HeartWare® Grits Teeth As Long Game Means Wider Losses

In short

HeartWare®’s quarterly financial story is interesting a fine example of a company that is living through successive quarterly losses in pursuit of the long game, which is ultimately FDA approval for its ventricular assist device.

Background

We covered HeartWare’s last set of quarterly financials back in August in the wake of the company’s acquisition of World Heart. At that time the company was investing heavily in building the corporate infrastructure necessary to commercialise in the U.S. in anticipation of FDA approval, as well as incurring significant clinical costs in pursuit of that goal. And it still is.

So what’s changed three months later? Well, in a nutshell the admin and clinical costs have remained high, while sales revenues have dropped off in the U.S. as studies wrap up. Consequently even continued EU sales growth couldn’t stop losses widening in the period.

The full release can be found here, and quick glance at the income statement suggests only a modest sales increase. The reality is that U.S. revenues have declined as the company has withdrawn from a revenue-generating study and completed enrollment in other studies as it finalises its PMA. Sales in Europe have continued to grow well compared with a year ago, the number of the company’s (Heartware Ventricular Assist) HVAD devices implanted in the period comparing favourably with the equivalent period a year ago.

Set alongside the prior quarter however, OUS volumes are actually down from 276 units to 214 units, accepting that seasonal differences such as EU summer doldrums mean this is a slightly less reliable comparator. So why the heavy losses in the quarter ($25M loss on $22M sales) compared with a year ago($14M loss on $21m sales)? Well, two areas really. Firstly, cost of sales is high, which is probably a reflection of a skew towards OUS sales where selling prices are lower. Secondly, selling and general and admin costs have shot up 30% as the company looks like it’s building an infrastructure that will support a U.S. full commercialisation. And finally, R&D spend has again shot up from under $13m to over $21m as the company closed in on completion of its clinical studies. Compared with prior quarter the R&D spend has stabilised, but the company will be looking forward to the day when its R&D spend declines and its U.S. revenues hit the post-approval sky. Given the FDA’s circulatory devices panel thumbs-up from earlier in the year that day may not be too far away.

Company comments “We are pleased to have maintained strong international growth, particularly during the summer months of Europe, as 214 HeartWare® Ventricular Assist Systems were sold outside the U.S. in the third quarter of 2012, a 51% increase compared to 142 in the third quarter of last year,” noted Doug Godshall, President and Chief Executive Officer. “With the completion of enrollment in our Destination Therapy study in the United States, domestic revenue was primarily limited to the remaining slots in the Continued Access Protocol in the Bridge-to-Transplant indication. As a result, 42 of the 256 global units sales generated during the third quarter of 2012 were from the U.S. Globally more than 2,500 patients have now received the HeartWare System at one of the 103 international hospital sites or 50 clinical sites in the U.S.”

“Following the positive recommendation of the Circulatory System Devices Advisory Committee in the second quarter, we have been focused on working with the FDA as it finalises its review of our Premarket Approval (PMA) application for U.S. commercialisation of the HeartWare Ventricular Assist System as a bridge to heart transplantation”

Source: HeartWare International, Inc.