Item 1. Business
Overview
HeartWare is a medical device company that develops and manufactures miniaturized implantable heart pumps, or ventricular assist devices, to
treat patients suffering from advanced heart failure. The HeartWare Ventricular Assist System (the “HVAD System”), which includes a ventricular assist device (“VAD”) or blood pump, patient accessories and surgical tools, is
designed to provide circulatory support for patients in the advanced stage of heart failure. The core of the HVAD System is a proprietary continuous flow blood pump, the HVAD Pump, which is a full-output device capable of pumping up to 10 liters of
blood per minute. The HVAD System is designed to be implanted adjacent to the heart, avoiding abdominal surgery, which is generally required to implant similar devices.
2
Heart failure is a chronic disease that results in the heart’s pumping power being weaker
than normal. In a healthy person, the left ventricle of the heart pumps oxygenated blood into the aorta and the blood is then circulated throughout the body until it returns through the venous system to the right side of the heart, which pumps it
into the lungs where it is re-oxygenated. If the left ventricle is not working properly, the oxygenated blood is not fully cleared from the lungs and the blood is not circulated effectively. If the muscle of the left ventricle is damaged or is not
working efficiently, the ventricle will tend to compensate by working harder in an effort to supply adequate blood flow into the aorta. The increased effort generally results in dilation or enlargement of the ventricle, rather than increased blood
flow. This dilation then makes it harder for the heart to contract effectively which results in even lower blood flow and increased effort and further dilation of the ventricle. This progressive, degenerative process generally continues until the
patient becomes debilitated and eventually dies from inadequate clearing of the lungs and inadequate flow of oxygenated blood throughout the body. The inadequate lung clearance or lung congestion is why the advanced stages of heart failure are
called congestive heart failure.
In November 2012, we received approval from the United States Food and Drug Administration
(“FDA”) for the HVAD System as a bridge to heart transplantation in patients with end-stage heart failure. The HVAD System has been available in the European Union since receiving CE marking in 2009. In May 2012, we received an expanded
European label for long-term use of the HVAD System in all patients at risk of death from refractory, end-stage heart failure. The HVAD System has been implanted in patients at over 230 health care sites in 37 countries.
Bridge-to-transplant
FDA
approval for a bridge-to-transplant (“BTT”) indication was based on the results of our ADVANCE clinical trial and Continued Access Protocol (“CAP”). HeartWare’s premarket approval (“PMA”) submission included data
from the Company’s pivotal ADVANCE clinical trial, an FDA approved Investigational Device Exemption (“IDE”) study designed to evaluate the HVAD System as a bridge to heart transplantation for patients with end-stage heart failure.
Under ADVANCE, 140 patients at 30 hospitals in the U.S. received the HeartWare investigational device between August 2008 and February 2010. The ADVANCE study achieved a 94% survival at 6 months and successfully met its primary endpoint of
establishing non-inferiority between the investigational device and comparator arm of the study, which was derived from contemporaneous patients from the Interagency Registry for Mechanically Assisted Circulatory Support (“INTERMACS”)
[p<0.0001]. Four supplemental allotments of patients have been granted by the FDA under a CAP, encompassing more than 250 additional patients.
To help assure the continued safety and effectiveness of an approved device, FDA requires a post-approval study (“PAS”) as a
condition of approval under 21 CFR 814.82(a)(2) to assess device performance in a real-world setting. HeartWare’s PAS is a registry consisting of 600 post-approval patients who receive an HVAD and an additional 600 post-approval control
patients derived from a contemporaneous group of continuous flow, intracorporeal left VAD (“LVAD”) patients entered into the INTERMACS database. The data for both arms of the study will be entered into the INTERMACS registry by the
implanting centers. Other post approval commitments include the transfer of patients from the ADVANCE IDE study into a post approval database as well as an obligation to continue training sites in accordance with an approved training program.
Destination Therapy
In
May 2012 we completed enrollment in our clinical trial named “ENDURANCE” for a destination therapy indication. Designed to enroll up to 450 patients at 50 U.S. hospitals, the non-inferiority study is a randomized, controlled,
unblinded, multi-center clinical trial to evaluate the use of the HVAD System as a destination therapy in advanced heart failure patients. The study population was selected from patients with end-stage heart failure who have not responded to
standard medical management and who are ineligible for heart transplantation. Patients in the study were randomly selected to receive either the HVAD System or, as part of a control group, an
3
alternative ventricular assist device approved by the FDA for destination therapy, in a 2:1 ratio. Each patient receiving the HVAD System or control VAD will be followed to the primary endpoint
at two years, with a subsequent follow-up period extending to five years post implant.
On August 27, 2013, the FDA approved an IDE
Supplement allowing HeartWare to commence enrollment in an additional patient cohort for the ENDURANCE clinical trial. In this supplemental cohort, HeartWare intends to enroll up to 286 patients receiving the HVAD System, as well as up to an
additional 143 control patients using a randomization scheme consistent with the ENDURANCE protocol. Patients will be followed for 12 months after implant. HeartWare intends to incorporate the data from both this supplemental cohort and ENDURANCE
into an anticipated PMA Application seeking approval of the HVAD System for the destination therapy indication.
Other Clinical
Activities
On December 16, 2013, HeartWare received approval from the Japanese Pharmaceuticals and Medical Devices Agency to
commence a clinical study in Japan for market authorization for a BTT indication. The study is anticipated to include 6 patients at 5 sites. Enrollment may commence following institutional review board approvals at each site.
In addition, on December 24, 2013, HeartWare received conditional approval from the FDA for a prospective, controlled, unblinded,
multi-center clinical trial to evaluate the thoracotomy implant technique for the HVAD System.
MVAD System
Beyond the HVAD System, we are also evaluating our next generation miniaturized device, known as the MVAD System. The MVAD System is based on
the same technology platform as the HVAD System but adopts an axial flow, rather than a centrifugal flow, configuration and is being developed in multiple designs. The MVAD Pump is less than one-half the size of the HVAD Pump and can provide partial
or full support. The MVAD platform is designed to allow for a variety of configurations and surgical placements with the goal towards further reduction of surgical invasiveness while producing superior clinical results.
CircuLite
On
December 1, 2013, we acquired CircuLite, Inc. CircuLite is the developer of the SYNERGY Circulatory Support System, a partial support system designed to treat less sick, ambulatory, chronic heart failure patients who are not yet
inotrope-dependent. The SYNERGY Surgical System, which received CE Marking in the European Union in 2012, is designed for long-term support and is intended to reduce the heart’s workload while improving blood flow to vital organs. The system is
currently undergoing an upgrade to resolve issues that arose after its commercial release and is not presently available for sale at the direction of regulatory authorities. Sales are expected to resume in a controlled fashion following regulatory
approval to re-launch the system in Europe and will focus on building experience at a small number of centers of excellence, refining training techniques and implementing additional system upgrades in advance of a full rollout. The next generation
endovascular system, which will be implanted collaboratively by cardiologists and surgeons in a hybrid catheterization (“cath”) lab setting, offers an interventional approach to circulatory support. While our HVAD and MVAD Systems offer
minimally invasive treatment to end-stage heart failure patients, the SYNERGY platform offers even less invasive and ultimately interventional options to earlier-stage heart failure patients.
Operations
We began
generating commercial revenue from sales of the HVAD System in January 2009 and have incurred net losses in each year since our inception. We expect our losses to continue as we expand our pipeline through continued research and development into
next generation products, continue our clinical trials, enhance our infrastructure and expand commercial markets both inside and outside of the United States.
4
We have financed our operations primarily through the issuance of convertible notes and the
issuance of shares of our common stock. On December 15, 2010, we issued convertible senior notes with an aggregate principal amount of $143.75 million pursuant to the terms of an indenture dated as of December 15, 2010. The convertible
senior notes are senior unsecured obligations of the Company. The convertible senior notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15 of each year. The convertible senior
notes will mature on December 15, 2017, unless earlier repurchased or converted. The notes offering was completed pursuant to a prospectus supplement, dated December 9, 2010, to a shelf registration statement on Form S-3 that was
previously filed with the SEC and which was declared effective on December 9, 2010.
Most recently, in March 2013, we completed a
public offering of 1,725,000 shares of our common stock, including the underwriters’ exercise of their over-allotment option to purchase 225,000 shares, at an offering price of $86.45 per share for aggregate gross proceeds of approximately
$149.1 million. After fees and related expenses, net proceeds from the offering were approximately $141.0 million. The offering was completed pursuant to a prospectus supplement, dated March 12, 2013, to a shelf registration statement on Form
S-3 that was previously filed with the SEC and which was declared effective on December 9, 2010.
On January 30, 2014, we filed
a new shelf registration statement with the SEC on Form S-3. This shelf registration statement allows us to offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering any
combination and amount of the securities described in the prospectus contained in the registration statement or in the prospectus supplement filed with respect to a particular offering.
Market Opportunity
Heart Failure
Heart failure is one of the leading causes of death in the developed world. The American Heart Association estimates that heart
failure affects over 5.5 million people in the United States, while the European Society of Cardiology reports a prevalence of at least 10 million in European countries. Heart failure is a cardiovascular disease with both an
increasing incidence and death rate worldwide. In the United States, approximately 670,000 new cases are diagnosed annually and approximately 57,000 patient deaths are attributed to advanced heart failure.
Our Target Markets—Class III and Class IV Patients
Our technologies target certain classes of advanced heart failure patients, specifically Class III and IV patients as defined by the New York
Heart Association (“NYHA”). We believe that there is a significant market opportunity for ventricular assist devices, or VADs, that are smaller, easier to implant, easier to use and/or more reliable than the other devices that are
currently available. We also believe there is a significant market opportunity for any device that, relative to existing therapies, demonstrates superior patient outcomes at a lower cost.
It is estimated that there are approximately 5 million Class III heart failure patients worldwide. Of these 5 million patients, we
estimate that approximately 1 million patients are severely impacted by congestive heart failure, or CHF, but are not yet nearing the end stages of the disease. While these patients suffer on a daily basis, they do not need the same full
support as the sicker, later-stage Class IV patients and they may be less willing to undergo the more invasive procedure required for the placement of the typical VAD. We believe that up to one-third of these 1 million patients could be
candidates for a partial support system, such as the SYNERGY Circulatory Support System, placed in a less invasive surgical approach because of the potential for reduced surgical risk and shorter post-operative recovery periods.
5
CHF Treatment Options
Although many pharmacological therapies and pacing devices that are designed to stimulate the heart have proven to be effective at prolonging
the quality and duration of a patient’s life, these treatments and devices do not halt the progression of CHF. Pharmacologic management of CHF focuses primarily on improving the overall pump function of the heart while slowing the rate of CHF
progression. For later stage Class III and Class IV patients, some investigations have suggested that the increase in patient survival rates using medical therapy is limited and that optimal medical therapy has not been demonstrated to stop or
reverse the effects of CHF. Other approaches, such as devices that allow physicians to restrict or reduce the size of the heart and cell based therapy, are either in the early development stages or have not yet achieved outcomes that we believe
would lead most physicians to consider these technologies as viable solutions.
Heart transplantation is the current primary therapy for
refractory advanced heart failure and ultimately provides the best recovery of cardiac function. Heart transplantation is an effective and accepted surgical procedure that can result in end-stage heart failure patients resuming relatively normal
lives for a period usually expected to be ten years or longer. However, the therapy is significantly constrained by the limited number of available donor hearts. Also, many patients with heart failure are ineligible for heart transplantation because
of factors such as age or the presence of other diseases.
VAD Treatment for Advanced Heart Failure
Circulatory assist devices are designed to take over some or all of the pumping function of the heart by mechanically pumping blood into the
aorta. Implantation of circulatory assist devices is the only therapy other than transplantation that has been shown to rehabilitate a patient from NYHA Class IV to Class I or II. A November 2001 article in
The New England Journal of
Medicine
on a study entitled “Randomized Evaluation of Mechanical Assistance for the Treatment of Congestive Heart Failure,” or the REMATCH study, concluded that “the use of a left ventricular assist device in patients with
advanced heart failure resulted in a clinically meaningful survival benefit and an improved quality of life. A left ventricular assist device is an acceptable alternative therapy in selected patients who are not candidates for cardiac
transplantation.” The conclusions in this study have since been reconfirmed in a number of subsequent similar studies with VADs, including a bridge-to-transplant study and a destination therapy study, reported in the August 2007 and November
2009 articles respectively in
The New England Journal of Medicine
. These conclusions were further echoed in the bridge-to-transplant study for the HVAD System, as described by Aaronson
et al
. in the June 2012 article in
Circulation
. In summary, the HVAD pump was associated with “high rates of 180 day success and survival” with “a favorable adverse event profile” and significantly improved functional capacity and quality of life as not
previously reported with any other “drug or device therapy for advanced heart failure.”
A large population of end-stage heart
failure patients can benefit from VAD therapy, such as our HVAD System. Within this population there are generally four applications for VADs: “bridge-to-transplant” therapy, “bridge-to-decision” therapy, “destination
therapy” and “bridge-to-recovery” therapy.
