HeartWare International (HTWR) Douglas Evan Godshall on Q1 2016 Results - Earnings Call Transcript

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About: Heartware International, Inc. (HTWR)
by: SA Transcripts

HeartWare International, Inc. (NASDAQ:HTWR) Q1 2016 Earnings Call May 4, 2016 8:00 AM ET

Executives

Christopher J. M. Taylor - VP-Corporate Communications & Investor Relations

Peter F. McAree - Senior Vice President, Chief Financial Officer and Treasurer

Douglas Evan Godshall - President, CEO & Executive Director

Analysts

Jason R. Mills - Canaccord Genuity, Inc.

Michael Weinstein - JPMorgan Securities LLC

Imron Shahzad Zafar - SunTrust Robinson Humphrey, Inc.

Danielle J. Antalffy - Leerink Partners LLC

Matthew Taylor - Barclays Capital, Inc.

Robert Adam Hopkins - Bank of America Merrill Lynch

Lawrence Biegelsen - Wells Fargo Securities LLC

Chris T. Pasquale - Guggenheim Securities

Operator

Greetings and welcome to the HeartWare International First Quarter 2016 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

And I now would like to turn the conference over to the company. Please go ahead.

Christopher J. M. Taylor - VP-Corporate Communications & Investor Relations

Thank you, operator, and thank you all for joining us for the HeartWare International conference call and webcast to review our first quarter 2016 financial results.

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, quality compliance, 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 the 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 the call is contained in 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 Investors on the HeartWare website. Any forward-looking statements are based on judgments, 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 assume an obligation to update any forward-looking statements.

Participating on our call today are HeartWare's CEO and President, Doug Godshall; and Chief Financial Officer, Peter McAree. Today's prepared remarks will be followed by a question-and-answer session. In the interest of time, we respectfully ask you to limit yourself to one question and one concise follow-up and then please feel free to return to the queue. Thanks very much.

And now, I'd like to turn the call over to Peter McAree who will review our results for the quarter. Good morning, Peter.

Peter F. McAree - Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Chris, and good morning, everyone. In my comments I will make reference to certain non-GAAP measures to provide a comparable understanding of our results to the prior year. Details on our GAAP to non-GAAP results may be found in the reconciliation tables in our financial results release.

I'd like to start by highlighting some of the trends we observed in our business during the first quarter. First, internationally, HVAD unit sales were down 15% year-over-year. As expected, sales in Germany were impacted by the ramp up of HeartMate III among the top centers. These centers which were interested to try a new device made fairly rapid switches from HeartMate II to HeartMate III in order to balance out their preferred (3:00) volumes. Even so, the MVAD system continues to be favored for implants, which benefit from its smallness, versatility and proven performance.

In other parts of Europe, the story was more about (3:15) in a handful of markets. We don't have information on St. Jude's geographic performance, other than what was stated on their call two weeks ago. From this, we surmise that international markets including Japan grew roughly 10%.

In the U.S., I want to remind everyone that last August we concluded the enrollment in the HVAD ENDURANCE2 destination therapy study. This resulted in 48 fewer units being sold in the first quarter compared to last year. Overall, our U.S. unit sales decreased 23%, including the impact of DT units, and excluding DT, unit sales decreased 11%.

Based solely on our single-sided visibility, it appears to us that the total U.S. market was relatively flat year-over-year, reflecting a decline in the bridge segment in mid single-digit growth in destination therapy where we currently do not have a presence. In the bridge segment, our sales were impacted in part by our competitor's ongoing IDE trail, but in general, implant activity got off to a slow start this year, although it has picked up considerably over the past six weeks. We're also seeing a trend where sites are choosing to pursue coverage for potential transplant candidates under a destination therapy indication, given the more simplified criteria for reimbursement and their ability to treat first and list later.

With that back drop, details of our performance were as follows. In the first quarter, we sold 578 units globally compared to 713 HVAD units sold in the first quarter of 2015. Of the 578 units sold in the quarter, 295 were sold in the U.S. and 283 where sold internationally. We added two new centers in the U.S. and four new centers internationally.

Turning to revenue, at $55 million first quarter total revenue was 21% lower relative to last year. Foreign exchange had a negative impact of approximately $600,000 or approximately 1% for the quarter. Geographically, U.S. revenue was $33.3 million, also a decrease of 21% compared to the first quarter of 2015 in which we reported $42.2 million in U.S. revenue.

International revenue for the first quarter came in at $21.7 million, down from $27.8 million last year, which represented a 20% constant currency decrease from the same period in 2015. Gross margin percentage decreased to 58.2% in the first quarter of 2016 compared to 68.5% in the first quarter of 2015, reflecting lower sales volumes and total cost of $3.5 million in the first quarter of 2016 related to ongoing field actions targeted to improve battery and controller performance of the HVAD System. Adjusting for foreign exchange and field action costs, the resulting first quarter gross margin was 64.9%. This represented an approximate decrease of one point versus Q4 and four points versus Q1 of last year.

Turning to expenses, total operating expenses for the first quarter of 2016 were $47.3 million compared to $55.3 million for the first quarter of 2015. On a non-GAAP basis, operating expenses were comprised of research and development expenses of $24.9 million compared to $28.8 million in the first quarter of 2015, and selling and general administrative expenses of $21.5 million compared to $21.4 million in the first quarter of 2015.

Non-GAAP R&D decreased $3.9 million for the first quarter of 2016 compared with the same period in 2015, primarily as a result of lower project spending of $2.8 million and an $800,000 decrease in share-based compensation expense. Non-GAAP SG&A increased $100,000 for the first quarter of 2016 compared to the same period in 2015, primarily due to increases in personnel costs and professional fees of $2.4 million, offset by cost savings including share-based compensation expense of $800,000, the moratorium on the Medical Device Excise Tax that went into effect on January 1 of $900,000 and $600,000 in all other expenses.

