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February 1, 2011

Breaking News in Med-tech:

Analysts see HeartWare taking lead in LVAD market position

By OMAR FORD Medical Device Daily Staff Writer

In the next five years analysts are predicting that HeartWare International (Framingham, Massachusetts) could overtake Thoractec’s (Pleasanton, California) leading position in the left ventricle assist device (LVAD) market.

According to Jason Mills, an analyst with Canaccord Genuity (Toronto) it is estimated that Thoratec currently has 89% of the LVAD market, compared to HeartWare’s 6%. But by 2015 the positions are expected to flip flop and HeartWare’s share will grow to 49%, while Thoratec’s share is expected to contract to 47%.

The LVAD market itself is expected to grow to more than $900 million by 2015 quadrupling from the estimated $237 million market size in 2009.

HeartWare has developed the HeartWare HVAD which has been on the market in Europe since early 2009, with many saying that the device is likely a year away from getting U.S. approval.

Thoratec has developed the HeartMate II, which received FDA approval in January of last year (Medical Device Daily, Jan. 25, 2010).

In a research note submitted to Medical Device Daily, Mills said, “We prefer HeartWare common stock from a long-term investment standpoint, but also believe Thoratec represents a favorable risk/reward investment at current levels. As a result of the November release of HeartWare’s strong HVAD bridge-to-decision patient data [at the American Heart Association’s (AHA; Washington) annual meeting, Thoratec is still hovering around its 52-week low in the $25-$27 range, while HeartWare is near an all-time high. In light of both companies’ product pipeline announcements two weeks ago (which favored HeartWare in our view), for Thoratec shares to appreciate we believe the company must first produce upside to estimates over the next few quarters; second, show strong momentum in the U.S. destination therapy market, and third keep pace with HeartWare’s strong European growth.”

Mills’ analysis comes a little more than a year after Thoratec positioned itself to acquire Heartware for $282 million. Thoratec backed out of the deal thanks in part to the Federal Trade Commission saying the acquisition would cause the firm to have a monopoly on the LVAD market (MDD, Aug. 4, 2009).

One of the main reasons HeartWare is expected to overtake the LVAD market is because of the clinical data and the strong response it’s receiving from surgeons.

“There are several factors,” Mills told Medical Device Daily. “For one Heartware’s system is smaller; two the data and outcomes for the device are strong; and three where it’s implanted seems to be preferred by surgeons.”

The device is designed to be implanted next to the heart, avoiding the abdominal surgery generally required to implant competing devices.

Because of its smaller size it requires less invasive surgery - a key factor - that causes the biggest threat to Thoratec’s position in the market.

Other analysts echo similar assessments.

In an article published in the Jan. 12 edition of the Wall Street Journal, Wedbush Securities (Los Angeles) analyst Duane Nash expressed concern about the looming approval of HeartWare’s HVAD in the U.S. and said that Thoratec’s answer to the device probably won’t come in enough time to stop the firm’s market share from eroding.

Thoratec’s Heartmate III is expected to be in clinical trials at the end of 2012 but analysts say U.S. commercialization could be at five years or more from now.

In the WSJ article Nash was quoted as saying since this was the case, Thoratec would be “sort of powerless to prevent erosion of market share to HeartWare.”

Mills told MDD that Thoratec had to perform significantly well in Europe to quell some of HeartWare’s expected growth and to continue cultivating its destination therapy market.

Europe could be tricky for Thoratec to gain a strong footing on, when already the firms are running neck and neck in terms of marketshare.

“On a run rate, [HeartWare] is parroting Thoratec, and it isn’t even in France yet,” Mills said. On a longer term I see [HeartWare] taking the number one position in Europe.”

Larry Bieglesen, an analyst with Wells Fargo Securities (New York) said that this year will be key for Thoratec – and agreed with some of Mills assessments. He noted that France could be a major determining factor of who gains the marketshare leadership position in Europe.

“Although Thoratec is still the market leader we note that HeartWare will soon start to compete in France which is the second biggest market in Europe (15%-20% of total). Thoratec’s ability to maintain share in the face of competition from HeartWare could be a key determinant of it’s stock performance in 2011 in our view,” Biegelsen said in analysts notes.

“In the absence of major catalysts we believe 2011 is about execution for Thoratec and the rate of certification of new DT centers will be a leading indicator of growth in this segment in 2011 and beyond,” Biegelsen said.

While both firms’ devices have contributed to the overall growth of the LVAD market, Mills said that the market is still underpenetrated.

“HeartMate II changed the paradigm of care for heart failure patients we think,” Mills said. “But getting the word out about safe outcomes takes time. And right now we’re plodding along in the market, we haven’t yet seen the tipping point.”

Even in 2015, Mills said the LVAD market would still see only about 20% penetration.

Other players in the field won’t do much to change the landscape of the market, he added.

Mills said Terumo (Ann Arbor, Michigan) and WorldHeart (Salt Lake City) could gain FDA approval for their devices, but ultimately Heartware and Thoratec will hold key positions in the market.

Terumo is still seeking to gain FDA approval for a BTT indication for its DuraHeart application and WorldHeart is looking to clinch the same for its Levacor device.

“Both of them have an opportunity,” Mills told MDD. “But they are very far behind. I don’t think they will have the type of share Thoratec and HeartWare will have.”

Mills went on to say that large med-tech companies are taking notice of the two firms and they provide “attractive acquisition targets.”

“The large med-tech cap companies are cash rich and growth starved,” Mills said. “If the larger companies are going to get into the LVAD market they’re going to buy into it. “The reason you don’t see these companies developing devices in this market, is because the regulatory pathways are very arduous and the [LVAD] is a fairly expensive franchise to build.

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