Bridge-to-transplant therapy
—Each year, the number of heart failure
patients in need of a heart transplant exceeds the number of donor hearts that become available. According to the Organ Procurement and Transplantation Network, or OPTN, and Scientific Registry of Transplant Recipients, or SRTR, 1,949 heart
transplants were conducted in the United States in 2011, and as of February 2014, 3,790 people are currently listed for heart transplant. The OPTN/SRTR 2011 Annual Data Report reported 42% of the patients transplanted were on a VAD as a
bridge-to-transplant. In light of the survival benefit of VADs over inotropes, the volume of patients on inotropic therapy at transplant has diminished while the use of VADs has increased. Bridging the patient to transplant with a VAD provides the
clinicians time to stabilize the patient until a suitable donor heart becomes available. We expect this percentage of patients on the waiting list who receive VAD support as a bridge-to-transplant to continue to increase as surgeons and
cardiologists become more familiar with the technology, and confidence in the procedure grows in line with improving clinical data and device reliability.
6
Bridge-to-decision therapy
—VADs are increasingly being used to assist
physicians in determining which patients previously not eligible for a transplant should be listed. Rather than disqualify certain patients based upon their pre-VAD implant status, patients may receive VAD implants and then the physician
subsequently evaluates whether or not to list them for heart transplant in the future. The VAD “bridges” the physician’s listing decision and enables them to determine whether or not the patient will be a good transplant
candidate by evaluating their overall health status after time spent on the VAD. This indication is best reflected in the National Institute of Health’s, or NIH, sponsored INTERMACS (Intra-agency Registry for Mechanical Assist Circulatory
Support) registry, which showed in June 2012 that 21% of registered patients were listed for heart transplant at the time of their implant, while 33% were listed as “bridge to candidacy”, or bridge-to-decision.
Destination therapy
—Circulatory assist devices can also be used as a permanent or lifetime therapy in medically refractory
advanced heart failure patients who are deemed ineligible for heart transplantation due to, for example, their age or the presence of other diseases. For these late stage patients, drug therapy historically has been the only alternative, with the
12-month mortality rate of approximately 75%. We believe that device durability and reliability, together with ease and perceived risk of implantation and better clinical outcomes, are important factors in determining the long-term success of VADs
as a destination therapy. Of note, 44% of patients in the INTERMACS registry were registered as destination therapy.
Bridge-to-recovery therapy
—Circulatory assist devices that provide prolonged unloading of the heart muscle, or myocardium, have
been claimed to lead to recovery of the heart in some patients. In these patients, the combination of ventricular unloading and pharmaceutical therapy enables the physician to wean the patient from the pump and eventually remove it.
Our Solution and Products
Proprietary Pump Technology
The HVAD System features the smallest, full-output centrifugal pump designed to be implanted in the chest, directly adjacent to the heart. At
the core of our technology platform is our proprietary “hybrid” system for suspending the impeller, which is the only moving part within the pump. The impeller is suspended within the pump housing by the opposing forces of passive magnets
and hydrodynamic thrust generated by the pump impeller, which circulates a cushion of blood. Once power is applied to the device and the impeller begins to rotate, there are no points of mechanical contact within the pump, thus providing a
completely wearless pumping system.
We believe the hybrid suspension system has several important advantages over traditional
technologies. The elimination of the internal mechanical bearings which are characteristic of second generation devices removes all points of mechanical friction or contact within the pump. We believe that this removal of contact should lead both to
longer term reliability of the device and to a potential reduced risk of physical damage to blood cells as they pass through the pump. Our hybrid suspension technology also establishes a miniaturization path, which we believe will allow us to
significantly downsize our pump technology without compromising clinical performance. We believe competing pump designs which rely on either active magnetic or hydrodynamic forces alone face various physical constraints that may limit their ability
to downsize without sacrificing performance.
The HeartWare HVAD System
The first product in our portfolio, the HVAD System, is comprised of the HVAD Pump, a small, permanently implantable VAD, patient accessories
and surgical tools. The HVAD Pump is capable of generating up to 10 liters of blood flow per minute. With a displaced volume of only 50 cubic centimeters and a mass of 140 grams, the HVAD Pump is the only approved full-output pump implantable in the
pericardial space, directly adjacent to the heart. It is also the only pump designed to be implanted above the diaphragm in all eligible patients. We believe the implanting in the pericardial space generally leads to shorter surgery time and a less
invasive procedure relative to alternative devices, which are normally implanted in the abdomen.
7
Device reliability of the HVAD System is designed to be enhanced through the use of dual motor
stators with independent drive circuitry, allowing a seamless transition between dual and single stator mode if required. The pump’s inflow cannula is integrated with the device itself, providing proximity between the heart and the pumping
mechanism, facilitating ease of implant and helping to ensure optimal blood flow characteristics. The use of a wide-bladed impeller and the clear flow paths through the pump are designed to help reduce the risk of pump-induced damage to blood cells.
The HVAD System has been approved for sale in Europe since early 2009. In November 2012, we received approval from the FDA for the HVAD
System as a bridge to heart transplantation in patients with end-stage heart failure.
The HeartWare MVAD System
The MVAD System is comprised of similar components, surgical tools and peripherals as the HVAD System, but is differentiated significantly by
the MVAD Pump. The MVAD Pump is a miniaturized blood pump intended for chronic heart failure patients. The device is a full-output axial flow pump with a fully suspended rotor and a displacement volume of less than one half of that of the HVAD Pump.
The pre-clinical Good Laboratory Practices (“GLP”) in-vivo studies completed in September 2011 have shown the MVAD Pump to have similar comparable blood flow characteristics to the HVAD Pump. The MVAD Pump is designed for pericardial
implantation and initial human clinical trials are expected to commence in 2014. We plan to introduce our next generation controller, PAL, with the MVAD Pump in clinical trials and separately for use with the current HVAD Pump. PAL is a one-piece
wearable controller and battery designed for an active patient lifestyle.
We believe it is likely that more patients will be willing to
undergo a shorter, less invasive surgical procedure that may result in quicker recoveries and hospital discharge. We have taken advantage of the versatility of the MVAD Pump design with multiple configurations specific to less invasive implantation
procedures. This development has been supported by over 100 in-vivo studies. These devices may expand the potential pool of chronic heart failure patients.
Before the MVAD System will be available for commercial sale, we will need to achieve the following milestones:
|
|
•
|
|
completion of the system development including next generation peripherals (e.g., controller, batteries, power adapters);
|
|
|
•
|
|
approval of and successful completion of a clinical trial; and
|
|
|
•
|
|
receipt of regulatory approvals for commercialization.
|
The CircuLite SYNERGY
Platform
HeartWare acquired CircuLite on December 1, 2013 and with it, CircuLite’s SYNERGY Circulatory Support System.
Approximately the size and weight of a AA battery, the CE marked SYNERGY Surgical System is implanted through a right, mini-thoracotomy procedure and does not require a sternotomy or cardiopulmonary bypass. With this approach, the inflow cannula is
placed in the left atrium, and the outflow graft is attached to the subclavian artery. CircuLite’s proprietary micro-pump is then placed in a pacemaker-like pocket and attached to the inflow cannula and outflow graft, which connects to a
wearable, external controller and battery pack. The system is currently undergoing an upgrade to resolve issues that arose after its commercial release and is not presently available for sale at the direction of regulatory authorities. CircuLite has
pioneered the partial-assist approach and demonstrated that this technique can enhance the quality of life for a less sick group of heart failure patients, which is believed to be a substantially larger population than the end-stage heart failure
patients that HeartWare currently treats with our full-support VADs. The next generation endovascular system, which will be implanted collaboratively by cardiologists and surgeons in a hybrid cath lab setting, offers
8
an interventional approach to circulatory support. While our HVAD and MVAD Systems offer minimally invasive treatment to end-stage heart failure patients, the SYNERGY platform offers even less
invasive and ultimately interventional options to earlier-stage heart failure patients.
Enhanced Quality of Life with Implantable
Devices
Currently, the HVAD System and all commercially available VADs are powered by a controller, batteries and other power
sources carried external to the body. Power is transferred to the implanted pump via a thin electrical cable, called a driveline, which exits the patient’s skin in the abdominal area. We are working to develop an implantable system utilizing
transcutaneous energy transfer (“TET”) or wireless power that will eliminate the need for a percutaneous driveline. A TET system contains a wearable power management system that is inductively coupled to an implanted pump controller and
electronics that includes a rechargeable battery. The patient can remove the wearable power management system and enjoy a high quality lifestyle while the system is powered by the implanted battery.
We are collaborating with Dualis MedTech GmbH, a subsidiary of AVRA Surgical, Inc., on the development of an implantable system. Since
mid-2011, a team of HeartWare and Dualis engineers has worked to successfully demonstrate the feasibility of a wireless energy transfer system with both HVAD and MVAD pumps. We are now working towards GLP animal studies for an implantable system.
Our Business Strategy
Our primary goal, above all else, is to focus on optimizing outcomes of patients being treated for congestive heart failure. To this end, we
are leading innovation in the VAD sector and are also striving to develop and maintain a proprietary technology platform that enables the development of a pipeline of ever-smaller heart pumps that will reduce procedural invasiveness and
simultaneously increase the number of patients who can benefit from our products. In addition, we intend to explore technologies and therapies for treatment of heart failure.
We believe that our technology portfolio provides us with a significant competitive advantage in the market. To capitalize on that advantage,
we are pursuing the following plan:
Expand Market Penetration outside of the U.S.
—
We sell to VAD centers
and distributors throughout Europe and in other countries outside the U.S. With the receipt of CE Marking in January 2009, we began to develop the necessary infrastructure to support commercial sales in Europe. Throughout 2013 we continued to expand
our infrastructure to support commercial activity and have generated sales through 2013 from customers in 37 countries outside of the U.S. In the future, we intend to build wider distribution channels and ordering systems to deliver our products to
the European market on a wider commercial scale as well as increase the number of countries where we have approval to sell our device commercially.
Expand U.S. Market Penetration
—
Our goal is to expand U.S. market penetration following FDA approval in
November 2012 for the HVAD System for a bridge-to-transplant system. Our focus is to continue to establish and maintain commercial sites at all of the major U.S. health centers that support VAD implantation. In the U.S., we currently have
approximately 100 commercial sites.
We also intend to seek an expanded indication for the HVAD System to include destination therapy. In
May 2012, we completed enrollment in our ENDURANCE destination therapy clinical trial. Each test patient will be followed to the primary endpoint of two years, with subsequent follow period extending to five years post-implant. On August 27,
2013, the FDA approved an Investigational Device Exemption (“IDE”) Supplement allowing HeartWare to commence enrollment in an additional patient cohort for the ENDURANCE clinical trial. Patients will be followed for 12 months after
implant. HeartWare intends to incorporate the data from both this supplemental cohort and ENDURANCE into an anticipated pre-market approval application seeking approval of the HVAD System for the destination therapy indication.
9
Focus on continuous product development
—
In parallel with the
clinical development of the HVAD System, we plan to advance the development of our next generation products, such as the MVAD System and a TET system, and to enhance our peripheral equipment. We expect assessment and development and/or enhancement
work for the MVAD System, the TET system and peripheral equipment to continue throughout 2014. We have completed GLP studies for the MVAD System. We plan to introduce our next generation controller, PAL, with the MVAD Pump in clinical trials and
separately for use with the current HVAD Pump. PAL is a one-piece wearable controller and battery designed for an active patient lifestyle.
We also anticipate ongoing research and development expenditures with respect to the SYNERGY Circulatory Support System. The SYNERGY Surgical
System is currently undergoing an upgrade to resolve issues that arose after its commercial release and is not presently available for sale at the direction of regulatory authorities. Our efforts will include refining training techniques and
implementing additional system upgrades in advance of a full rollout.
Partner with leading professionals in the fields of
cardiovascular surgery around the world
—
We have established relationships with leading professionals in the field of cardiovascular surgery and heart centers around the world and continue to expand this network. We believe
these relationships are key to our growth as they help to drive clinical awareness of our products.
Explore complementary or
alternative therapies and technologies
—
We intend to explore business development opportunities including strategic alliances, joint ventures, and acquisitions that might complement or expand our market opportunities. In
early 2012, we entered into a development agreement with Dualis MedTech to develop ventricular assist devices with wireless TET system technology exclusively for HeartWare. In mid-2012, we acquired World Heart Corporation primarily to expand our
intellectual property portfolio and in late 2013, we acquired CircuLite to develop a partial support system to treat less sick, chronic heart failure patients.
Sales and Marketing
Our sales and
marketing strategy is to educate and promote the benefits of ventricular assist devices for the treatment of clinical heart failure among a variety of health care professionals. We market directly to cardiac centers and hospitals that perform heart
transplants as well as through medical device distributors outside of the U.S. with experience in local markets.
We work with a broad
spectrum of health care industry participants to promote the clinical benefits of our device, including hospital administrators, cardiologists, surgeons, nurses, perfusionists, insurers and government and industry representatives. A key to the
development of our business is optimizing patient outcomes via effective training and clinical end-user support programs and resources.
To support our sales and marketing strategy, we have recruited and trained experienced territory managers and clinical specialists. This field
team supports customers by supporting implant procedures, providing technical information and training, resolving clinical issues, and educating health care professionals on the benefits of the HVAD System. In addition, we partner with leading
physicians in the field to proctor new physicians on the use of our devices in their centers and to present clinical and technical data about our system at scientific symposia, congresses, and trade shows, as well as publish in peer reviewed
cardiovascular journals.
Our product management team conducts market research on end-user preferences and unmet needs, identifies areas
of improvement in our product offering and services, and works with research and development on new technologies that meet newly identified needs that are not addressed with our current platform of products.
Globally, over 5,000 implants have been performed using the HVAD System. The HVAD System has been implanted in patients at over 230 health
care sites in 37 countries.
10
Intellectual Property
We rely on a combination of patents, trade secrets, trademarks and copyrights, together with non-disclosure and confidentiality agreements, to
protect our proprietary rights in our technologies.