Changes in the fair value of contingent consideration associated with the 2013 acquisition of CircuLite resulted in $600,000 of expense during the first quarter of 2016 compared to expense of $2.1 million in the first quarter of 2015.

Interest and other expense net decreased by approximately $4.9 million to $2.1 million during the first quarter of 2016 compared to $7 million during the first quarter of 2015, primarily due to favorable changes in unrealized foreign exchange gains and losses of $4.6 million and net interest income from our investment in Valtech, which was partially offset by an increase in convertible debt interest expense.

Net loss for the first quarter of 2016 was $17.5 million, or a loss of $1 per basic and diluted share, compared to a net loss of $14.5 million, or a loss of $0.85 per basic and diluted share for the first quarter of 2015. Non-GAAP net loss for the first quarter of 2016 was $16.5 million, or $0.95 per basic and diluted share, compared to non-GAAP net loss of $9.4 million, or $0.55 per basic and diluted share for the first quarter of 2015.

At March 31, we had approximately $189 million of cash and investments compared to approximately $244 million at year-end. This decrease from the fourth quarter of 2015 was primarily attributable to $31 million in aggregate loans made to Valtech Cardio in accordance with the terms of the business combination agreement, in addition to operating cash uses, which included annual employee incentive payments and incurred costs associated with the battery and controller field actions.

Cash management always plays an important role in how we manage our business and we recognized with the delay of MVAD and as a consequence of the loans we made to Valtech in the first quarter that we will need to be even more dialed in on productive uses of capital in 2016.

With that, we entered 2016 with a narrowed set of priorities, which include making corrections to MVAD, further enhancing HVAD's performance in peripherals and accomplishing early submission for PMA approval of HVAD for destination therapy.

As we progress through 2016, investors can expect close and careful management of expenses and capital needs. As we look to our performance for the remainder of the year, we're expecting continued top line pressure. Given market feedback on the early performance of HeartMate III compared to HeartMate II, it stands to reason that other international customers will try out HeartMate III, yet it's difficult for us to predict how market share may ultimately settle out based upon early and somewhat mixed data. As such, we remain confident despite the near-term market factors we discussed this morning, HVAD continues to have market leading potential.

At this point, I will hand the call over to Doug.

Douglas Evan Godshall - President, CEO & Executive Director

Thanks, Peter, and good morning, everyone. Just a couple of months ago in our year-end call, we laid out our expectations for 2016 and outlined our development portfolio. We also set forth some very specific and targeted priorities for the year.

First, we are seeking to further strengthen the competitive profile of the HVAD System by accelerating pursuit of the DT indication in the U.S. and by advancing a series of enhancements to the pump, the peripherals and surgical tools.

Second, our field and support teams are intensely focused on defending and growing the market share for HVAD. And third, our team has been focused on development of the most expedient path for MVAD's return to the clinic with enhancements that will enable the pump to live up to its potential.

As we indicated previously, this past quarter was a challenge. We also forecasted that 2016 was going to be a transitional year with pressures on the top line, but visibility into the precise trajectories in this market can be difficult to discern. The LVAD landscape remains ever changing, which brings both challenge and substantial opportunity. This is a market that is still evolving with clinical trials and new product introductions from one of the two players having a major impact on the space in addition to the normal variability and implant volumes making a smooth straight growth trajectory tough to achieve. We did achieve growth for the most part for a six years span and plan to do so for at least another six years following this reset.

The upside to this volatility is this market is very much poised for growth with a substantial amount of runway ahead. With just over 7,000 patients receiving VAD last year, there clearly remains an untapped market potential of tens of thousands of patients who could benefit from VAD therapy. We expect the number to continue to grow, not just from absolute population growth and an aging society, but also from meaningful technological progress in the field.

As we and others continue to innovate, creating more sophisticated solutions that become better addressing the needs of this patient population, both in terms of clinical performance and quality of life, we have the capacity to open up broader market segments and drive meaningful and sustained growth. For HeartWare, the growth opportunities are on the near-term horizon as we move ahead in our pursuit of a destination therapy indication for HVAD System.

The U.S. population of patients with advanced heart failure who are ineligible for a transplant continues to grow and there's enormous potential for HVAD to have a meaningful impact in that market. It is encouraging to see how eager our customers are to have access to the HVAD for their DT patients.

This year, we are facing the prospect of share rebalancing in major implanting centers outside the U.S. and the allure of trialing the newest device available and gaining clinical experience, both combined to temper HVAD growth. While this has been taking place outside the U.S., the large trial enrolling in the U.S. is also having an impact as it diverts potential new recipients of the HVAD System to the competitive study. We expect this trend to continue through completion of enrollment of the trial.

The challenge that we face as this market grows and evolves is pinpointing the impact that all of the myriad variables will have on implant volumes, and by extension, our financial results. Despite these pressures, HVAD remains the most versatile pump utilized in the widest range of patients among currently available systems.

HeartWare isn't just about a pump, however, it is also about our people. The strength of our customer relationships is a hallmark of what makes us HeartWare and is a core component of our past and future success. Strengthening these relationships has always been very important for us, but this year our marketing and sales teams as well as our executive team are putting forth an even more intensified effort to position HeartWare as the partner of choice for the heart failure cardiologists and VAD surgeons around the globe.

Recent evidence of this intensified customer focus occurred last week at The International Society for Heart & Lung Transplantation, or ISHLT, in Washington DC. Our team coordinated one-on-one meetings, group functions, clinical investigators' meetings and other events, which were attended by more than 1,000 clinicians. With recent changes in the market announced last week, we see an even greater opportunity for HeartWare to be the singularly focused, dedicated, most successful LVAD resource for cardiologists and surgeons.

HeartWare's leadership was on full display during the meeting, as there were more than 90 presentations of data on the HVAD System, highlighting both clinical trial and real-world commercial experience.

HeartWare had a strong presence, sponsoring two scientific symposia; one on discussing HVAD algorithms and another on HVAD's versatility outcomes and patient management. The range of presentations over the course of the week demonstrates why we are so confident in HVAD's ability to survive and thrive once the new competitive landscape settles down a bit.

