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Brief of Q2 2006 Thoratec Corporation Earnings Conference Call - Final
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Event Brief of Q2 2006 Thoratec Corporation Earnings Conference Call - Final
OVERVIEW
Management reported that 2Q06 total revenues were $54.8m. Non-GAAP net income was $5m or $0.09 per diluted share. THOR is reiterating its prior revenue guidance for 2006 of $206-215m and net income on a GAAP basis of $2-5m or $0.04-0.09 per diluted share.
FINANCIAL DATA
A. Key Data From Call 1. 1H06 consolidated revenues = $103.5m. 2. 2Q06 total revenues = $54.8m. 3. 2Q06 non-GAAP net income = $5m. 4. 2Q06 non-GAAP EPS = $0.09 per diluted share. 5. 2Q06 GM = 59%. 6. 2Q06 OpEX = $28.9m. 7. Cash and short-term investments available-for-sale at the end of 2Q06 = $197m. 8. 2006 revenue guidance = $206-215m. 9. 2006 EPS (GAAP basis) guidance = $0.04-0.09 per diluted share.
PRESENTATION SUMMARY
S1. 2Q06 Business Review (G.B.) 1. Overview: 1. THOR's VAD business posted strong results in 2Q06, with sales growing 28% vs. 2Q05. 2. During 2Q06, THOR sold 471 pumps VS. 381 IN 2Q05. 1. This was also in sharp contrast to the Co.'s 1Q06 results and was driven by strong bridge implantation rates and an acceleration in enrollment in the Co'.s HeartMate II trial. 3. The enrollment of 94 patients in 2Q06 is more than 40% higher than the Co.'s previous best qtr. 4. THOR is increasingly pleased with the experience of the HeartMate II, which is clearly its key growth driver. 5. 2Q06 was also marked by a significant milestone in the HeartMate II trial, the completion of enrollment in the bridge-to-transplantation (BTT) arm with 133 patients in late May. 6. The strong growth in the VAD business contributed to the Co.'s total revenues of $54.8m, which represents a 15% increase vs. revenues in 2Q05 and a 12% increase vs. 1Q06. 7. The Co. was able to drive revenue growth to the bottom line, as well as non-GAAP net income increased by 55% vs. 1Q06. 2. Patient Enrollment & Center Details: 1. The Co. benefited from a significant increase in bridge activity in North America vs. 1Q06. 1. Reflecting this ramp in the bridge business, the Co.'s PVAD and IVAD experienced strong growth vs. 2Q05 and 1Q06. 2. THOR is seeing a normalized level of reorder activity for the IVAD by centers as the device is in its second year of full commercialization. 1. The Co. believes this increase in bridge activity during 2Q06 reflects the variability that occurs in that market. 3. While there are ebbs and flows in the bridge business, the Co. is encouraged by activity in 2Q06 and expects modest growth vs. long-term. 4. The HeartMate product line; the XVE and II turned in a very strong performance during 2Q06 led by the HeartMate II clinical trial enrollment and commercial activity in Europe. 5. YTD, overall HeartMate pump unit volume increased 25% vs. 1H05. 6. As of 07/26/06, THOR had enrolled 319 patients in the HeartMate II phase II trial vs. 225 patients enrolled as of 04/26/06, an increase of 94 patients vs. past three months. 1. This compares with 66 patients enrolled in the three months from 01/26/06 to 04/26/06. 7. The updated enrollment includes 171 patients in the bridge arm vs. 115 patients as of 04/26/06. 8. In the destination therapy arm, enrollment was 148 or an increase of 38 vs. 110 patients enrolled in this three months ago. 1. 86 of these patients will count toward the 200 indicated in the study protocol. 2. 62 of the destination therapy patients are enrolled in non-randomized portions of the trial, including patients who are transitioned to a HeartMate II directly from an XVE or in a small patient cohort that cannot be randomized to the larger XVE. 3. As the Co. said in the past, THOR believes the ability of the HeartMate II to treat these smaller patients will be an important attribute to achieving increased market penetration post approval. 9. With respect to center activity, THOR is seeing positive trends in implant activity in several low volume or new centers. 10. More than 400 total patients have now received the Co.'s HeartMate II therapy, including both clinical trial implants and commercial activity in Europe. 11. THOR added eight new centers; six in the US and two in Canada since 04/26/06 and now has 37 US and Canadian sites enrolling patients in the trial. 3. Trial Details: 1. At the end of May, THOR completed enrollment in the bridge arm, a milestone realized within 15 months of initiation of the trial and earlier than the Co. expected. 2. THOR received FDA approval of an IDE supplement that allows continued enrollment in the bridge arm under a Continued Access Protocol (CAP). 