As of December 31, 2013, we have 67 issued U.S. patents, 14 issued Australian
patents, 11 patents issued patents in Great Britain and France, 10 issued patents in Germany and Japan, as well as patents issued in the Netherlands, Spain, Italy, Austria, Belgium, China, Korea, Canada, Israel and Turkey. We also have 72
pending U.S. non-provisional patent applications and a number of international patent applications filed under the Patent Cooperation Treaty, as well as in Japan, Europe, Australia, China, Canada, Hong Kong, India, Korea and Israel. The total patent
filings listed above include 12 issued U.S. patents, 20 pending U.S. non-provisional patent applications, and associated foreign patents and patent applications acquired in the CircuLite transaction.
Our U.S. and foreign issued patents and patent applications cover fundamental technologies underlying our hemodynamically and physiologically
compatible full-output, long-term circulatory assist devices. The main technologies claimed in patents and patent applications include:
|
|
•
|
|
use of dual stators in a blood pump;
|
|
|
•
|
|
the combination of passive magnetic bearings and hydrodynamic thrust bearings;
|
|
|
•
|
|
channels or wide-bladed impellers in a blood pump;
|
|
|
•
|
|
the use of ceramic between an impeller and motor stator;
|
|
|
•
|
|
flow estimation based on impeller speed and viscosity;
|
|
|
•
|
|
use of platinum alloy for blood pump impellers;
|
|
|
•
|
|
alternative axial flow pump technologies; and
|
|
|
•
|
|
wireless energy transfer systems.
|
Major patents and pending patent applications
covering technologies for our HVAD System are scheduled to expire at various times between 2016 and 2027. Patents and patent applications covering technologies for our MVAD System are scheduled to expire at various times between 2024 and 2030.
We actively monitor our intellectual property position and periodically review new developments to identify prudent extensions to our patent
portfolio. We plan to file additional patent applications on inventions that we believe are patentable and important to our business. We may also license or acquire patents from third parties that may enhance or expand our development activities.
Accordingly, we intend to pursue and defend aggressively patent protection on our proprietary technologies. We have previously asserted claims and responded to counterclaims relating to our intellectual property. In connection with these processes,
we have entered into and may in the future enter into settlement agreements pursuant to which third parties or their successors or assigns may commercialize competing technologies or products that would have otherwise been precluded by our patents
subject to the agreement. See Item 1A. “Risk Factors”.
Despite our efforts, we may be subject to challenges, with or
without merit, regarding our patents or other intellectual property. The medical device industry is characterized by a large number of patents and by frequent and substantial intellectual property litigation. Our products and technologies could
infringe, or other persons could allege that our products and technologies infringe, upon the proprietary rights of third parties. If third parties successfully assert infringement or other claims against us, we may not be able to sell our products.
In addition, patent or intellectual property disputes or litigation may be costly, result in product development delays or divert the efforts and attention of our management and technical personnel. If any such disputes or litigation arise, we may
seek to enter into a royalty or licensing arrangement. However, such an arrangement may not be available on commercially acceptable terms, if at all. We may decide, in the alternative, to litigate the claims or to design around the patented or
otherwise proprietary technology. At this time we are not party to any material legal proceedings that relate to patents or proprietary rights.
11
Our intellectual property also includes non-patented technology, processes and procedures, and
technical knowledge and know-how accumulated or acquired since inception, all of which are significant to our competitive position. It is our policy to enter into confidentiality, non-disclosure and intellectual property assignment agreements with
employees and consultants to help ensure that we can protect our rights in developed proprietary technology and prohibit the disclosure of any confidential information or trade secrets.
Government Regulation
United
States
Our products are regulated by the FDA as a Class III medical device under the U.S. Food, Drug, and Cosmetic Act. FDA
regulations govern:
|
|
•
|
|
product design and development;
|
|
|
•
|
|
product safety and effectiveness;
|
|
|
•
|
|
premarket approval (“PMA”);
|
|
|
•
|
|
advertising and promotion;
|
|
|
•
|
|
product sales and post-market activities;
|
|
|
•
|
|
medical device (adverse event) reporting; and
|
|
|
•
|
|
field corrective actions (e.g., recalls).
|
Premarket Approval
Each of our devices are regulated as a Class III medical device. PMA approval from the FDA is required before marketing of a Class III medical
device in the United States can commence and the process of obtaining PMA can be costly, lengthy and uncertain. In November 2012, we received approval for the HVAD System as a bridge to heart transplantation in patients with end-stage heart failure.
The Company recently completed enrollment in its ENDURANCE trial, which is now in the two year follow up period to the primary endpoint.
A separate PMA submission for the HVAD System for a destination therapy indication will be required. A PMA application must be supported by extensive data including, but not limited to, technical, preclinical and clinical trials to demonstrate the
safety and effectiveness of the device to the FDA’s satisfaction. Among other information, the PMA application must also contain a full description of the device and its components, a full description of the methods, facilities and controls
used for manufacturing, and proposed device and patient labeling.
If the FDA determines that a PMA application is complete, the FDA
accepts the application and then begins an in-depth review of the submitted information. The FDA, by statute and regulation, has 180 days to review an accepted PMA application, although the review and response process generally occurs over a
significantly longer period of time, often more than a year, and can take up to several years. During this review period, the FDA may
12
request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and
evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of our and our key suppliers’ facilities to evaluate compliance with the quality
system regulation. They will also conduct a Bioresearch Monitoring (“BIMO”) inspection of the clinical trial including some of the clinical data sites. To help assure the continued safety and effectiveness of an approved device, the FDA
may also require a post-approval study as a condition of approval. Post-approval studies were required as a condition of approval for the HVAD System as a bridge to heart transplantation.
Under the Food and Drug Administration Safety and Innovation Act (Public Law 112-144) which included the Medical Device User Fee Amendments of
2012, the fee to submit a PMA application for FY 2013 was $248,000. User fees are expected to rise over time until the law sunsets in 2017. We qualified for a small business exemption that allowed us to file our first PMA application at no charge,
however we presently do not qualify for the exemption. PMA supplements are required for modifications to the manufacturing process, labeling, use and design of a device that is approved through the premarket approval process. PMA supplements often
require submission of the same type of information as a PMA application except that the supplement is limited to information needed to support any changes from the device covered by the original PMA. The changes to design may require significant
testing, validation and documentation and may be associated with significant review times from 30 days to 180 days and fees generally from approximately $4,000 to $37,000 with the exception of the Panel Track Supplement (includes clinical data) is
$186,000.
A post-approval study (“PAS”) may also be required and could be a clinical or non-clinical study required in the PMA
approval order and is intended to gather specific information to address questions about the post-market performance and physician experience with an approved medical device. Concurrent with PMA approval of the HVAS for bridge-to-transplant
indication, the FDA has required us to complete a PAS as a condition of approval under 21 CFR 814.82(a)(2) to assess device performance in a real-world setting. HeartWare’s PAS is a registry consisting of 600 patients who receive an HVAD and an
additional 600 control patients derived from a contemporaneous group of continuous flow, intracorporeal LVAD patients entered into the INTERMACS database. The data for both arms of the study will be entered into the INTERMACS registry by the
implanting centers. Other post approval commitments include the transfer of patients from the ADVANCE IDE study into a post approval database as well as an obligation to continue training sites in accordance with an approved training program.
Pervasive and Continuing FDA Regulation
Clinical trials require extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the oversight of an
institutional review board at the relevant clinical trial site and in accordance with applicable regulations and policies including, but not limited to, the FDA’s good clinical practice, or GCP, requirements. We, the trial data safety
monitoring board, the FDA or the institutional review board at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study patients outweigh the
anticipated benefits.
Both before and after FDA approval, numerous regulatory requirements apply. These include:
|
|
•
|
|
quality system regulation, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the design, manufacturing and commercialization phases;
|
|
|
•
|
|
regulations which govern product labels and labeling, prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling and promotional activities;
|
|
|
•
|
|
medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if it were to recur;
|
13
|
|
•
|
|
regulations which govern medical device tracking; and
|
|
|
•
|
|
notices of correction or removal and recall regulations.
|
Advertising and promotion of
medical devices are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated products have resulted in enforcement actions brought under healthcare
reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act, competitors and others can initiate litigation relating to advertising claims.
Compliance with regulatory requirements is enforced through periodic, unannounced facility inspections by the FDA. At the conclusion of an FDA
inspection, the inspector may provide observations identifying areas of potential regulatory concern. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA. Enforcement actions may include any of the
following sanctions against us:
|
|
•
|
|
warning letters or untitled letters;
|
|
|
•
|
|
fines, injunction and civil penalties;
|
|
|
•
|
|
recall or seizure of our products;
|
|
|
•
|
|
customer notification, or orders for repair, replacement or refund;
|
|
|
•
|
|
operating restrictions, partial suspension or total shutdown of production or clinical trials;
|
|
|
•
|
|
refusing our request for premarket approval of new products;
|
|
|
•
|
|
withdrawing premarket approvals that are already granted; and
|
European Union
The primary regulatory environment in Europe is that of the European Union, or EU which consists of 28 member states in Europe. In 2014, two EU
directives that covered medical devices—Directive 93/42/EEC covering medical devices and Directive 90/385/EEC for active implantable medical devices—became EU regulations, which augmented and clarified earlier directives. The EU also has
numerous standards that govern and harmonize the national laws and standards regulating the design, manufacture, clinical trials, labeling, adverse event reporting and post market surveillance activities for medical devices that are marketed in
member states. Medical devices that comply with the requirements of the national law of the member state in which they are first marketed will be entitled to bear CE Marking, indicating that the device conforms to applicable regulatory requirements,
and, accordingly, can be commercially marketed within EEC states and other countries that recognize this mark for regulatory purposes. We received CE Marking for the HVAD System in January 2009. In May 2012, we received an expanded label for
long-term use of the HVAD System in all patients at risk of death from refractory, end-stage heart failure.
Australia
In Australia, the Therapeutic Goods Administration, or TGA, is responsible for administering the Australian Therapeutics Goods Act. The Office
of Devices, Blood and Tissues is the department within the TGA responsible for devices. The TGA recognizes five classes of medical devices and HeartWare’s circulatory assist device falls under the category of “active implantable medical
devices.”
The Australian Register of Therapeutic Goods, or ARTG, controls the legal supply of therapeutic goods in Australia. The
ARTG is the register of information about therapeutic goods for human use that may be imported, supplied in, or exported from Australia. Any use of an unapproved medical device in humans, even in pilot trials, requires an exemption from the
requirement for inclusion on the ARTG.
14
In March 2011, we received approval from the TGA to sell the HVAD System commercially in
Australia.
Other International Regulations
We are also subject to international regulations in other countries where our products are sold. We currently have sales to customers in a
variety of countries outside of the EU, U.S. and Australia. These regulations relate to product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable
to our products in these countries are similar to those of the FDA. The national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries. In certain countries,
doctors may request use of our product under compassionate or emergency use or special access programs prior to approval. These programs tend to be limited and patient-specific and do not replace premarket approval.
In order to be positioned for access to European and other international markets, we sought and obtained certification under the International
Standards Organization (“ISO”) 13485 standards. ISO 13485 is a set of integrated requirements, which when implemented, form the foundation and framework for an effective quality management system. These standards were developed and
published by the ISO, a worldwide federation of national bodies, founded in Geneva, Switzerland in 1947. ISO has more than 90 member countries and ISO certification is widely regarded as essential to enter Western European markets.
Healthcare Regulation
Recent healthcare policy changes
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal
government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. For example, on March 23, 2010, the Patient Protection and Affordable Care Act (the
“Affordable Care Act”) was signed into law. On March 30, 2010, a companion bill, the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”) was also signed into law. Among other things, the
Affordable Care Act and the Reconciliation Act (collectively, the “Acts”), when taken together, impose a 2.3% excise tax on the sale of certain medical devices, including our devices, which took effect January 1, 2013. In addition, it
is possible that standard setters or regulators may address certain unique aspects of the accounting for the Acts in the future.
Regulations related to prohibiting “kickbacks” and false claims and protecting patient confidentiality
A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state and foreign laws, prohibit payments that are
intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws constrain our sales, marketing and other promotional activities by limiting the
kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or
causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Because we may provide some coding and billing information to
purchasers of the HVAD System and our other products, and because we cannot assure that the government will regard any billing errors that may be made as inadvertent, these laws are potentially applicable to us. Anti-kickback and false claims laws
prescribe civil and criminal penalties for noncompliance, which can be substantial.
There are a number of federal and state and foreign
laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services
promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving
individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of
15
health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we are found to be in violation of the privacy rules under HIPAA or similar laws, we could be
subject to civil or criminal penalties.
Transparency of payments
A section of the Affordable Care Act known as the Sunshine Act requires applicable manufacturers of drugs and devices to report annually for
publication certain payments and other transfers of value to physicians and teaching hospitals as well as certain ownership interests held by physicians. Pursuant to recently issued regulations, applicable manufacturers, including the Company, must
begin to submit reports in 2014 with respect to payments and transfers occurring in 2013. Certain states and foreign countries have similar statutes and regulations requiring reporting of payments to healthcare providers. We are establishing
processes and procedures to capture and report payments to physicians and teaching hospitals.
Other Regulation
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes certain disclosure requirements regarding the use of “conflict
minerals” originating from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of “conflict minerals” whether or not these products are manufactured
by third parties. The conflict minerals include tin, tantalum, tungsten and gold, and their derivatives. These new requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of our products. There will be
additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for
all metals used in our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free.