We are gratified to see one year survival in pediatrics at nearly 90% in 178 patients. We witness the improving outcomes over time in our ENDURANCE study. We're reminded by many presenters just how flexible and enabling the HVAD is as evidenced by many thoracotomy and BiVAD presentations. We also were given a glimpse into the future of a potential smart pump, which would be enabled uniquely by HVAD's advanced algorithms.

We were also reminded of the importance of our commitment to this field as we honored Dr. Bud Frazier's lifetime contribution to the mechanical circulatory support field and we were joined by over 400 of our global customers for the event.

Furthermore, while there had been a fair amount of expectations surrounding data from our competitors' new device at the conference, physician feedback was mixed, with many striking a wait-and-see position based on the early data releases. These observations, as well as many other presentations of data from around the VAD world, helps strengthen our confidence in our long-term competitiveness.

It also reinforces why securing destination therapy approval in the U.S. is such a priority for us. DT accounts for more than half the U.S. market and approximately a third of the global market. So it is an obvious opportunity for growth. And with this approval, we also should address and witness an enhanced utilization in bridge-to-transplant, as some of the larger destination therapy centers have been reluctant to adopt the HVAD given the low percentage of bridge cases in their centers. DT is also the major growth opportunity in the U.S., so we can't wait to get the submission completed and to participate in this enormous segment of the market.

As we said on our last quarterly call, we are planning to submit for DT ahead of time, with data from at least six months to follow from the ENDURANCE patient dataset. We expect we'll have full one year follow-up data on key endpoints from more than 80% of the patients at the time of submission. We're making steady progress in prepping the file for submission and are on track to submit to the FDA this summer.

The vast majority of our clinical time and energy is being spent preparing the submission, but we also have engaged in discussions regarding a possible CAP and it has become clear that this CAP or Continued Access Protocol pertains to devices that are not otherwise available or that can uniquely treat a certain patient population.

In the case of HVAD, it is readily available and can be used for DT patients if the physician chooses, but the NCD for Medicare gets in the way, which is really a CMS issue not an FDA issue. We're evaluating alternative options for studying the HVAD to assess other hypotheses, as we did with ENDURANCE2 and with our LATERAL Study, which recently completed enrollment.

We have a number of HVAD related enhancements that we referenced on our last call that are well underway. The first of which is an upgraded battery that is now rolling out and has received extremely positive feedback, as has our software upgrade that is underway outside the U.S. And both of these have been greatly improving the user experience with significantly increased support times and reliability.

We showed our next-generation enhanced controller at the ISHLT and we're looking to file for the approval later this year. We have another – a number of other in-process mechanical, algorithm, peripheral and clinical efforts for the HVAD system that we will be continuing to advance this year and which we anticipate will create what our customers view as a new, more advanced device in the coming years, sort of an HVAD II.

As Peter mentioned, we're being very mindful of our spend as we work through this transition year and we will be following through with strategic and highly focused investments in the months ahead.

Research and development represents one of the biggest levers in our business that, from an expense perspective, can be up or down regulated as needed. Historically, we have been heavily weighted in R&D spend as a percent of sales, expecting that the clinical advancements that are enabled by new technologies will be key drivers to our future growth. We kicked off this year with a more focused project list than in the years past, as we recognize the need to drive the key initiatives across the goal line. This should have the dual benefit of managing our financials efficiently, while still delivering on high impact product launches in 2017 and beyond.

Also working in our favor from an expense standpoint this year is the progress we've made in enhancing our quality system. This has been a tremendous undertaking and the most significant volume of work and associated expenses is winding down now. Our systems and processes are in a much stronger position thanks to this effort.

We have made considerable progress on our path back to the clinic with MVAD and we're feeling very good about the enhanced tests we have created and their ability to simulate the clinical phenomena we witnessed last year. This gives us even greater confidence in the likelihood of success when we do return to the clinic, but more important than how we feel is how our investigators and advisors feel.

We have held multiple reviews of our work product to-date and it is clear our technical and clinical advisors are much more bullish now than they were just a couple of months ago. The potential for MVAD to materially improve outcomes in an even more versatile platform is still a powerful draw for our customers as I heard over and over again at ISHLT. And they really seem to appreciate our transparency, persistence and focus on getting it right. We now have a very short list of possible enhancements and will be down selecting once a couple of our tests are completed, at which time we expect to provide a timeline for our return to clinic.

As we look beyond this transition period, we see a pipeline rich with new technological opportunities to advance and propel even greater growth. The advancements that we have planned for this year, in particular the early submission for the HVAD System for DT as well as enhancements to the HVAD System itself and steps we're taking operationally, will set us up for strong revenue expansion and overall financial performance beyond 2016.

Our first encounter with the new competitor has been instructive and motivating. It is confirmed that we are in a very competitive position as it is today and will be in an even more favorable position in the very near future as our enhancements begin hitting the market.

Thank you for all your time this morning. And operator, we can now open for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Jason Mills with Canaccord Genuity. Please proceed with your question.

Jason R. Mills - Canaccord Genuity, Inc.

Great. Thanks. Thanks, Doug, for taking the question. Can you hear me okay?

Douglas Evan Godshall - President, CEO & Executive Director

Absolutely.

Jason R. Mills - Canaccord Genuity, Inc.

Great. Clearly, Doug, it seems a good bit of the volatility in the stock relates to the volatility in the commentary regarding the data, both HeartMate III data and the HVAD data, and what we've seen in the data obviously is ENDURANCE2, which spooked people on the stroke side. And clearly, folks are trying to get their arms around both the one-year data from HeartMate III and the stroke data that we saw at ISHLT there and what might portend from the temporal data on HVAD IV ENDURANCE2.

