then where the HVAD is, even though the HVAD has a reasonably low shear level but we believe that may be there were something to their designs that we could leverage or put in our long term pipeline.

What we didn’t anticipate and that has been the good fortune of that acquisition is that by intertwining our engineers with their team and seeing some of the design principals of their impellers, it forced our engineers to challenge their own assumptions about how much we could positively impact the MVAD impeller. Was there something we could change with the geometry of that impeller that would positively affect the shear stresses on the fluid?

And it was certainly within the normal range of other continuous flow pumps that we just stuck with our current impeller design but when we saw the test results, very recently, it was staggering frankly, milti-fold deduction in shear relative to commercial devices, relative to our pipeline devices. It's not sort of normal physiologic blunt effect in shears but it's darn close.

So we don’t know yet if this new impeller will have the hoped for effect on acquired von Willebrand syndrome. It certainly has the potential. We don’t know yet if what was already looking like a super-loads from thromboembolic system in the MVAD which has incredibly clean fluid flows but if this further reduction is shears is also going to further reduce thromboembolic complications but it’s logical that it would.

So when we stacked up those two meaningful potential clinical benefits and had this real sort of technical imperative of switching from ceramic tube to the titanium tube causing us to take a pause which we discovered in late July, it seemed almost an ethical obligation to implement this new impeller because it could really create a stunning performance out of a super small pump.

And ultimately we think the long term growth of the market will be accelerated substantially if you can have a device that is really fun for the surgeon to use, but more importantly dramatically reduces adverse events. And in this impeller, I think, we think we have a chance to unlock that box.

Suraj Kalia - Northland Securities

And finally on the HVAD, if I heard correctly it’s now going to be an aggregated trial and you'll are not going to be presenting data next year on ENDURANCE and at the same time the patients will have to follow blood pressure or monitor their blood pressure at home. I guess, am I thinking of this correctly. Now, to me it seems like we are introducing a certain level of patient compliance at home. As you and I both know its blood pressure monitoring it. The physiological state you’re in, the time you take the blood pressure, all of these things make a difference. And you’re introducing a certain level of patient compliance and another variable in this equation at least for the 360 or so patients for the aggregate study. Doug, am I thinking about his correctly, especially given how mean or tier pressure is measured way differently than systolic and diastolic? I'd love some color on that.

Doug Godshall

Sure Suraj. And actually I think one of the important findings for us when we looked at the nine sites that are already applying this protocol that we are adopting for this trial, is the frequency of tracking is in their minds incredibly helpful because when you rely on patients showing up at the hospital every three months and you take their pressure at that one moment, whether you do systolic, diastolic and calculate a mean or you use equipment to derive the mean, you can lose the ability to really track where the pressures are over a continuum. And they seem to have consistently lower pressures than other sites as well as the consistently better outcomes and at least they think that it’s because they are checking more frequently and able to capture the mean over time on a more accurate basis.

The view of those sites at least that are already doing this for both their HeartMate II and their HVAD patients is that this is not an overly burdensome activity for the patients. The patients already have sort of their daily VAD management activities, adding a couple of minutes to this, provided that the patients have the equipment and some patients can use blood pressure cuffs, some patients you can’t take the pressure because of the VAD, so you use Doppler. Doppler is considerably more affordable than it used to be. So it’s not thousands of dollars for Doppler, its $200 for a Doppler.

So it appears to be abundantly achievable. And for us at least the stark contrast between the sites outcomes that managed well and didn’t manage as aggressively and the stark contrast between patients who had spikes in mean arterial pressure and the correlated neurologic events with those who had better moderated neurologic events, we felt we needed to address this on a prospective fashion and particularly when overlaid with the obvious attention that we received from the agency on the neurologic event side, both at our panel as well as in our label. This we see as an approval assurance, more so than approval delay as some people would characterize it. So I think, as usual we took longer than we are supposed to.

So I apologize that we held you guys through the open of the market. For those who are still listening I really want to thank you for joining us. We're thrilled with our progress to date in the U.S. and I am wildly impressed with our results our team in the field, our operations team and the like have delivered to date. We're really just setting the stage for future growth and look forward to speaking with some of you next week and others in a quarter. Thanks very much.


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