Third Party Reimbursement
In the United
States, hospitals and doctors generally rely on third-party payers, such as Medicare, Medicaid, private health insurance plans and self-funded employers, to pay or reimburse for all or part of the cost of medical devices and the related surgical
procedures. In the United States, heart failure represents Medicare’s greatest area of spending.
In 2011, the Center for Medicare
and Medicaid Services, or CMS, established reimbursement rates for the treatment of patients with LVADS, with major complications and comorbidities (“MS-DRG 1”) and without major complications and comorbidities (“MS-DRG 2”). Most
patients that receive VADs and all patients that receive heart transplants are eligible for MD-DRG 1 reimbursement. Under current payment rates, the national average Medicare payment to CMS-certified centers for MS-DRG 1 procedures is approximately
$150,000. Actual payments are subject to other variables such as an application of a wage index, indirect medical education costs, cost outliers, and disproportionate share payments for each institution. In addition, when VAD patients are discharged
from the hospital and then readmitted for transplantation, hospitals may qualify for 2 separate
MS-DRG
1 or 2 payments.
We believe that our products will be Medicare-eligible and therefore that they should be entitled to reimbursement. On October 30, 2013,
CMS issued a Decision Memo for Ventricular Assist Devices for Bridge-to-Transplant and Destination Therapy (CAG-00432R), which updated the national coverage determination (“NCD”) for bridge-to-transplant and destination therapy VADs. The
updated NCD, among other things, attempts to clarify BTT and DT patient selection criteria. The updated NCD clarified that BTT patients, without an exemption, must be active on the Organ Procurement and Transplantation Network’s waitlist for a
heart in order to be eligible for Medicare or Medicaid reimbursement. Since the HVAD System is currently only approved in the U.S. for BTT patients, this update to the NCD creates a subset of potential HeartWare BTT patients who may no longer be
eligible for Medicare and Medicaid reimbursement.
16
Most private insurance providers have implemented U.S. policies for circulatory assist devices,
including Blue Cross and Blue Shield Plans, Aetna, Cigna, United Healthcare and others, and these private insurance providers have their own reimbursement criteria for their members, which can be found in their VAD medical policies. Generally, these
third-party payors do not impose the active listing requirements contained in the NCD. However, they may not cover medical devices during an ongoing clinical trial; even though a trial may be categorized as a Medicare approved IDE Category B2
clinical trial. All of our sites in the U.S. bridge-to-transplant and destination therapy clinical trials received Medicare and third party reimbursement to some extent. Our staff includes reimbursement and government policy professionals whose
objectives include improving insurance reimbursement outcomes for the HVAD System.
International reimbursement varies from country to
country and often hospital to hospital. The European system is more effective at focusing resource intensive procedures in a small number of centers within each country and LVAD’s fall into that category of resource intensive procedures. In
those hospitals that perform VAD implantation, we believe that there are adequate budgets to purchase circulatory assist devices although governmental austerity programs could impact available funding. As in the United States, we believe that in
Europe physicians and patients drive the decision as to which VAD to purchase. In many jurisdictions, a favorable health technology assessment is required prior to obtaining reimbursement for a medical device. These assessments are often difficult
to conduct and can be time consuming and expensive.
Competition
Competition in the VAD industry is expected to increase as better devices become available. We believe that our products compete primarily on
their safety and efficacy as a treatment for congestive heart failure as compared to other devices and other treatments. Other factors that affect our ability to effectively compete in the VAD market is our ability to obtain necessary regulatory
approvals to market the device in the U.S., the price of our device and the ability of healthcare providers to secure reasonable reimbursement rates. We believe that over time smaller, less invasive, reliable and durable devices will emerge as the
preferred alternatives for the treatment of congestive heart failure. In the long run, we believe our continued competitive success will depend on our ability to enhance patient outcomes and develop innovate products.
Our principal competitors in the implantable cardiac assist space include Thoratec Corporation, Jarvik Heart, Inc., MicroMed Cardiovascular,
Berlin Heart GmbH, and Sunshine Heart, Inc., and a range of other smaller, specialized medical device companies with devices at varying stages of development.
See Item 1A. “Risk Factors.” for additional information.
Research and Development
Research and
development costs include activities related to the research, development, design, testing, and manufacturing of prototypes of our products as well as costs associated with certain clinical and regulatory activities. We expect our research and
development expenses to continue to increase as we continue to research and develop improvements to the HVAD System, research the application of, and develop our MVAD heart pump technology in a variety of designs and variations, enhance our
peripheral product offerings, conduct additional pre-approval and post-approval clinical trials and hire additional employees. For the years ended December 31, 2011, 2012 and 2013 we incurred research and development expenses of $50.1 million,
$83.5 million, and $102.5 million, respectively.
Manufacturing and Assembly
Our manufacturing activities to date
,
and for the foreseeable future, will continue to consist primarily of process development,
component assembly, quality control testing and sustaining engineering. Most of the components of the HVAD System are manufactured by third parties, including the center post, pump housing and impeller. Some critical components, including the
controller, are manufactured solely by an outside supplier and are essentially provided to us as a finished good ready-for-sale as part of our HVAD System.
17
In order to sell our product commercially in the European Union, we are required to meet certain
regulatory standards. In October 2008, we received a Certificate of Registration from British Standard Institution (BSI) certifying that the Company’s Quality Management System complies with the requirements of ISO 13485:2003. It signifies that
HeartWare has established a comprehensive quality system that conforms to the International Organization for Standardization (“ISO”) 13485:2003 requirements. The ISO 13485:2003 standard is fully recognized in many countries as a measure of
quality. In January 2009, we received a Full Quality Assurance Certificate, CE 540273 from BSI. It signifies that the HVAD System designed and manufactured by HeartWare conforms with the provisions of Council Directive for Active Implantable Medical
Devices, 90/385/EEC, Annex 2, Section 3.2 at every stage, from design to final controls. In order to maintain these certifications we must show through annual surveillance audits conducted by the British Standard Institute (BSI) that
HeartWare’s Quality System remains compliant with the requirements of ISO 13485 and applicable standards. Our Miami Lakes facility was inspected and approved by the FDA prior to the FDA’s approval to manufacture the HVAD System in the U.S.
Our new Miami Lakes facility was inspected and approved by the FDA in June 2013.
We do not presently have supply agreements with many of
our key suppliers and we have not secured second source suppliers for all of our supplies. See Item 1A. “Risk Factors” for additional information.
Employees
As of December 31, 2013,
we had 569 employees, of whom 380 employees are engaged in operations activities including research and development, quality assurance and manufacturing, 129 are engaged in marketing, sales, clinical and regulatory activities and 60 are engaged in
finance, legal and other administrative functions. None of our employees are represented by a labor union or covered by a collective bargaining agreement other than employees in France that are subject to national, collective bargaining agreements.
We consider our relations with our employees to be good.
Corporate History
HeartWare International, Inc. was incorporated in Delaware on July 29, 2008 as a wholly-owned subsidiary of HeartWare Limited, a
corporation incorporated in Australia on November 26, 2004. On November 13, 2008, HeartWare Limited completed its redomiciliation from Australia to Delaware pursuant to certain schemes of arrangement approved by an Australian court. In
connection with this redomiciliation, each holder of HeartWare Limited ordinary shares was issued one share of HeartWare International, Inc. common stock in exchange for every 35 ordinary shares of HeartWare Limited. As a result, HeartWare Limited
became a wholly-owned subsidiary of HeartWare International, Inc., and HeartWare International, Inc. became the parent company of the HeartWare Group. The ordinary shares of HeartWare Limited traded on the on the ASX from January 31, 2005 until
November 13, 2008 when the common stock of HeartWare International, Inc. started trading on the ASX in the form of CHESS Depositary Interests, or CDIs. On February 24, 2009, common shares of HeartWare International, Inc. were listed for
trading on the NASDAQ Global Market and commenced trading on the following day. On September 17, 2013, HeartWare was officially delisted from the ASX meaning that interests in HeartWare are no longer publicly traded on the ASX.
Recent Acquisition of CircuLite
On
December 1, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which we acquired CircuLite. CircuLite is the developer of the SYNERGY Circulatory Support System, a partial support system
designed to treat less sick, ambulatory, chronic heart failure patients who are not yet inotrope-dependent. In connection with the acquisition of CircuLite, we agreed to pay $30 million consisting of approximately $18 million in shares of HeartWare
common stock, par value $0.001 per share (the “Common Stock”), equal to approximately 230,000 shares of Common Stock (the “Closing Payment”), and approximately $12 million in cash to repay outstanding CircuLite indebtedness and
pay certain transaction liabilities and expenses. These shares were valued as of closing at approximately $22 million based upon the closing price of
18
our Common Stock on the trading day prior to closing. In addition to the Closing Payment, CircuLite securityholders may be entitled to receive additional shares of Common Stock (or cash, in
certain cases, at our discretion) upon the achievement of specified performance milestones.
The SYNERGY Surgical System, which received
CE Marking in the European Union in 2012, is designed for long-term support and is intended to reduce the heart’s workload while improving blood flow to vital organs. Approximately the size and weight of a AA battery, the CE marked SYNERGY
Surgical System is implanted through a right, mini-thoracotomy procedure and does not require a sternotomy or cardiopulmonary bypass. With this approach, the inflow cannula is placed in the left atrium, and the outflow graft is attached to the
subclavian artery. CircuLite’s proprietary micro-pump is then placed in a pacemaker-like pocket and attached to the inflow cannula and outflow graft, which connects to a wearable, external controller and battery pack. The system is currently
undergoing an upgrade to resolve issues that arose after its commercial release and is not presently available for sale at the direction of regulatory authorities. Sales are expected to resume in a controlled fashion following regulatory approval to
re-launch the system in Europe and will focus on building experience at a small number of centers of excellence, refining training techniques and implementing additional system upgrades in advance of a full rollout. The next generation endovascular
system, which will be implanted collaboratively by cardiologists and surgeons in a hybrid cath lab setting, offers an interventional approach to circulatory support. While our HVAD and MVAD Systems offer minimally invasive treatment to end-stage
heart failure patients, the SYNERGY platform offers even less invasive and ultimately interventional options to earlier-stage heart failure patients.
19
Item 1A. Risk Factors
Our business faces many risks. We believe the risks described below are material risks facing the Company. However, these risks may not be the
only risks we face. Additional unknown risks, or risks that we currently consider immaterial, may also impair our business operations. If any of the events or circumstances described below actually occurs, our business, financial condition or
results of operations could suffer, and the trading price of our shares could decline significantly. Investors should consider the specific risk factors discussed below, together with the cautionary statements under the caption “Forward-Looking
Statements” and the other information and documents that we file from time to time with the Securities and Exchange Commission.
Risks Related
to Our Business and Industry
We have incurred operating losses since our inception and anticipate that we will continue to incur operating
losses for the foreseeable future.
We have incurred net losses since our inception, including net losses of $59.3 million, $87.7
million and $55.1 million for the fiscal years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, our accumulated deficit was $329.4 million. Currently, we only have one product, the HVAD System, approved for
sale. We continue to incur substantial clinical trial expenditures, significant research and development costs and costs related to our operations. We expect to continue to incur significant operating losses for the foreseeable future as we incur
costs associated with:
|
|
•
|
|
conducting multiple clinical trials, including preapproval trials for new products or indications and post approval trials for existing products;
|
|
|
•
|
|
researching and developing next generation products and peripherals as well as incremental improvements to and sustaining engineering for existing products and peripherals;
|
|
|
•
|
|
integrating and developing acquired and licensed technology;
|
|
|
•
|
|
building our service capabilities to meet growing customer demand;
|
|
|
•
|
|
growing, maintaining and protecting our intellectual property;
|
|
|
•
|
|
seeking and maintaining regulatory approvals and operating our quality systems;
|
|
|
•
|
|
expanding our sales and marketing capabilities both globally and in the U.S.;
|
|
|
•
|
|
manufacturing product and increasing our manufacturing capabilities to meet rising demand;
|
|
|
•
|
|
broadening our infrastructure in order to meet the needs of our growing operations; and
|
|
|
•
|
|
complying with the requirements related to being a public company in the United States.
|
To
become and remain profitable, we must succeed in developing and commercializing products with significant market potential. This will require us to succeed in a range of challenging activities, including all of the activities listed above. We may
never succeed in these activities, and we may never obtain all of the regulatory and reimbursement approvals necessary in the markets in which we expect to operate or otherwise generate revenue sufficient to achieve profitability. Further, the
markets in which we operate may contract or we may not obtain significant market share so as to support our ongoing business operations. If we do achieve profitability, we may not be able to sustain it.
20
We have a significant amount of indebtedness consisting primarily of our convertible senior notes. We may not
be able to generate enough cash flow from our operations to service or pay principal and interest on our indebtedness, which could adversely affect our business, financial condition or results of operations. Furthermore, we may incur additional
indebtedness or refinance our current indebtedness in the future, which could also adversely affect our business, financial condition or results of operations. The conversion of our convertible senior notes at the election of the holders, to the
extent we settle such conversion in cash, could impact our liquidity; to the extent we settle in stock, may dilute our existing stockholders.