So, perhaps you could walk through the current contemporary status of the data, specifically on the stroke side where it seems like most clinicians are focused. And I guess, the elephant in the room question again continues to be where is HVAD eminently competitive, at what stroke rate events per patient do you believe the ENDURANCE2 data need to show to be to feel like your reps can go out and fight very, very effectively, both internationally and in the U.S.?

Douglas Evan Godshall - President, CEO & Executive Director

Yes. So we're encouraged by the consistency of the feedback from folks who are actively monitoring blood pressure. The results that they see confirm for them that their outcomes are better than what we showed at ISHLT last year with ENDURANCE1. And that combined with our global experience with HVAD gives us great confidence that what we will see is an improvement in ENDURANCE2 versus ENDURANCE1. So both the learning curve benefit and the blood pressure management benefit, we don't have a specific, the number has to be X for the HVAD to be competitive. And this is in part because as we heard over and over again and I know you heard over and over again at ISHLT, the flexibility, ease of implant, ease of use of the HVAD combined with a very acceptable adverse event profile make it the device of choice – has made it a device of choice in every geography when it has the appropriate approvals. Obviously, in the U.S., we have the DT constraint.

On the competitive front, I think the jury is out, we really don't know what the data will look like with HeartMate III ultimately in a broader population. So we'll see. I think there was some puts and takes in their data based on at least how physicians told me they view the data. And we're very much focused on ourselves, making our device better, finding better ways to run our device, collaborating with our physicians to run studies to confirm the benefits and attributes of our device. And we think that's going to play out both in terms of improved performance of the current version of HVAD as well as informing how we can further enhance the HVAD performance into the future.

Jason R. Mills - Canaccord Genuity, Inc.

Thanks, Doug. That's helpful. And I guess just to follow-up on that, though, and push a little bit further. Clearly, the HeartMate III one year data, 80%, what you started to hear from clinicians is some concern about that level of stroke. And so following this industry for quite a while, what you hear from physicians is a continual search for sort of "the perfect device" for an adverse event profile looks much better than the current generation, even the HeartMate III data that we saw. And what that seems to look like, just in talking to physicians, is a stroke rate that's much, much lower than what HeartMate III showed, seems like maybe 10% less, and then thrombus rate similar to really what you've shown in the HeartMate III data is looking good there as well. So they kind of want both. So do we need that level of – that kind of an adverse event profile either out of the current generation of the HVAD or improvements in HeartMate III or HVAD 2 or down the line perhaps MVAD to accelerate growth and penetrate a very underpenetrated patient population? It just seems to me like that more improvements need to occur and I am wondering your competence in seeing that in HVAD?

Douglas Evan Godshall - President, CEO & Executive Director

Yeah. So I think what we will see with HVAD in current incarnation will be improvements based on better understanding of how to manage the device and manage the patient. It would be hard to imagine a major dramatic change like all the events drop by two-thirds. That's just not probably achievable, but we are certainly seeing improvements over time. Many sites are really delighted with the experience that they have with very low adverse events.

We're nowhere where we want to be and I don't think we're yet at the level we need to be to get to that sort of 20,000 plus patients per year rate that we all believe this market can bear. We're very intrigued by some algorithm announcements we'll be able to make with HVAD that we're working on that are inspired in part by our learnings on MVAD and the decade of work that we've had on HVAD. So, do I think HVAD sort of the next-gen HVAD will see a step function reduction in some adverse events? Yeah, I actually think it will. Time will tell and we'll have to prove that. Do I think one of the reasons people were tackling me last week, begging me to get MVAD to them is because they see its potential to have a material impact on adverse events? Yeah, I think that was – it's not just because it's such a small device, I think they see the potential for that device to be a real game changer in terms of the overall outcomes.

We obviously have to prove it. Our first clinical experience identified an issue with suction and some thrombotic episodes, but also saw some very intriguing benefits that have played out over time at least in a very small subset that hopefully we'll be able to carry forward once we restart the clinical trial.

Jason R. Mills - Canaccord Genuity, Inc.

That's helpful, Doug. I appreciate it. One quick one and I'll get back in queue, on MVAD, since you ended with that. You mentioned a short list of possible enhancements. When might you have a more formal communication for the Street and for investors on MVAD? Will that be in 2016 and can you provide any sort of more granularity as to timing? Thanks. I'll get back in queue. Appreciate it.

Douglas Evan Godshall - President, CEO & Executive Director

I expect we'll be giving an update in 2016, yes.

Operator

Thank you. Our next question comes from the line of Mike Weinstein with JPMorgan. Please proceed with your question.

Michael Weinstein - JPMorgan Securities LLC

And I apologize, I'm on a cell phone. So, my connection may not be great.

Douglas Evan Godshall - President, CEO & Executive Director

No problem, Mike.

Michael Weinstein - JPMorgan Securities LLC

So, Doug, let me just follow-up with the last question on MVAD. So, how do you get yourself to a point where you've got an answer on MVAD? I was actually aback by it, just a comment of having a list of possible items that you could do to try and remedy MVAD and just kind of came across as if you're not going to know what the solution is even once you start to implement something that is still going to be a bit of a guess as to what you need to do to upgrade the system.

Douglas Evan Godshall - President, CEO & Executive Director

Yeah, I don't look at it that way, Mike. We had to create new tests – new test protocols, a very different approach than what we used in the past, because as you know, with 200 pristine animal studies and no issues identified and all the traditional ways of setting devices on vention in-vivo, they didn't detect what we then detected in the clinic. So bad news is, we got into the clinic, good news is, we think we had enough clinical experience that we think we've faired it out to carriers to focus on principally suction. We knew suction was an issue and our suction response – it was a potential issue and it just turned out our suction response was not adequate. So we are certain we're going to have an enhanced suction response. And that's being finalized now.

We have what's the as yet not confirmed is, we have a definite suction response algorithm that we'll be implementing, but there are some other intriguing potential additional enhancements that we just want to make sure there's no unintended consequences of making some of those changes. So that's the process we're going through right now. It's just evaluating a couple other things that are – we don't want to make so many changes that we end up creating a more complex interaction. I'd say we're 80% of the way towards certainty as to what we're going to be selecting. We just have to finish some tests to confirm which ones we'll do and they don't have any impact on timing because they're all being run in parallel.