1. Under this CAP, THOR can enroll up to an additional 90 bridge patients. 3. While the Co.'s pooling analysis and prior experience have led THOR to believe that pooling was an appropriate option for the HeartMate II bridge approval. 4. Based on recent events, the Co. has decided not to pool patients from the phase I trial as part of its PMA application. 5. The Co. is exploring a modular PMA approach to expedite the review process based on strong encouragement to do so from the FDA and their positive view of the pace of enrollment in the trial. 6. Regardless of how the Co. proceeds, THOR is confident that it can file its PMA by year-end, including all necessary clinical data. 7. Assuming a six-month FDA review time frame, the Co. would expect to have bridge approval by mid-2007. 4. Investigators Meeting: 1. THOR held its Investigators Meeting during 2Q06. 2. The Co. had 150 customers attend, representing all of its participating centers with the majority of them sending a complete team, including a cardiologist, surgeon and VAD coordinator. 3. THOR has seen increased levels of activity at many of these lower volume or new centers. 4. The Co. had the presentation of important data during 2Q06. 1. The first was a presentation at the American Society of Artificial Internal Organs meeting by Ken Butler from THOR. 2. Ken Butler regarding bearing wear in 12 ex-planted HeartMate II pumps after continuous use ranging from 198 to 750 days. 3. The study found that an analysis of 15 pumps currently undergoing in-vitro life testing demonstrated a projected bearing life of approx. ten years. 4. The presentation concluded that these findings provided additional evidence of the long-term durability of the device. 5. THOR expects the HeartMate II to be very visible at both the Heart Failure Society of America meeting in Seattle and the European Association of Cardiothoracic Surgery, both of which occur in Sept. 6. At EACS, [Dr. Scruber] from Hanover will be presenting data on 66 post-CE mark patients from 21 centers in eight countries. 7. A paper regarding destination therapy hospital costs appeared in the July issue of the Journal of Heart and Lung Transplantation. 1. The study headed by Dr. Leslie Miller of the University of Minnesota reviewed the experience of 23 post-rematch patients, comparing costs from implantation to discharge, with outcomes reported from the rematch trial. 2. The results showed that mean hospital costs for post-rematch patients were 40% lower than those in the trial due in part to the fact that the mean hospital length of stay was 25% lower in the post-rematch group. 3. Dr. Leslie Miller's conclusion was that outcomes of improved post-approval, including significantly lower hospital costs, strong trends toward better survival to discharge, and shorter avg. length of stay. 5. Developments: 1. THOR's market development group continues to have a positive impact on its efforts. 1. They are establishing the length between the referral community and the implanting centers, and between THOR and these centers. 2. Their efforts are also leading to an increased number of patients being evaluated for VAD. 3. This group now numbers 11 and the Co. plans to continue expanding this program towards the end of 2006 and into 2007. 2. Another positive development in the Co.'s Cardiovascular business was the proposed JCAHO Guidelines regarding destination therapy, which the Co. understands will become final in about two weeks. 1. The Co. been actively involved with the development of these proposed guidelines and are very supportive of them. 6. ITC Details: 1. Revenues were essentially flat with both 2Q05 and 1Q06. 2. THOR did see meaningful growth in the international business and hospital point-of-care revenues were up about 8% vs. 2Q05, driven by sales of the HEMOCHRON Signature Elite, which is becoming a larger contributor to revenues at ITC. 3. The Co.'s alternate site business was up about 7%, without any revenues from the newly introduced ProTime device that was launched in July, as THOR continues to see solid demand in the pharmaceutical clinical trial markets. 4. THOR ended 2Q06 with a solid level of back orders in the ProTime business and the initial reaction from distributors and customers to the new ProTime has been very positive. 5. THOR shipped several hundred instruments during the first month of its formal commercial launch and it believes that its expanded capacity will address order fulfillment and anticipated demand for this new offering. 6. Offsetting these increases at ITC was a shortfall in the skin incision business.