As of December 31, 2013, our indebtedness under our 3.5% Convertible Senior Notes due December 15, 2017 in the principal amount of
$143.75 million totaled $107.1 million, net of discounts. Generally, holders may convert their Convertible Notes at their option only upon satisfaction of one or more of the conditions relating to the sale price of our common stock, the trading
price per $1,000 principal amount of Convertible Notes or specified corporate events. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof, at our election. Our ability to make
payments on, or to refinance, our Convertible Notes, to incur future indebtedness, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability
to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, clinical and other factors, some of which are beyond our control. If we do not generate sufficient cash flow
from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of the Convertible Notes or on their maturity, or to fund our liquidity needs, we may be
forced to refinance all or a portion of our indebtedness, including the Convertible Notes, on or before their maturity, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be
able to affect any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other
factors, including market conditions. In addition, in the event of a default with respect to the Convertible Notes, the holders of the Convertible Notes and/or the trustee under the indenture governing these notes may accelerate the payment of our
obligations under these notes, which could have a material adverse effect on our business, financial condition or results of operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or
restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.
In addition, our significant indebtedness combined with our other financial obligations and contractual commitments could have other important
consequences. For example, it could:
|
|
•
|
|
make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions;
|
|
|
•
|
|
make us more vulnerable to adverse changes in government regulation and reimbursement;
|
|
|
•
|
|
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
|
|
|
•
|
|
place us at a competitive disadvantage compared to our competitors who have less debt; and
|
|
|
•
|
|
limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.
|
Any of these factors could materially and adversely affect our business, financial condition or results of operations. In addition, if we
incur additional indebtedness, which we are not prohibited from doing under the terms of the indenture governing the convertible senior notes, the risks related to our business and our ability to service our indebtedness would increase.
In the event the conditional conversion feature of the notes is triggered, holders of the Convertible Notes will be entitled to convert the
Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by
21
delivering solely shares of our common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of
cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a
current rather than long-term liability, which would result in a material reduction of our net working capital. The terms of our convertible senior notes permit us to settle them, upon conversion by the holders thereof, in cash, stock, or a
combination thereof. To the extent we use stock for settlement, our existing stockholders may be diluted.
We may need substantial additional funding
and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.
We currently spend more cash than we generate from operating revenue. During 2013, HeartWare generated revenue from commercial sales of the
HVAD System internationally and in the U.S. We also generated revenue from use of the HVAD System in clinical trials within the U.S. and through special access programs in other countries. Depending on a range of outcomes, especially our achievement
and continuation of regulatory approval of our products and the growth of revenue, we may need to seek additional funding in the future. Additional funding may not be available on terms favorable to us, or at all. If we raise additional funding
through the issuance of equity securities, our shares may suffer dilution. If we are unable to secure additional funding, our product development programs and our commercialization efforts would be delayed or reduced or may cease entirely.
In November 2012, we received approval to market the HVAD System in the U.S. as a bridge to heart transplantation. Our future success depends heavily on
our ability to maintain FDA approval to market our existing product for our initial indication and our ability to obtain FDA approval for any additional indications, and to market our pipeline products in the U.S., the largest medical device market
in the world.
The process of obtaining and maintaining marketing approval or clearance from the FDA for our existing and future
products, or enhancements or modifications to these products, could:
|
|
•
|
|
take a significant period of time;
|
|
|
•
|
|
require the expenditure of substantial resources;
|
|
|
•
|
|
involve rigorous pre-clinical and clinical testing;
|
|
|
•
|
|
require changes to our products;
|
|
|
•
|
|
require corrective action, including recalls, with respect to products already distributed; and
|
|
|
•
|
|
result in limitations on the indicated uses of the products.
|
Assuming we are able to file the
required FDA regulatory premarket approval applications for additional indications for our HVAD System as well as for the MVAD System and other pipeline products, there can be no assurance that we will receive the required approvals from the FDA
or
,
if we do receive the required approvals, that we will receive them on a timely basis or that we will otherwise be able to satisfy the conditions of approval, if any. The failure to receive product approval by the FDA, or any significant
delay in receipt, will have a material adverse effect on our business, financial condition or results of operations.
22
If we are unable to commence or complete successfully our U.S. trials, or if we experience significant delays
in the successful commencement or completion of our U.S. trials, our ability to obtain regulatory approval to commercialize our products within the U.S., and our ability to generate revenue, will be materially adversely affected. Delays or
inability to successfully complete trials outside of the U.S. can also negatively impact our business in a material way.
Regulatory
approvals to sell our existing and future products both in and outside of the U.S. typically require clinical trials which can be time consuming and expensive. Significant technical, bench and preclinical testing may be required prior to submitting
for regulatory authorization to commence a clinical trial. The cost, timing and outcome of any of these trials or testing may not be favorable or may be insufficient to obtain the required approvals.
Completion of any of our clinical trials, including our ongoing destination therapy trials, and initiation of new clinical trials, including
our conditionally approved thoracotomy trial, trials for our next generation MVAD System, and trials for the newly acquired SYNERGY System, could be delayed or adverse events during a trial could cause us to amend, repeat or terminate the trial. If
this were to happen, our costs associated with the trial will increase, and it will take us longer to obtain regulatory approvals and to commercialize the product, or we may never obtain regulatory approvals. Our clinical trials may also be
suspended or terminated at any time by regulatory authorities, the data safety and monitoring board, site investigational review boards, or by us including during the closing stages of enrollment of the trial and the subsequent patient data
follow-up period in the event that, for example, there should be an unacceptable level of adverse clinical events such as stroke, bleeding or pump exchanges. Any failure or significant delay in completing clinical trials for our products will
materially harm our financial results and the commercial prospects for our products.
The completion of any of our clinical trials could
be substantially delayed or prevented by several factors, including:
|
|
•
|
|
slower than expected rates of patient recruitment and enrollment, including as a result of study inclusion and exclusion criteria;
|
|
|
•
|
|
our competitors undertaking similar clinical trials at the same time as us, or having functionally comparable products that have received approval for sale;
|
|
|
•
|
|
failure of patients to complete the clinical trial;
|
|
|
•
|
|
physicians or patients preferring to use approved devices or other experimental treatments or devices rather than our devices;
|
|
|
•
|
|
prevalence and severity of adverse events and other unforeseen safety issues;
|
|
|
•
|
|
inability or unwillingness of patients or medical investigators to follow our clinical trial protocols;
|
|
|
•
|
|
inability to monitor patients adequately during or after treatment;
|
|
|
•
|
|
effectiveness of third-party registries for data collection;
|
|
|
•
|
|
risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product is effective;
|
|
|
•
|
|
governmental and regulatory delays or changes in regulatory requirements, policies or guidelines;
|
|
|
•
|
|
the availability of governmental or third party reimbursement for investigational devices;
|
|
|
•
|
|
varying interpretation of data by regulatory agencies; and
|
|
|
•
|
|
perceived lack of product efficacy following clinical trials.
|
While the U.S. is the largest
medical device market in the world, the risks described above apply to both U.S. clinical trials and regulatory approvals as well as foreign clinical trials and regulatory approvals. If we
23
cannot timely conduct foreign trials in our major target markets (to the extent required in order to market our device in such locations), such as Japan, and receive timely approval in those
jurisdictions to market our device for a variety of indications, our business will suffer.
We currently rely entirely on sales of our sole product,
the HVAD System, to generate revenue. Our existing and future products may not achieve or sustain market acceptance. In addition, any factors that negatively impact sales of this product will adversely affect our business, financial condition and
results of operations.
Our sole product is the HVAD System, which we introduced to the European market in January 2009 and which
received regulatory approval in the U.S. in late 2012. We expect to continue to derive substantially all of our revenue for several years from the sale of this product and its related devices. Accordingly, our ability to generate revenue is entirely
reliant on our ability to market and sell this product. We expect to begin to derive limited revenue from the MVAD System once it enters clinical trials; however, clinical trials of the next generation MVAD System may adversely impact revenue from
the current generation HVAD System.
Even if we obtain the necessary regulatory approvals in all jurisdictions to commercialize the HVAD
System or any other product that we may develop, our products may not gain or sustain market acceptance among physicians, patients, health care payers or the medical community.
The degree of market acceptance of any of the devices that we may develop and commercialize will depend on a number of factors, including:
|
|
•
|
|
the perceived effectiveness of the product;
|
|
|
•
|
|
the prevalence and severity of any adverse events or side effects especially as it relates to survival, quality of life, stroke, thrombus and bleeding;
|
|
|
•
|
|
potential advantages over alternative treatments or competitive products;
|
|
|
•
|
|
the strength of our marketing and distribution support;
|
|
|
•
|
|
the strength and perceived advantages of our peripherals such as the monitor, controller and batteries; and
|
|
|
•
|
|
sufficient third party coverage or reimbursement.
|
If the HVAD System, or any other product
that we may develop, does not achieve an adequate level of acceptance by physicians, patients, health care payers and the medical community, we may not generate or maintain positive gross margins and we may not become profitable or be able to
sustain profitability. If we do achieve market acceptance of our products, we may not be able to sustain it or otherwise achieve it to a degree which would support the ongoing viability of our operations.
If we are unable to manage our expected growth, we may not be able to meet market demand, generate expected benefits from the opportunities available to
us, satisfy quality regulations or commercialize our products.
We expect to continue to expand our operations and grow our research
and development, product development, quality, regulatory, manufacturing, sales, marketing and administrative operations. This expansion has placed, and is expected to continue to place, a significant strain on our management, infrastructure,
information technology, operational and financial resources. To manage continued growth and to commercialize our products, we will be required to improve existing operational, quality and financial systems, procedures and controls and expand, train
and manage our growing employee base. In addition, we will need to manage relationships with various third parties and external entities participating in our research and development efforts, clinical trials, quality systems, manufacturers,
suppliers and other organizations, including various regulatory
24
bodies in the U.S. and other jurisdictions. We may not be able to implement needed improvements in an efficient and timely manner and may discover deficiencies in existing systems and controls.
Our failure to accomplish any of these tasks could materially harm our business and prospects.
Our ability to achieve profitability from a current net
loss level will depend on our ability to increase gross revenue, manage our expenditures and reduce the per unit cost of producing the HVAD System by increasing our customer orders and manufacturing volume.
Currently, gross sales and the gross profit from sales of the HVAD System are not sufficient to cover our operating expenses. To achieve
profitability, we need to, among other things, substantially reduce the per unit cost of our products. We believe this can be achieved by decreasing our product assembly costs and increasing our manufacturing volume, which may allow for volume
purchase discounts to reduce our raw material and component costs and improve absorption of manufacturing overhead costs. If we are unable to increase sales and simultaneously reduce assembly, raw material, component and manufacturing overhead
costs, our ability to achieve profitability will continue to be severely constrained. Any increase in manufacturing volumes must be accompanied by a parallel increase in customer orders. As part of our efforts to prepare for possible increased sales
(both globally and in the U.S.), we relocated to a new manufacturing facility in Miami Lakes, Florida in 2013. Additionally, on October 17, 2013, we entered into a long-term lease for a new corporate headquarters in Framingham, Massachusetts
consisting of approximately 58,000 square feet. These facility upgrades have increased our operating expenses. Similarly, as our operations have expanded, we have incurred additional costs and added headcount to build our infrastructure, quality
systems, product pipeline, sales organization and administrative capabilities. The occurrence of one or more factors that negatively impact sales of our products, operating expenses or our ability to forecast future sales or expenses may prevent us
from achieving our desired increase in manufacturing efficiency and spending control, which would prevent us from attaining profitability.
We compete
against companies that have longer operating histories, more established or approved products and greater resources than we do, which may prevent us from achieving further market penetration or improving operating results.
Competition in the medical device industry is intense. Our products will compete against products offered by public companies, such as Thoratec
Corporation and Sunshine Heart, Inc., as well as several private companies, such as Jarvik Heart, Inc. and MicroMed Cardiovascular. Some of these competitors have significantly greater financial and human resources than we do, have established
reputations or approved products or significantly greater name recognition than we do, and have significantly larger and more established distribution channels and sales and marketing capabilities than we do. For example, Thoratec Corporation has
received marketing approval in the U.S. for HeartMate II for both destination and bridge-to-transplant indications, whereas the HVAD System is currently only approved for the bridge-to-transplant indication. We are likely to compete with new
companies in the future as additional competitors enter the market. We also face competition from other medical therapies which may focus on our target markets as well as competition from manufacturers of pharmaceutical treatments and other devices
that have not yet been developed. Competition from these companies could adversely affect our business.
In addition, our European
customers are geographically dispersed and, at this stage, a significant portion of our revenue is sourced in Germany among a small number of clinical sites, which also use competitive products. If these sites were to cease using our products or use
our products on a reduced or inconsistent basis, such events would have a material adverse effect on our financial condition and results of operations.
Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their
products. Factors affecting our competitive position include:
|
|
•
|
|
the availability of other products and procedures, such as heart transplants and pharmaceuticals;
|
|
|
•
|
|
product performance and design;
|
25
|
|
•
|
|
sales, marketing and distribution capabilities;
|
|
|
•
|
|
comparable clinical outcomes;
|
|
|
•
|
|
success and timing of new product development and introductions;
|
|
|
•
|
|
penetration into existing and new geographic markets; and
|
|
|
•
|
|
intellectual property protection.
|
We are still building our sales, marketing and distribution experience.