Michael Weinstein - JPMorgan Securities LLC

Got you. And let me ask this, the market commentary that you guys made early on just relative to the first quarter, it sounded like volumes picked up in the last six weeks. Were you talking about bridge or destination or both?

Peter F. McAree - Senior Vice President, Chief Financial Officer and Treasurer

Just from our perspective, Mike. So, unfortunately, that's the only visibility we have, but from our perspective (33:09) picked up in the quarter.

Michael Weinstein - JPMorgan Securities LLC

And that's great, but were you differentiating between the two, either bridge or destination?

Douglas Evan Godshall - President, CEO & Executive Director

No.

Michael Weinstein - JPMorgan Securities LLC

Okay. Let me just try and get to kind of what comes next. So as we play forward to this year, and obviously the market share settle out, assuming that your data from the ENDURANCE2 trial is beneficial, is constructive, can you just walk through what your strategy is going to be to try and recapture market share, not just in the U.S. but internationally? So assuming at the end that you've got a data set you can run with.

Douglas Evan Godshall - President, CEO & Executive Director

Yeah. And we're not rolling over now in terms of market share. Physicians want to try a new device, understood. Physicians want to get their own experience. It'll be very interesting to see what the – once they have a body of experience, how sticky that new share disposition turns out to be. We get some very favorable feedback from some centers and some mixed feedback from other centers.

So we really don't know yet how well the new device is going to be in a broader, longer experience. The versatility, utility of MVAD continues to be something that resonates extraordinarily well with customers. We've had some who've already migrated back to HVAD from a low watermark just a couple of months ago just because of the – they can't do everything with HeartMate 3 that they had hoped to be able to do. So we have a sustainable advantage on size and versatility, which we fully expect will continue to accrue our benefit. Assuming that our destination therapy data shows improvement over our prior destination therapy data and is a new, more useful clinical trial data set, you better believe we're going to use that extensively.

So we're always looking for new opportunities and right now I would say the – our waveforms, our log files, our versatility of our system are extraordinarily attractive to both surgeon and cardiologists and have many sites internationally at least, particularly after they saw the data at ISHLT, pausing to wonder why they would choose to use the new device. And we're certainly going to do everything we can to prevent them from having a desire to do so.

Michael Weinstein - JPMorgan Securities LLC

Understood. Thank you, Doug. I appreciate it.

Douglas Evan Godshall - President, CEO & Executive Director

Thank you.

Operator

Thank you. Ladies and gentlemen, as we move through the questions, we ask that you please limit yourselves to one question and one follow-up. Our next question comes from the line of Bruce Nudell with SunTrust Robinson Humphrey. Please proceed with your question.

Imron Shahzad Zafar - SunTrust Robinson Humphrey, Inc.

Hey. Good morning. This is actually Imron Zafar in for Bruce. Thanks for taking my question.

Douglas Evan Godshall - President, CEO & Executive Director

Hi, Imron.

Imron Shahzad Zafar - SunTrust Robinson Humphrey, Inc.

I wanted to ask specifically about thrombosis. I know you mentioned, Doug, earlier that there's a variety of considerations in device selection, but just given the CE Mark performance with HeartMate 3, I just wonder how low do you think the PT rate requiring pump exchange can be brought down with medical management and without the need for a pump exchange, just in terms competitiveness with the performance of HeartMate 3 in that trial.

Douglas Evan Godshall - President, CEO & Executive Director

So I assume you're speaking of HVAD as it is today. We see on average probably about a 5% – 5% to 6% pump exchange rate, but we also see many centers that are substantially lower than that. And part of that is how they I think regulate the patients and how they manage the patients. Part of it is how they implant the device and we're really seeking as we look forward, and as I implied in my earlier comments, as we think about, okay, so if we're not going to do a Continued Access Protocol, let's go to another study and we are looking at soon commencing a couple of new studies, one is looking at anti-platelet optimization, another is looking – partnering with the University of Chicago in a multi-center study looking at hemodynamic optimization where they are seeing substantial improvements in re-hospitalization rates with their hemodynamic optimization protocol and we want to test that in a broader set of centers because they're also experiencing fewer overall complications inclusive of pump thrombus.

So, we expect we will see declining rates of pump thrombus and we are certainly in parallel with – focusing on that with MVAD. We are also testing some hypotheses with HVAD. So, a key component of our HVAD pipeline will be further enhancement around the pump thrombus area. So, I suspect we're going to see overall decline in thromboembolic rates with the sort of next-gen HVAD, although the current-gen HVAD is already very competitive across the broad spectrum of adverse events. Right now, that one particular adverse event of pump thrombus is sort of the one hook that the competitor device is hanging on.

Imron Shahzad Zafar - SunTrust Robinson Humphrey, Inc.

Okay. Thank you. And then, as you look ahead to the expected approval for HeartMate 3 in the short-term indication, is your sense that there's going to be a much broader use of that device in the DT segment off label, just given the performance of that in the European study?

Douglas Evan Godshall - President, CEO & Executive Director

So, we've only seen 50 patients of data and we hear all sorts of anecdotal data, good and bad. So, I really don't know what sort of a bigger trial in a normal VAD population, not sort of the very less sick population they studied internationally, to see sort of how the device really performs. So, time will tell and time will also tell what their label's going to look like, what reimbursement's going to look like for this concept of a short-term indication. I don't know what constraints will be placed into that label or whether there'll be an NCD or they'll try to go to local Medicare carriers. It's really too early to say, both in terms of what their data looks like, what the label looks like, and what payment looks like. We are – we can't wait to get our own DT label. And the clinical pull for that – for our device, including folks who've used lots of HeartMate IIIs in the trial, is gratifying and motivates us to keep working as expeditiously as possible to get our filing in place.