S2. 2Q06 Financial Review & Guidance (C.L.) 1. Detailed Financials: 1. 2Q06 total revenues were $54.8m vs. revenues of $47.6m in 2Q05. 1. The growth was driven by strong Cardiovascular div. revenues of $35.8m, largely due to the 28% increase in VAD sales vs. 2Q05. 2. Revenues in the Cardiovascular div. included $700,000 from grafts. 3. VAD ASPs increased slightly due to the modest price increases on the Co.'s THOR line, as well as product mix. 4. Revenues at ITC were $19m, up 1% vs. 2Q05. 5. Consolidated revenues for 1H06 were $103.5m vs. $98.1m in 1H05. 6. Non-GAAP net income was $5m or $0.09 per diluted share vs. $4.4m or $0.09 per diluted share in 2Q05. 7. Several reasons for the flat non-GAAP EPS: 1. Total diluted share count increased to 53.3m in 2Q06 vs. 50.1m in 2Q05. 1. This resulted in approx. $0.01 per share impact. 2. THOR has increased spending in R&D to complete its HeartMate II pivotal trial, as well as made investments in market development in anticipation of its HeartMate II launch for bridge. 1. This spending accounts for a significant portion of the difference in OpEx in 2Q06 vs. 2Q05. 3. Lower GM also impacted earnings in 2Q06. 8. Non-GAAP net income excludes amortization of intangibles, certain litigation, CEO transition expenses and other unusual or non-recurring costs, as well as share-based compensation expense under FAS 123(R) and changes in the value of the make whole provisions for the Co.'s convertible notes. 1. It also takes into account the tax effect of these adjustments. 9. On a GAAP basis, net income was $337,000 or $0.01 per share vs. $2.4m or $0.05 per diluted share in 2Q05. 1. Factors impacting the Co.'s GAAP EPS include the items just mentioned. 10. 2Q06 tax rate was 44% vs. 34% in 2Q05. 1. The increase in this quarterly rate reflects adjustments the Co. needed to make in 2Q06 to reflect its lower expected tax rate for the remainder of the year. 11. The impact of FAS 123(R) in 2Q06 was approx. $1.5m net of taxes or $0.03 per share. 12. 2Q06 GM was 59% vs. 59% in 1Q06 and 61% in 2Q05. 1. The Co. had GM improvement at ITC, but margins at the Co.'s Cardiovascular div. were impacted by the accounting treatment of capitalized variances. 2. The Co. expects to achieve overall GM in the range of 60-61% for all of 2006. 13. 2Q06 OpEX was $28.9m, excluding amortization of intangibles, restructuring, and other expense, but including the impact of FAS 123(R) vs. $22.7m in 2Q05 and approx. $1.3m higher than 1Q06. 1. These increases are driven primarily by HeartMate II-related spending, as well as FAS 123(R) expenses of $2.4m. 2. Balance Sheet: 1. Cash and short-term investments available-for-sale at the end of 2Q06 were $197m vs. $201m at the end of 1Q06 and $211m at the end of 2005. 1. The reduction in the Co.'s cash balance was due to the purchase of its new headquarters facility in 1Q06 and the repurchase of $15m of stock during 2Q06. 2. This is the total the Co. has spent YTD and THOR still has $10m remaining in the program authorized earlier by its Board. 3. Guidance: 1. THOR is reiterating its prior revenue guidance for 2006 of $206-215m and net income on a GAAP basis of $2-5m or $0.04-0.09 per diluted share. 2. THOR is updating its guidance for the GAAP tax rate for the year and expects a range of 24-27% vs. previous guidance of 35%. 4. Conferences: 1. The Co. will be appearing at Canaccord Adams Conference on Aug. 8 and at Kaufman Bros and Bear Stearns Conferences in Sept.
S3. Closing Comments (G.B.) 1. Details: 1. While the Co. is disappointed that it will not be able to proceed with a pooled bridge-to-transplant PMA submission, given its rapid completion of the 133-patient pivotal enrollment, this will be a relatively minor setback of about three months. 2. THOR reports that here have been a number of extremely positive developments where the Co. didn't meet or exceed expectations that give THOR great optimism as it looks ahead. 1. These include strong 2Q06 financial results led by a solid rebound in the Co.'s core bridge transplant activity resulting in 28% growth in the VAD sales vs. 2Q05. 3. Solid performance worldwide in the Co.'s HeartMate product line during 1H06, generating a 25% increase in combined HeartMate II and XVE unit volumes for 1H06 vs. 1H05. 4. Acceleration of enrollment in the HeartMate II trial of more than 40%, with significant gains at both new sites, as well as sites in the trial as 2006 began. 5. Completion of enrollment in May in the bridge-to-transplant arm of the HeartMate II pivotal trial. 6. Looking forward to the balance of 2006, there a number of key activities that the Co. will be focused on: 1. Supporting the presentation of positive HeartMate II data beginning with Heart Failure Society and EACS meetings in Sept. 2. Completing the expansion of HeartMate II trial sites. 3. Building on the pace of enrollment in the destination therapy trial. 4. Submitting the Co.'s PMA for bridge-to-transplant approval prior to the end of 2006. 5. Continuing to build the Co.'s VAD market development sales organization in support of all of its products. 6. Successfully rolling out the Co.'s new ITC ProTime coagulation testing system.