To develop and increase sales, distribution and marketing capabilities, we plan to continue to invest significant amounts of financial
and management resources. In developing these sales, marketing and distribution functions ourselves, we will face a number of risks, including:
|
|
•
|
|
not being able to attract and retain a significant, successful or qualified marketing or sales force;
|
|
|
•
|
|
incurring substantial costs of establishing, training and providing regulatory oversight for a marketing or sales force;
|
|
|
•
|
|
incurring substantial costs or time delays in connection with receiving approvals to sell and obtain reimbursement for our products in new markets; and
|
|
|
•
|
|
any failure to comply with all legal and regulatory requirements for sales, marketing and distribution, which are significant in the medical device industry, that could result in enforcement actions by the FDA or other
authorities that could jeopardize our ability to market our products or could subject us to substantial liability.
|
We have limited
manufacturing capabilities and personnel, and if our manufacturing facilities are unable to provide an adequate supply of products, our growth could be limited and our business could be harmed.
We currently manufacture our HVAD System at our facilities in Miami Lakes, Florida. If there were a disruption to our manufacturing facilities
or the surrounding area, for example, due to a hurricane or climate change, we would have no other means of manufacturing our HVAD System until we were able to restore the manufacturing capability at our facility or develop alternative manufacturing
facilities.
If we are unable to produce sufficient quantities of our HVAD System for sale or for use in our current and planned clinical
trials, or if our manufacturing process yields substandard product, our development and commercialization efforts would be delayed. Further, even if we are able to produce sufficient quantities of our products, we may not be able to attain
sufficient profitability on that production or any resultant sales.
We currently have limited resources, facilities and experience to
commercially manufacture our products. In order to produce our products in the quantities that we anticipate will be required to meet anticipated market demand, we will need to increase the production process and efficiency over the current level of
production. There are significant technical and regulatory challenges to increasing manufacturing capacity and efficiency, and continuing to develop commercial-scale manufacturing facilities will require the investment of additional funds and hiring
and retaining additional management and technical personnel who have the necessary manufacturing experience. We may not successfully complete any required increase in a timely or economically viable manner, or at all. If we are unable to do so, we
may not be able to produce the HVAD System in sufficient quantities to meet future demand.
If we are unable to manufacture a sufficient
or consistent supply of the HVAD System or any other product we are developing, or if we cannot do so efficiently, our revenue, business and financial prospects would be adversely affected.
26
We manufacture a Class III device implanted in the heart that subjects us to numerous risks.
There are risks associated with implanting our device in end stage heart failure patients, including, but not limited to, death, bleeding,
stroke, device malfunction and other adverse events; should our customers experience an increase in adverse events they may reduce their usage or purchase of our device; should our patients experience injury due to these events, they or regulatory
authorities may pursue legal or administrative action against us. Any of these occurrences could have a materially adverse impact on our operations and financial results and conditions as well as customer confidence in us or our products.
Our manufacturing facilities and the manufacturing facilities of our suppliers must comply with applicable regulatory requirements. If we or our suppliers
fail to achieve and maintain regulatory approval for these or additional manufacturing facilities, our business and our results of operations would be harmed.
Completion of our clinical trials and commercialization of our products require access to, or the development of, manufacturing facilities that
meet and maintain applicable U.S. and international regulatory standards to manufacture a sufficient supply of our products. In addition, the FDA must approve facilities that manufacture our products for U.S. commercial purposes, as well as the
manufacturing processes and specifications for the product, with similar, additional approvals required in order to achieve and maintain CE marking in Europe or regulatory approvals in other jurisdictions. Suppliers of components and products used
to manufacture our products must also comply with FDA and foreign regulatory requirements, which often require significant time, money, resources, record-keeping and quality assurance efforts and subject us and our suppliers to potential regulatory
inspections and stoppages. If we or our suppliers fail to comply with the regulatory requirements for our manufacturing operations, our commercialization efforts could be delayed or suspended, which would harm our business and our results of
operations.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes, which could have an adverse effect on
our business, financial condition or results of operations.
Even after products have received marketing approval or clearance from the
FDA or other regulatory bodies, those product approvals and clearances can be withdrawn due to failure to comply with regulatory standards or the occurrence of problems following initial approval whether identified through a required post-approval
study or through medical device reporting. As a device manufacturer, we are required to demonstrate and maintain compliance with a variety of regulatory requirements, including the FDA’s Quality System Regulation, or “QSR.” The QSR is
a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products, including trend analysis and corrective and
preventative actions. In addition, the U.S. federal medical device reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or
serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by
the FDA. Our failure to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection or complaint information could result in enforcement actions, including a public warning letter, a shutdown of or
restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other
sanctions, any of which could cause our business and operating results to materially suffer.
In the European Union, we are required to
maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. If we fail to continue to comply with ISO regulations, European Union
organizations may withdraw clearance to market, require a product recall or take other enforcement action.
27
Product deficiencies could result in field actions, recalls, substantial costs and write-downs; this could
also lead to delay or termination of ongoing trials.
Our products are subject to various regulatory guidelines, involve complex
technologies and are approved for a specified life. Identified quality problems, such as failure of critical components such as batteries or controllers, or the failure of third parties to supply us with sufficient conforming quantities of these
products or components, could lead to adverse clinical events that could cause us to amend, repeat or terminate clinical trials, or impact the availability of our product in the marketplace. In addition, product improvements, product redundancies or
failure to sell product before it expires could result in scrapping or expensive rework of product and our business, financial or results of operations could suffer. Product complaints, quality issues and necessary corrective and preventative
actions could result in communications to customers or patients, field actions, the scrapping, rework, recall or replacement of product, substantial costs and write-offs, and harm to our business reputation and financial results. Further these
activities could adversely affect our relationships with our customers or affect our reputation which could materially adversely affect our earnings, results and financial viability.
We operate in multiple regulatory environments that require costly and time consuming approvals.
Even if we obtain regulatory approvals in specific jurisdictions to commercialize the HVAD System or any other product that we may develop,
sales of our products in other jurisdictions will be subject to regulatory requirements that vary from country to country. The time and cost required to obtain approvals from these countries may be longer or shorter than that required for FDA
approval, and requirements for licensing may differ from those of the FDA. Some jurisdictions may even require that we conduct additional trials. Laws and regulations regarding the manufacture and sale of our products are subject to future changes,
as are administrative interpretations and policies of regulatory agencies. If we fail to comply with applicable foreign, federal, state or local market laws or regulations, we could be subject to enforcement actions. Enforcement actions could
include product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, which in each case would harm our business.
If we fail to obtain and maintain adequate level of reimbursement for our products by third party payers, there may be no commercially viable markets for
our products or the markets may be much smaller than expected.
Although our customers have generally achieved reimbursement for the
purchase of our products to date, the availability and levels of reimbursement by governmental and other third party payers affect the market for our products. Reimbursement and health care payment systems vary significantly by country, and include
both government sponsored health care and private insurance. Payers may attempt to limit coverage and the level of reimbursement of new therapeutic products or experimental devices. Government and other third party payers also continually attempt to
contain or reduce the costs of health care by challenging prices charged for health care products and services. Often, reimbursement is determined independently of and only following product approval, and may need to be renewed on a regular basis.
To obtain reimbursement or pricing approval in some countries, we may be required to produce clinical and economic data, which may
involve one or more clinical trials, that compares the cost-effectiveness of our products to other available therapies. In addition, the efficacy, safety, performance and cost-effectiveness of our products in comparison to any competing products may
determine the availability and level of reimbursement for our products.
We believe that future reimbursement may be subject to increased
restrictions both in the United States and in international markets. Future legislation, regulation or reimbursement policies of third party payers may adversely affect the demand for our existing products as well as products currently under
development and limit our ability to sell our products on a profitable basis. We cannot predict how pending or future legislative and regulatory proposals would influence the manner in which medical devices, including ours, are purchased or covered
and reimbursed.
28
On October 30, 2013, CMS issued a Decision Memo for Ventricular Assist Devices for
Bridge-to-Transplant and Destination Therapy (CAG-00432R), which updated the national coverage determination (“NCD”) for bridge-to-transplant and destination therapy VADs. The updated NCD, among other things, attempts to clarify BTT and DT
patient selection criteria. The updated NCD clarified that BTT patients, without an exemption, must be active on the Organ Procurement and Transplantation Network’s waitlist for a heart in order to be eligible for Medicare or Medicaid
reimbursement. Since the HVAD System is currently only approved in the U.S. for BTT patients, the update to the NCD creates a subset of potential HeartWare BTT patients who may no longer be eligible for Medicare and Medicaid reimbursement.
Therefore, the update may adversely affect our revenue, earnings, business or results of operation.
If reimbursement for our products is
unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, market acceptance of our products would be impaired and our future revenue would be materially adversely affected. Often reimbursement is not available for
products used in clinical trials as the relevant insurance providers may refuse to provide reimbursement for trial products on the basis that the products are “experimental” or “investigational” and do not have the requisite
regulatory approvals. As we develop next generation products, this requirement may materially adversely affect our revenue, earnings, business and stock price.
Destination therapy procedures represent an increasing share of ventricular assist device implants. Although we are currently conducting destination
therapy trials, we may be unable to submit for approval of a destination therapy indication for several years.
Hospitals must meet
specific regulatory or reimbursement requirements in order to perform destination therapy procedures. These requirements and national coverage determinations may change from time to time. We are currently conducting clinical trials to study the use
of the HVAD System for destination therapy. If reimbursement is reduced or unavailable for clinical trial cases, or physicians decline to use our products for destination therapy in the future, our market opportunities will be diminished and our
business and stock price may be adversely impacted. The number of destination therapy procedures actually performed depends on many factors, most of which are out of our direct control, including:
|
|
•
|
|
the number of sites approved for destination therapy by relevant regulatory agencies;
|
|
|
•
|
|
the clinical outcomes of destination therapy procedures;
|
|
|
•
|
|
implanting surgeons’ and referring cardiologists’ commitment to destination therapy;
|
|
|
•
|
|
the economics of ventricular assist devices for destination therapy at individual hospitals, which includes the costs of the VAD and related pre- and post-operative procedures and treatment and their reimbursement; and
|
|
|
•
|
|
the economics of hospitals not conducting a destination therapy procedure, including the costs and related reimbursements of long-term hospitalization of advance heart failure patients and alternative therapies.
|
The different outcomes of these and other factors, and their timing, may have a material and adverse effect on our future
results.
In addition, our primary competitor has received a destination therapy indication for its product. If physicians grow accustomed
to that device for destination therapy and become unwilling to use our device for this indication, our ability to participate in and benefit from this opportunity may suffer.
The long and variable sales and deployment cycles for our ventricular assist device, or VAD, systems may cause our product sales and operating results to
vary significantly from quarter-to-quarter.
Our VAD systems have lengthy sales cycles and we may incur substantial sales and marketing
expenses and expend significant effort without making a sale. Even after making the decision to purchase our VAD systems,
29
our customers often deploy our products slowly, and this time period may be extended if our products are acquired on a consignment basis, as is the case for many of our customers. In addition,
cardiac centers that buy the majority of our products are usually led by cardiac surgeons who are heavily recruited by competing centers or by centers looking to increase their profiles. When one of these surgeons moves to a new center we sometimes
experience a temporary but significant reduction in purchases by the departed center while it replaces its lead surgeon. As a result, it is difficult for us to predict the quarter in which customers may purchase our VAD systems and our product sales
and operating results may vary significantly from quarter to quarter. In addition, product purchases often lag initial expressions of interest in our product by new centers as training of the VAD team and internal hospital administrative procedures
are typically required prior to the initial implant procedures.
Adverse changes in general economic conditions in the United States and overseas could
adversely affect us.
We are subject to the risks arising from adverse changes in general economic market conditions. Many global
economies remain sluggish as they recover from a severe recession and unprecedented turmoil. The U.S. and other developed economies continue to suffer from market volatility, difficulties in the financial services sector, tight credit markets,
softness in the housing markets, concerns of inflation, reduced corporate profits and capital spending, significant job losses or slower than expected job creation, reduced consumer spending, and continuing economic uncertainties. The turmoil and
the uncertainty about future economic conditions could negatively impact our current and prospective customers, adversely affect the financial ability of governments and health insurers to pay claims, adversely impact our expenses and ability to
obtain financing of our operations, cause delays or other problems with key suppliers and increase the risk of counterparty failures. We cannot predict the timing, strength or duration of the lingering effects of the severe global economic downturn
or the timing or strength of the subsequent recovery. Healthcare spending in the United States and foreign jurisdictions has been, and is expected to continue to be, negatively affected by these economic trends. Since the sale of the HVAD System to
a new patient is generally dependent on the availability of third-party reimbursement and normally requires the patient to make a significant co-payment, the impacts of the effects of the recession on our potential customers may reduce the referrals
generated and thereby reduce our customer orders. Similarly, the impacts of the challenging economy on our existing customers may cause some of them to cease purchasing HVAD Systems and this will reduce our revenue, which in turn will make it more
difficult to achieve the per unit cost-savings which are expected to be attained through increases in our manufacturing volume.
The
severe recession has impacted the financial stability of many public and private health insurers. As a result, insurers are scrutinizing claims more rigorously and delaying or denying reimbursement more often. Although VAD procedures occur in
relatively limited numbers, the per procedure reimbursement levels may draw the attention of third-party payers. Since the sale of the HVAD System is generally dependent on the availability of third-party reimbursement, any delay or decline in
reimbursement will adversely affect our revenue.
Global market and economic conditions may exacerbate certain risks affecting our business.