Imron Shahzad Zafar - SunTrust Robinson Humphrey, Inc.

Okay, great. Thank you very much.

Douglas Evan Godshall - President, CEO & Executive Director

You're welcome. Thank you.

Operator

Thank you. Our next question comes from the line of Danielle Antalffy with Leerink Partners. Please proceed with your question.

Danielle J. Antalffy - Leerink Partners LLC

Thanks so much. Good morning, Doug and everybody. Just a question, Doug, on the international performance. I was wondering if you could give any clarity on where we are in the market share loss trajectory here. So, maybe one way to get at that is, if you could give some color on how many high volume HeartWare centers maybe we could specifically focus on Germany are still predominantly HeartWare that could default to HeartMate III here in the near-term? I'm just trying to get a sense of how much more incremental share loss there might be at some of these high volume centers.

Douglas Evan Godshall - President, CEO & Executive Director

Yes. So, there are four big German centers, which are, we think, fairly well progressed in their adoption of HeartMate III. And so, our plan is for that device to now be at its maximum share in those sites and to move it back in the other direction if at all possible. If their clinical performance is on par with HVAD, that will be challenging, because those sites do generally have a bias towards fair share or equal share whenever possible unless one device has just fundamentally better performance for them as the HVAD did. So, it was great while it lasted for us because we tilted so heavily – we tilted them so heavily in our direction because of the superior outcomes they were getting with HVAD. They're assessing whether they can get equal or hopefully not better outcomes with the new device. So, I don't anticipate that we'll see a meaningful share erosion at those sites, and because they are so much larger than any other sites internationally, and we did such a healthy business with them, it's why we saw such a sort of overall share shift internationally as quickly as we did because they delivered a disproportionate percentage of our business relative to other centers.

There are other centers and other geographies who've not trialed the device yet. Some have looked at it and decided they don't see based on the data and their experience with HVAD any reason to trial the device. I'm sure our competitors is not going to take no for an answer, at least not initially, but we're encouraged that in both German centers and non-German centers, there's a reluctance to try the new device based on the superb experience and support they've got with HeartWare.

I don't think we're done losing share just because the device hasn't rolled out everywhere. People are going to want to try it. And the larger centers, we're not anticipating unless our performance is just fundamentally better than we perceive it to be. We're not expecting those centers to move in the wrong direction.

Danielle J. Antalffy - Leerink Partners LLC

Okay. That's helpful. Thank you. And just one follow-up on that thinking internationally now again. Are there still new geographies that could come online that could help offset some of that share loss? Are we in a situation where really you'll still bleed some share from here and your performance is going to be driven largely by market growth?

Douglas Evan Godshall - President, CEO & Executive Director

We continue just to explore new geographies and new sites within existing geographies. Until this year, we have always been surprised pleasantly by how many sites we add every quarter. It did slowdown a little bit last quarter relative to some of the really robust growth we've seen historically in terms of site adds, but each site we've added over the past couple of years, by and large, has been a very small contributor that is a long-term project for us.

Whether it's a country that has just started doing VADs or a site that has just started doing VADs, they tend to start with a handful of patients in the first year and we try to build from there. We are – I just met with some group of physicians from a new country that will be coming online very shortly. They talk a big game, but I think they'll be like most countries where they'll trial a little bit to see how it goes, make sure they get paid and the real contribution probably occurs in 2017.

Danielle J. Antalffy - Leerink Partners LLC

Okay. Thanks so much.

Douglas Evan Godshall - President, CEO & Executive Director

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Taylor with Barclays. Please proceed with your question.

Matthew Taylor - Barclays Capital, Inc.

Good morning. Thanks for taking the question. I just wanted to clarify one thing. So you talked today about enhancements and being able to submit for the DT approval on an accelerated timeline. The last time we have talked, you weren't 100% sure that the FDA was going to accept that. I guess can you just talk about your confidence there and whether you know for sure that you're going to be able to submit for DT early?

Douglas Evan Godshall - President, CEO & Executive Director

Yeah. So, we feel very good about our device performance and that with proper patient management that our device in the combined trials should demonstrate that the overall experience with HVAD is at least equal with HeartMate II in that population, which in theory is sort of the concept between – behind a non-inferiority trial.

And we continue to believe that filing on six month data with a large cohort of 12 month outcomes in a supplemental cohort, which again is supplementing the real trial, the two year trial, will demonstrate that we no longer have an exposure and issue with stroke relative to the HeartMate II, particularly when taking into context of the overall performance of the devices and the advantages of one over the other.

So our intention is to file on six month data. We've met with our investigators very recently and they seem to agree – although they don't see the data, they do agree that as soon as we get this approved and into their hands that it would be greatly preferred to waiting, provided that there's is no downside. What the FDA will not give you in these kinds of situations is a red light, green light. They're not going to say, oh sure, we'll approve it even though we haven't seen the data, or they'll just warn you in cases like this to say, well, you really have to do a lot of analysis, you'll have to be able to defend our statistics, et cetera.

And so our expectation is we'll be able to defend our statistics. Our expectation is that we will prove our thesis that improved management of these patients delivers a device that is no longer "inferior" on the stroke side. And then, when blended with the totality of experience in both trials that that would then be approvable. We have no idea if six month or 12 month data would require a panel. So it's hard to say – in either case, given it's two trials, it's different than other approaches, it's hard to know if the data is compelling, as we certainly hope it will be, then we'll get approved sooner. We believe either way, we're going to get approved for DT.

Matthew Taylor - Barclays Capital, Inc.

Okay. And just to follow-up on your earlier comments, I guess if you could explain conceptually, in the prepared comments, you talked about the BTT volumes slowing, and I didn't understand why that would be the case. Is that just something that you're saying was an observation or is there a market force there that you think is pushing that on BTT volumes?