International markets, especially Europe, represent a major part of our present business. Approximately 49% of our 2013 revenues were derived
from international sales and much of our marketing efforts are focused on European countries. Although not materially impacted to date, our accounts receivable in certain European countries may be subject to significant payment delays due to
government funding and reimbursement practices or limited financial flexibility of our distributors. European governments have announced or implemented austerity measures to constrain the overall level of government expenditures, which may include
reforming health care coverage and reducing health care costs. These measures will continue to exert pressure on our customers and may impact their ability to pay for product on a timely basis or to maintain their current purchasing patterns. These
adverse market and economic conditions could reduce our product sales and revenue, result in additional allowances, or reduce credit sales to our distribution network. In addition, some European and other payers require health technology assessments
or economic cost-benefit analyses to be conducted by a
30
manufacturer or third party analysis group in order to obtain or maintain reimbursement of medical devices. These analyses can be expensive and time consuming, and may not produce outcomes
favorable to us. Adverse or delayed outcomes will adversely affect our revenue.
Fluctuations in foreign currency exchange rates could adversely affect
our financial results.
Changes in foreign currency exchange rates can affect the value of our assets, liabilities, costs and revenue.
In 2013, approximately 45% of our revenue was sourced from international sales denominated in foreign currencies, mainly in Europe and principally in Euros, while most of our expenditures are incurred in U.S. dollars.
With limited exceptions, our international sales will be denominated in Euros or in local currencies, not U.S. dollars, and fluctuations
in foreign currency exchange rates, especially an appreciation of the U.S. dollar against major international currencies, will materially impact our revenue and earnings. Due to the size and stage of development of our operations and revenue,
we do not presently mitigate our exposure to exchange risk to a significant extent other than by holding the majority of our funds in U.S. dollars or U.S. dollar denominated investments.
Healthcare policy changes, including the Patient Protection and Affordable Care Act, may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal
government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the
amounts of reimbursement available for our products and could limit the acceptance and availability of our products. Moreover, as discussed in the paragraph below, the Affordable Care Act imposes significant new taxes on medical device makers such
as us. The Affordable Care Act and other proposals could have a material adverse effect on our financial position and results of operations.
On March 23, 2010, the Affordable Care Act was signed into law by President Obama. On March 30, 2010, a companion bill, the Health
Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”) was also signed into law by President Obama. Among other things, the Affordable Care Act and the Reconciliation Act (collectively, the “Acts”), when taken
together, impose a 2.3% excise tax on the sale of certain medical devices. In addition, it is possible that standard setters or regulators may address certain unique aspects of the accounting for the Acts in the future. In light of the inherent
uncertainty of how and when these Acts and other companion legislation, if any, will be implemented and applied, we are unable to fully predict the actual impact on our financial statements. Other elements of this legislation such as comparative
effectiveness research, an independent payment advisory board, transparency requirements, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may
materially impact numerous aspects of our business.
We are subject to federal and state laws prohibiting “kickbacks” and false or fraudulent
claims, which, if violated, could subject us to substantial penalties. Foreign jurisdictions in which we operate may have similar laws. Other laws such as the Foreign Corrupt Practices Act (the “FCPA”) and the U.K. Bribery Act prohibit
improper payments to government officials to induce the purchase of products or similar actions. Any challenge to or investigation into our practices under these laws are costly to defend, might result in fines and penalties and could cause adverse
publicity, thus causing harm to our business and operations. In addition, we can be held liable for our distributors’ failure to comply with these laws.
A federal law commonly known as the Medicare/Medicaid anti-kickback law, and several similar state and foreign laws, prohibit payments that are
intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws constrain our sales, marketing and other promotional activities by limiting the
kinds of financial arrangements, including sales
31
programs, we may have with hospitals, physicians or other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Because we may provide some coding and billing
information to purchasers of the HVAD System and our other products, and because we cannot assure that the government will regard any billing errors that may be made as inadvertent, these laws are potentially applicable to us. In addition, these
laws are potentially applicable to us because we provide reimbursement to healthcare professionals for training on the use of the HVAD System and our other products. Anti-kickback and false claims laws prescribe civil and criminal penalties for
noncompliance, which can be substantial.
The FCPA and the United Kingdom’s Bribery Act prohibit improper payments to government
officials to induce inappropriate behavior. In many jurisdictions, hospitals are owned or operated by governmental authorities, and physicians and administrators who are employed by the hospital may be considered to be a government official. As a
result, certain relationships with our customers could expose us to liability under these statutes. Corrupt practices and anti-bribery laws prescribe civil and criminal penalties for noncompliance, which can be substantial. Even an unsuccessful
challenge or investigation into our practices is costly to defend, and could cause adverse publicity, and thus could have a material adverse effect on our business, financial condition or results of operations.
In addition, under certain circumstances, we may be liable for the actions of our distributors to the extent they do not comply with these
laws.
If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal
penalties, which could increase our liabilities and harm our reputation or our business.
There are a number of federal and state and
foreign laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services
promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving
individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we are found to
be in violation of the privacy rules under HIPAA or similar laws (to the extent applicable to us), we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on
our business, financial condition or results of operations. European privacy laws are generally more stringent than similar laws in the U.S. Since a significant amount of our revenue arises in Europe, we may be at risk should we fail to comply with
local requirements even if we have complied with U.S. regulations.
We rely on specialized suppliers for certain components and materials, and we do
not have second-source suppliers for all of our components.
We depend on a number of suppliers to successfully manufacture sufficient
quantities of the components we use in our products, both our existing commercial products and our products in development. We rely on suppliers for various critical components including the center post, housing and impeller that are assembled into
our primary product, the HVAD System, as well as finished products that comprise our peripheral and external equipment included in the HVAD System. Lead times for our components are significant and can be up to as long as sixteen weeks and many of
our components are manufactured to very tight tolerances and specifications. We do not presently have supply agreements with the vast majority of our key suppliers but have extensive purchase orders in place with these vendors.
32
We have second-source suppliers for some, but not all, of our components. In particular, we do
not have second-source suppliers for our controllers, battery chargers and monitors. Our reliance on third-party suppliers also subjects us to other risks that could harm our business, including:
|
|
•
|
|
we do not believe that we are a major customer of many of our suppliers, in terms of the volume of components and materials that we purchase, and these suppliers may therefore give other customers’ needs higher
priority than ours or discontinue or modify components based on demand from other customers;
|
|
|
•
|
|
we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms;
|
|
|
•
|
|
some of our components are extraordinarily complex and must be manufactured to extremely tight tolerances and specifications with the result that our suppliers, especially new suppliers, may make errors in manufacturing
that could negatively affect the efficacy or safety of our products or cause our components not to be delivered on time or at all or to be delivered outside of our specifications;
|
|
|
•
|
|
the availability of second-source suppliers may be extremely limited or their implementation as a supplier may be lengthy due to the tight tolerances and specifications in which we typically operate;
|
|
|
•
|
|
switching components or changes to our components, specifications or designs may require product redesign and submission to the FDA or a PMA supplement, which can lead to production interruptions;
|
|
|
•
|
|
our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver products to us in a timely manner; and
|
|
|
•
|
|
our suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.
|
Any interruption or delay in obtaining products from our third-party suppliers, or our inability to obtain products from alternate sources at
acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competing products.
While we have identified second-source suppliers for other key components, we have not entered into written agreements with these suppliers
and we cannot assure you that we will be able to maintain our manufacturing schedule without undue delay or substantial cost if any of these arrangements is terminated.
Additionally, we may experience problems or delays in our own manufacturing and assembly processes, which may be harmful to our financial
status or reputation and, therefore, make it more difficult or expensive for us to continue with or enter into relationships with specialized suppliers. Our business plan is predicated on maintaining strong relationships and favorable supply
arrangements with a series of external parties to manufacture components of our HVAD System. If we are unsuccessful in this regard or are unable to secure or maintain agreements with these manufacturers on favorable terms or at all, then our ability
to commercialize our technology and expand our operations will be dramatically impaired.
We use external consultants and engineers to
help us develop new products and peripherals as well as components for our current products and peripherals. Many of these external projects anticipate innovation or technology development which does not currently exist and are funded on a time and
materials basis. As a result, the ability of third party contractors to develop the necessary technology in accordance with established budgets and timelines is uncertain. Failure to timely execute a development program could result in the delay or
abandonment of a new product or component or increase the cost of the activity. These outcomes could adversely impact our business, prospects and financial condition.
We may not be able to effectively protect our intellectual property rights which could have an adverse effect on our business, financial condition or
results of operations.
Our success depends in part on our ability to obtain and maintain protection in the United States and
other countries of the intellectual property relating to or incorporated into our technology and products. Our patent
33
portfolio consists of internally developed technology as well as patents and patent applications which we acquired in 2003 in connection with our purchase in bankruptcy of substantially all the
assets of Kriton Medical, Inc. and which pertain to technology used in the HVAD System. In addition, from time to time, we also acquire or license technology from third parties. As a result, we may have less complete knowledge and records with
respect to the development and ownership of the Kriton and third party technology, patents and intellectual property than we would otherwise have for technology, patents and intellectual property developed internally by us.
Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us with any
meaningful protection or any competitive advantage. Even if issued, existing or future patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from developing and marketing similar products
or limit the length of terms of patent protection we may have for our products. Further, other companies may design around technologies we have patented, licensed or developed. Moreover, changes in patent laws or their interpretation in the United
States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws
of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to
ours.
In September 2011, the Leahy-Smith America Invents Act, or the America Invents Act, was signed into law, and included a number of
significant changes to United States patent law, in part, to more closely align patent law in the U.S. with similar laws around the world. The America Invents Act transitions patent priority from a “first-to-invent” system to a
“first-to-file” system and modifies the way issued patents are challenged. Lack of precedential interpretation of the new provisions of the America Invents Act in specific cases by the U.S. Patent and Trademark Office and the courts
increases the uncertainty surrounding the effect of these changes. Accordingly, the America Invents Act and its implementation could increase the unpredictability and costs surrounding the prosecution of our patent applications and the enforcement
or defense of our issued patents and may alter the relative priority of our inventions requiring us to act more quickly to seek intellectual property protection, all of which could have a material adverse effect on our business and financial
condition.
We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if
we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.
We
rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the
medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:
|
|
•
|
|
assert claims of infringement;
|
|
|
•
|
|
protect our trade secrets or know-how; or
|
|
|
•
|
|
determine the enforceability, scope and validity of the proprietary rights of others.
|
Any
lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and puts our patent
applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The
occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.
34
Claims that our current or future products infringe or misappropriate the proprietary rights of others could
adversely affect our ability to sell those products and cause us to incur additional costs.
Substantial litigation over intellectual
property rights exists in the medical device industry. We expect that we could be increasingly subject to third-party infringement claims as our revenue increases, the number of technology holders grows and the functionality of products and
technology in different industry segments overlaps. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may allegedly infringe. For example, we are aware of certain patents
and patent applications owned by third parties that cover different aspects of mechanical circulatory support, methodologies for the pumping of blood and other fluids and the related devices and technologies. Any of these third parties might assert
a claim of infringement against us.
There can be no certainty that litigation will not arise in relation to third party intellectual
property or, if it does arise, whether or not it will be determined in a manner which is favorable to us. Any litigation, regardless of its outcome, would likely result in the expenditure of significant financial resources and the diversion of
management’s time and resources. In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or
selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms or at all. If a
successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our revenue may decrease substantially and we could be
exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order
mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our reputation, business, financial condition or
results of operations.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and
products could be adversely affected.
In addition to patented technology, we rely on a combination of non-patented proprietary
technology, trade secrets, processes and procedures, technical knowledge and know-how accumulated or acquired since inception. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or
misappropriated. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees, consultants, scientific advisors and third parties. These agreements may be breached, and we
may not have adequate remedies for any such breach. In addition, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use
intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. If our intellectual property is disclosed or misappropriated, it would harm our ability to protect our
rights and have a material adverse effect on our business, financial condition and results of operations.
We may be subject to claims that we or our
employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers of our employees.
We employ individuals who were previously employed at other medical device companies, including our competitors or potential competitors. To
the extent that our employees are involved in research areas that are similar to those in which they were involved with their former employers, we may be subject to claims that such employees have inadvertently or otherwise used or disclosed the
alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to defend against such claims.
35
If we fail to successfully introduce next generation products and improvements to our existing product, our
future growth may suffer.
As part of our strategy, we intend to develop and introduce a number of next generation products and make
enhancements to our existing product. We also intend to develop new indications for our existing products. If we are slow in bringing new products to market or otherwise fail to successfully develop, manufacture, design clinical trials for,
introduce or commercialize any of these new products, product improvements or new indications on a timely basis, or if they are not well accepted by the market, our future growth may suffer. For example, we are developing a next generation pump
based on our MVAD System technology, designing a new and improved controller and initiating a clinical trial for a thoracotomy placement, among others. If we are not successful in these efforts, among others, our future business opportunities and
growth potential will suffer.
Business development activities are inherently risky, and integrating our operations with businesses we may acquire may
be difficult and, if unsuccessfully executed, may have a material adverse effect on our business.
We may, selectively, from time to
time engage in business development activities, such as strategic acquisitions like our acquisition of CircuLite, Inc. on December 1, 2013, investments and alliances in order to complement or expand our current business or enter into a new
product area. These transactions can involve significant challenges and risks, including that the transaction does not advance our business strategy or fails to produce a satisfactory return on our investment. While our evaluation of any potential
acquisition or investment includes business, legal and financial due diligence with the goal of identifying and evaluating the material risks involved, we may be unsuccessful in ascertaining or evaluating all risks. These plans are also subject to
the availability of appropriate opportunities and competition from other companies seeking similar opportunities. Moreover, the success of any strategic effort may be affected by a number of factors, including our ability to properly assess and
value the potential business opportunity, and to integrate it into our business.