Douglas Evan Godshall - President, CEO & Executive Director

Yeah. So there's a path of least resistance phenomenon with the National Coverage Determination from CMS from a few years ago, which didn't have an immediate effect, but if you have a patient and they have to be listed, they're Medicare, they have to be listed for transplant and you've got a group at the hospital that have to chime on whether a patient is listable or not. If it takes considerable effort to get through your listing process, there are times when you'll just say, is it worth the extra few days of effort to try to get this patient listed or do I just tell him DT.

And so, the grey zone bridge to decision patients who still – many of them flow our way, it does take more work. And so there's a sort of DT by default phenomenon that happens when busy centers, busy physicians, am I going to go through all this trouble or there is a real impediment to listing like the patient smoked last week – oh, shoot, I can't list you now. You just smoked. And so while private payers will generally still – almost all of them will still pay for unlisted patients as bridge, some hospitals will say, let's just make a clean line. If they're listed, they're bridge. If they're not listed, they're DT. And then, it's harder and harder for the physicians in those centers at least to call that patient bridge.

Matthew Taylor - Barclays Capital, Inc.

Great. Thanks a lot.

Douglas Evan Godshall - President, CEO & Executive Director

Thank you.

Operator

Thank you. Our next question comes from the line of Bob Hopkins of Bank of America Merrill Lynch. Please proceed with your question.

Robert Adam Hopkins - Bank of America Merrill Lynch

Thanks. Good morning. Appreciate you taking the question. So just a quick follow-up from something you said on the last quarter call about market share outside of the United States. I think last quarter, you said that over the course of 2016, it wouldn't be unreasonable to suggest that you might lose double-digit or roughly 10 points of market share relative to where you exited 2015. So I guess now that you're a quarter in, I was wondering is that still guidance that you're comfortable with?

Douglas Evan Godshall - President, CEO & Executive Director

Yeah. And I'll Peter answer. Just to defend Peter, we didn't actually put a number. We just said double-digit.

Peter F. McAree - Senior Vice President, Chief Financial Officer and Treasurer

Yeah, we said double-digit growth overall. Yeah, our rough cals (52:42) – and again, it's very hard because we don't have geographic splits at all, but it appears to us that we're sort of approaching the number you cited, 10% or so. And as Doug said, there is a potential with them not having yet fully penetrated outside of the top centers that that number can continue to creep. So I think our comment still is relative.

Robert Adam Hopkins - Bank of America Merrill Lynch

Okay. I guess, I think is what I'm really getting at sort of qualitatively and quantitatively is, are things worse than you expected. That's really what I'm trying to get a sense for. Or are you seeing signs of stability in the OUS market share that give you comfort that what you said last time isn't going to be worse. And I thought – I know you said double digits, but I thought you kind of meant around 10 points. So, I'm just trying to – what I'm trying to really trying to get at, are things worse in your view relative to what you thought they're going to be?

Douglas Evan Godshall - President, CEO & Executive Director

No, they're not worse. They are pretty much in line with where saw them trending. Well, it's unfortunate is the confluence of events that make the numbers look worse. We had really spotty body implant volume in some geographies that had no competitive activity. We just didn't get cases.

So, we had a combination of lumpy end competition, whereas in prior years, there would have been angst on the Street about, wow, it's lumpy. Does this mean it's a trend? And then we got compounded with and we had the share loss that we sort of were thinking we might have and it proved to be true. So that double dip, frankly, both in the U.S. and internationally, more so internationally, we saw this lumpiness, but there were certain geographies where we do extraordinarily well in the U.S. and they didn't have a lot of cases this past quarter.

So, we know don't want to say everything is rosy and it's going to go back to where we were last year because we know that's not true. There is a new competitive phenomenon internationally and a big trial in the U.S., but it is not worse than we expected. It's sort of in line with our expectation.

Robert Adam Hopkins - Bank of America Merrill Lynch

Okay. And we've all seen volatility in market growth rates in the LVAD market over the years. So, I'm just curious what you're seeing in the U.S. and the bridge market and what you're seeing internationally. Is there something unique about what you're seeing this particular quarter or would you just put this in the bucket of, this is similar to what we've seen in the past? I'm just wondering if there's something we can specifically talk about this sort of a cause and effect here?

Douglas Evan Godshall - President, CEO & Executive Director

I'd say the NCD effect is something that has been a creeping phenomenon that we are now aggressively fighting back against in the U.S. Doctors want to use our device. We need to arm them so they can, but it's not too much effort for them to use our device. That it's worth their while. So, one of the initiatives that we're kicking off right now is a real focused effort to make sure folks are armed to efficiently make the argument with private payers that HVAD, their device of choice, is the one that they can use for the appropriate patients.

So, I'd say that is a – that has been an evolving trend, which we're going to push back against. And we think we do have some ability to push back against. And internationally, it's the lumpiness plus the obvious change of a new entrant.

Robert Adam Hopkins - Bank of America Merrill Lynch

Great.

Peter F. McAree - Senior Vice President, Chief Financial Officer and Treasurer

I'd add to what Doug said in terms of the U.S., that the NCD effect that he spoke of, but there was – to start the quarter, just a real burst of implants activity. And again, for us, it's a BTT (56:29) label only. It feels very pronounced this quarter – this last quarter.

Robert Adam Hopkins - Bank of America Merrill Lynch

Okay. I appreciate the color, guys. Thank you.

Peter F. McAree - Senior Vice President, Chief Financial Officer and Treasurer

Thanks.

Operator

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed with your questions.

Lawrence Biegelsen - Wells Fargo Securities LLC

Okay, guys. Thanks for taking the question. So, one on ENDURANCE2, one on MVAD. On ENDURANCE2, Doug, on the last call, we talked about presenting data in the second half of this year. Can you give us an update on that? And the endpoint being measured, if someone has a stroke 24 weeks after the event, how does that factor into the ENDURANCE2 presentation potentially being pushed into 2017? And then I had a follow-up on MVAD.

Douglas Evan Godshall - President, CEO & Executive Director

Yeah. We, our customers, our sales people, we all want to get this data out as quickly as possible. We've got to get it right. It's got to be clean. We are in discussion with our investigators as to sort of when is the data going to be done and locked and submitable, and do you submit – do you present on the – it's basically the dataset that gets submitted, or is it more appropriate to present on the full trial endpoint, which would come to your point. The patient reaches a follow-up in August, but there is a potential if there are late events in either arm that you would still have some lingering closeout that you'd have to do. So, that is a subject of much debate. We haven't put a pin in which meeting we would be presenting in as there is some debate, but it is not lost on us that 2016 would be the preferred year to present.

Lawrence Biegelsen - Wells Fargo Securities LLC

Do you have any level of confidence that you can present it in 2016, Doug?

Douglas Evan Godshall - President, CEO & Executive Director

We've not put a pin in which meeting we're going to be presenting it in.

Lawrence Biegelsen - Wells Fargo Securities LLC

Right. Then on MVAD, I guess the question we tend to get asked is, do you expect it to need a redesign, or – which would take multi quarters or years versus minor enhancements that'll allow you to go back to the clinic in a short period of time. Are those two options still being considered, Doug, among the enhancements that you talked about earlier? And is there – are you signaling on this call that a redesign is more likely and people should expect it to just take longer? Any color on that would be helpful. Thank you.

Douglas Evan Godshall - President, CEO & Executive Director

Yeah, the team has made extraordinary progress. The hardest part, and we talked about this before, the real challenge was can you replicate the phenomenon in the clinic because we didn't catch it the first time. And they've done really great work to date and have, particularly over the past three months, really hit their stride. And if you just sat through the last review we had a couple of days ago with our investigators, they're ready to put it in now. Well, we've got to finish the tests. And as I think about a major redesign, to me a major redesign is we're changing the impeller. We're changing the blood path.

We don't see any justification, any reason based on our testing that we would need to do that. So I don't see a major redesign as that is defined. Two, are we still going to need to run animal studies to confirm that these design changes are appropriate? Yes. From a regulatory perspective, we'll need to run the animal studies. I think our bench work that we're doing is now far more informative than our animal studies and gives us a very high level of confidence that we are on the right track with a – with modifications. We still haven't finalized.

From the very short list of a few, are we going to take all three or four or are we going to take a couple of them? And we're integrating clinical and technical feedback from outside folks, users and otherwise. But at the end of the day, it's really going to be our testing that's going to inform which ones we include. And so, is it – will we be submitting in the next quarter? No, we won't be submitting in the next quarter because we've still got to do the work and throw it into an animal. Are we narrowing in and getting very close to driving this to closure? Yes, yes, we are.

Lawrence Biegelsen - Wells Fargo Securities LLC

Thanks for taking the questions, guys.

Douglas Evan Godshall - President, CEO & Executive Director

Yeah.

Operator

Thank you, ladies and gentlemen. Our last question comes from the line of Chris Pasquale with Guggenheim Securities. Please proceed with your question.

Chris T. Pasquale - Guggenheim Securities

Thanks. Doug, I just wanted to follow-up on Larry's question on MVAD. So, I mean, at this point is it a foregone conclusion that you're basically starting over from square one here or do you think that there's any way for you to leverage the work you did previously to shorten the potential time to market at all?

Douglas Evan Godshall - President, CEO & Executive Director

So, I think you're implying are we going to start a new study or are we going to try to bolt-on to the old one. I think the most prudent path is to start a new one. You've got enough events in that cohort that you'd rather not burden your final study report with several events and try to explain them away. I think we are – on the flip side, you asked if we're going to leverage it; we are leveraging it every day and very heavily. Luckily, we've still got several patients who are doing, knock on wood, extraordinarily well. With each base study day (01:02:20) it gives us great confidence that we're really, really close to having an extraordinary device and that these modifications we're making to address the events that have been discovered in this initial clinical experience should put it over the goal line in terms of delivering the kind of performance that we had all hoped for – we were going to hit with the first effort. I think the first effort taught us a lot. And that, combined with the new enhanced testing we're doing, should lead to the game changer kind of device that we're all hoping and believing MVAD would be.

Chris T. Pasquale - Guggenheim Securities

Okay. And then, you completed enrollment in the LATERAL study last week. That's obviously not the top of your priority list right now, but can you talk about what kind of impact the addition of the thoracotomy label could have? Is that an important enough issue for clinicians that you think you can leverage it to create a competitive advantage?

Douglas Evan Godshall - President, CEO & Executive Director

It is a big deal. It's actually even a bigger deal internationally than I appreciated where our physicians are now saying, hey, we'd really love for you to do a study over here on thoracotomy, or if you don't need a study, get a label over here on thoracotomy. It would help us, help us with payers, help us to market our practice. We just recently had a center go through training. For that very reason, they want to start marketing their practice as a minimally invasive VAD center. And so, it does matter and – in fact, more than I expected because in theory, you can always do a thoracotomy if you want, but it's increasingly evident that having it on label will be a meaningful advantage for us.

Chris T. Pasquale - Guggenheim Securities

Okay. Thanks, Doug.

Douglas Evan Godshall - President, CEO & Executive Director

Thank you.

Operator

Thank you. Ladies and gentlemen, we come to the end of our time allowed for questions today. I'm going to turn the floor back over to the company for any final remarks.

Douglas Evan Godshall - President, CEO & Executive Director

Thank you very much, and thanks, everybody, for your questions. I apologize. I know there were still some folks in queue, but we wanted to make sure we moved along expeditiously today. We are thrilled with the progress we're making on next-generation HVAD, next-generation MVAD and even more delighted by the outpouring of goodwill and reminder of just how strong the many years of relationship building we've done has been for us. And as one of, I think, the second largest VAD center in the U.S. said to me as he was leaving the meeting on Saturday, this was an amazing week for HeartWare. And I think the amazing week for HeartWare at ISHLT last weeks is really the start of the beginning of a really transformative era for HeartWare.

So, thanks, everybody, for your time and we look forward to seeing you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.