Each acquisition involves the integration of a separate
company that was previously operated independently and has different systems, processes, policies and cultures. The process of combining companies may be disruptive to our businesses and may cause an interruption of, or a loss of momentum in, both
of the businesses as a result of the following difficulties, among others:
|
|
•
|
|
loss of key customers or employees;
|
|
|
•
|
|
difficulty in standardizing information and other systems;
|
|
|
•
|
|
difficulty in integrating operations, including consolidating facilities and infrastructure;
|
|
|
•
|
|
diversion of management’s attention from the day-to-day business of our Company as a result of the need to deal with the foregoing or other disruptions and difficulties;
|
|
|
•
|
|
loss of key customers or employees;
|
|
|
•
|
|
risks associated with acquiring intellectual property;
|
|
|
•
|
|
risks associated with entering markets in which we have no or limited prior experience;
|
|
|
•
|
|
dilutive issuances of equity securities, which may be sold at a discount to market price;
|
|
|
•
|
|
the use of significant amounts of cash;
|
|
|
•
|
|
the assumption of significant liabilities;
|
|
|
•
|
|
increased operating costs or reduced earnings;
|
|
|
•
|
|
failure to realize potential operating synergies;
|
|
|
•
|
|
financing obtained on unfavorable terms;
|
|
|
•
|
|
large, one-time expenses;
|
36
|
|
•
|
|
payment or performance milestones to or sharing of revenue or profits with third parties; and
|
|
|
•
|
|
the creation of certain intangible assets, including goodwill, the write-down of which in future periods may result in significant charges to earnings.
|
Any of these factors could materially harm our stock price, business, financial condition or results of operations. If we are unable to
successfully integrate strategic acquisitions in a timely manner, our business and our growth strategies could be negatively affected. Even if we are able to successfully complete the integration of the operations of other companies or businesses we
may acquire in the future, we may not be able to realize all or any of the benefits that we expect to result from the integration, either in monetary terms or in a timely manner.
We may choose to license or acquire products or technologies, in addition to or instead of developing them ourselves. We cannot be certain that these
efforts will be successful or that we will realize any revenue from them.
We license or acquire products and technologies under
licensing, purchasing and other agreements. In addition to active internal and external research and development efforts, we may seek, from time to time, to license or acquire new products or technologies to supplement or replace products or
technologies. License and acquisition of technology involves numerous risks, including:
|
|
•
|
|
the inability to successfully license or acquire the product or technology;
|
|
|
•
|
|
the incurrence of significant financial commitments to third parties;
|
|
|
•
|
|
the payment of performance milestones to or sharing of revenue or profits with third parties;
|
|
|
•
|
|
the risks associated with licensing or acquiring intellectual property, including the need to defend against charges of misappropriation or infringement of patent or other proprietary rights of third parties;
|
|
|
•
|
|
the risks associated with third parties terminating licenses arrangements if we do not perform as required under the agreements; and
|
|
|
•
|
|
the creation of certain intangible assets, including goodwill, the write-down of which in future periods may result in significant charges to earnings.
|
In addition, third parties may breach or terminate their license agreements with us or fail to conduct their activities in connection with our
relationships in a timely manner. If we or our counterparties terminate or breach any of our licenses we may:
|
|
•
|
|
lose our right to develop and market certain intellectual property;
|
|
|
•
|
|
experience delays in the development or commercialization of our product;
|
|
|
•
|
|
litigate or arbitrate disputes, both of which are time-consuming and expensive and have uncertain outcomes;
|
|
|
•
|
|
incur liability for damages; and
|
|
|
•
|
|
be unable to obtain any other similar licenses on acceptable terms, if at all.
|
Any of these
factors could materially harm our stock price, business, financial condition or results of operations.
37
If we cannot successfully manage the additional business and regulatory risks that result from our expansion
into multiple foreign markets, we may experience an adverse impact to our business, financial condition or results of operations.
We
have aggressively expanded, and expect to continue to expand, into additional foreign markets. This expansion will subject us to new business and regulatory risks, including, but not limited to:
|
|
•
|
|
failure to fulfill foreign regulatory requirements on a timely basis or at all to market the HVAD System or other future products;
|
|
|
•
|
|
availability of, and changes in, reimbursement within prevailing foreign health care payment systems;
|
|
|
•
|
|
adapting to the differing laws and regulations, business and clinical practices, and patient preferences in foreign countries;
|
|
|
•
|
|
difficulties in managing foreign relationships and operations, including any relationships that we may establish with foreign partners, distributors or sales or marketing agents;
|
|
|
•
|
|
compliance with the FCPA and the United Kingdom’s Bribery Act;
|
|
|
•
|
|
differing levels of protection for intellectual property rights in some countries;
|
|
|
•
|
|
difficulty in collecting accounts receivable and longer collection periods;
|
|
|
•
|
|
costs of enforcing contractual obligations in foreign jurisdictions;
|
|
|
•
|
|
recessions in economies outside of the United States;
|
|
|
•
|
|
political instability and unexpected changes in diplomatic and trade relationships;
|
|
|
•
|
|
currency exchange rate fluctuations; and
|
|
|
•
|
|
potentially adverse tax consequences, including our ability to interpret local tax rules and implement appropriate tax treatment/collection.
|
We will be impacted by these additional business risks, which may adversely impact our business, financial condition and results of
operations. In addition, expansion into additional foreign markets imposes additional burdens on our small executive and administrative personnel, research and sales department and generally limited managerial resources. Our efforts to introduce our
current or future products into additional foreign markets may not be successful, in which case we may have expended significant resources without realizing the expected benefit. Ultimately, the investments required for expansion into additional
foreign markets could exceed the returns, if any, generated from this expansion.
The taxation and customs requirements, together with
other applicable laws and regulations of certain foreign jurisdictions, can be inherently complex and subject to differing interpretation by local authorities. We are subject to the risk that either we have misinterpreted applicable laws and
regulations, or that foreign authorities may take inconsistent, unclear or changing positions on local law, customs practices or rules. In the event that we have misinterpreted any of the above, or that foreign authorities take positions contrary to
ours, we may incur liabilities that may differ materially from the amounts accrued in our financial statements.
The competition for qualified
personnel is particularly intense in our industry. In addition, we have added or made changes to executive personnel during 2013 and may continue to do so as our needs evolve. If we are unable to retain or hire executive and other key personnel, we
may not be able to sustain or grow our business.
Our ability to operate successfully and manage our potential future growth depends
significantly upon our ability to attract, retain and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial, legal and financial personnel. We have hired and expect to continue to hire a
substantial number of employees in these areas and others in order to support U.S. commercialization and the expected growth in our global business. During 2013, we filled key open positions, including Vice President, Research &
38
Development. However, we face intense competition for qualified personnel, and we may not be able to attract, retain and motivate these individuals. We compete for talent with numerous companies,
as well as universities and non-profit research organizations. Our future success also depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, management of
our operations and maintenance of a cohesive and stable environment. Although we have employment and incentive compensation agreements with all of our executive officers and incentive and compensation plans for our other personnel providing them
with various economic incentives to remain employed with us, these incentives may not be sufficient to retain them. We do not maintain key man life insurance on the lives of any of the members of our senior management. The loss of key personnel for
any reason or our inability to hire, retain and motivate additional qualified personnel in the future could prevent us from sustaining or growing our business.
Product liability claims could damage our reputation or adversely affect our business.
The design, manufacture and marketing of human medical devices, particularly implantable life-sustaining medical devices, carries an inherent
risk of product liability claims and other damage claims. Product liability and similar claims may be expensive to defend and may result in large judgments against us. A product liability or other damages claim, product recall or product misuse,
regardless of the ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages and could seriously harm our business. We maintain clinical trial insurance and limited product liability insurance.
We cannot be certain that insurance will be sufficient to cover all claims that may be made against us. Our insurance policies generally must be renewed on an annual basis. We may not be able to maintain or increase insurance on acceptable terms or
at reasonable costs. A successful claim brought against us in excess, or outside of our insurance coverage could seriously harm our financial condition or results of operations. Generally, our clinical trials will be conducted in (and our commercial
sales will be made to sites in respect of) patients with serious life-threatening diseases for whom conventional treatments have been unsuccessful or for whom no conventional treatment exists, and, during the course of treatment, these patients
could suffer adverse medical effects or die for reasons that may or may not be related to our medical devices. Any of these events could result in a claim of liability. Claims against us, regardless of their merit, could result in significant awards
against us that could materially adversely harm our business, financial condition, results of operations or prospects. A product liability or other damages claim, product recall or product misuse involving any type of VAD, but especially involving
one of ours, could also materially and adversely damage our reputation and the perception of VADs generally and affect our ability to attract and retain customers, irrespective of whether or not the claim or recall was meritorious.
Investors could lose confidence in our financial reports, and the value of our shares may be adversely affected, if our internal controls over financial
reporting are found not to be effective by management or by our independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.
Management’s assessment of our internal controls over financial reporting is discussed in Item 9A of this Annual Report on
Form 10-K for the year ended December 31, 2013. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure
controls and procedures, and internal control over financial reporting as of December 31, 2013. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures, and internal control over financial reporting are effective as of December 31, 2013. Our independent registered public accounting firm has issued their attestation report on our internal control over financial
reporting, which is included in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2013.
We
continue to evaluate our existing internal controls over financial reporting against the standards adopted by the Public Company Accounting Oversight Board, or PCAOB. During the course of our ongoing evaluation of the internal controls, we may
identify areas requiring improvement and will design enhanced processes and
39
controls to address any issues identified through this review. As we continue to commercialize our products, we will need to enhance our accounting and financial controls functions, particularly
as they relate to accounting for revenue and inventory, and we will need to add more personnel to our financial reporting group. Remediating any deficiencies, significant deficiencies or material weaknesses that have been or could be identified by
us or our independent registered public accounting firm may require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we implement to remedy any deficiencies will
effectively mitigate or remedy deficiencies. The existence of one or more deficiencies or weaknesses could affect the accuracy and timing of our financial reporting. Investors could lose confidence in our financial reports, and the value of our
shares may be adversely affected if our internal controls over financial reporting are found not to be effective by management or by our independent registered public accounting firm or if we make disclosure of existing or potential significant
deficiencies or material weaknesses in those controls.
Risks Related to Our Common Stock
The price of our common stock may fluctuate significantly.
Shares of our common stock were listed for trading on The NASDAQ Stock Market LLC on February 24, 2009. Trading commenced the following
day. Prior to that time, there had been no public market for our common stock in the United States. The closing price of our shares of common stock traded on The NASDAQ Stock Market LLC has ranged from U.S. $69.99 to U.S. $99.19 in the period from
January 1, 2013 to December 31, 2013. The price of our common stock could fluctuate significantly for many reasons, including the following:
|
|
•
|
|
future announcements or new information concerning us or our competitors, reimbursement, or the potential market for our products;
|
|
|
•
|
|
regulatory developments (such as the status of FDA approval of our device for the bridge-to-transplant indication), enforcement actions bearing on advertising, manufacturing, marketing or sales, and disclosure regarding
completed, ongoing or future clinical trials;
|
|
|
•
|
|
quarterly variations in operating results and our liquidity, which we have experienced in the past and expect to experience in the future;
|
|
|
•
|
|
introduction of new products or changes in product pricing policies by us or our competitors;
|
|
|
•
|
|
acquisition or loss of significant customers, distributors or suppliers;
|
|
|
•
|
|
technology acquisitions or divestitures;
|
|
|
•
|
|
changes in third party reimbursement practices;
|
|
|
•
|
|
fluctuations of investor interest in the medical device sector; and
|
|
|
•
|
|
fluctuations in the economy, world political events, foreign currency movements or general market conditions.
|
In addition, stock markets in general and the market for shares of healthcare stocks in particular, have experienced extreme price and volume
fluctuations in recent years, fluctuations that frequently have been unrelated to the operating performance of the affected companies. These broad market fluctuations may adversely affect the market price of our shares. The market price of our
shares could decline below its current price and the market price of our shares may fluctuate significantly in the future. These fluctuations may be unrelated to our performance.
Since 2005, interests in HeartWare were traded on the Australian Securities Exchange (the “ASX”) in the form of CHESS Depositary
Interests, or CDIs, each representing one thirty-fifth of a share of our common stock. On September 17, 2013, HeartWare was officially delisted from the ASX meaning that interests in HeartWare are no longer publicly traded on the ASX. The
absence of a listing on the ASX may reduce the ability of Australian residents to own shares of our common stock, which may impact our ability to raise capital in Australia.
40
We do not intend to pay cash dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividends on our shares, and we currently do not anticipate paying any cash dividends in the
foreseeable future. We intend to retain any earnings to finance the development and expansion of our products and business. Accordingly, our stockholders will not realize a return on their investment unless the trading price of our shares
appreciates.
Anti-takeover provisions in our charter documents and Delaware law may discourage a third party from acquiring us, which could limit our
stockholders’ opportunities to sell their shares at a premium.
Certain provisions of our Certificate of Incorporation and By-laws
may be considered as having an anti-takeover effect, such as those provisions establishing a classified board of directors, consisting of three classes of directors, and requiring that directors be removed only for cause, authorizing the board of
directors to issue from time to time any series of preferred stock and fix the designation, powers, preferences and rights of the shares of such series of preferred stock, prohibiting stockholders from acting by written consent in lieu of a meeting,
requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a stockholders’ meeting, and prohibiting stockholders from calling a special meeting of stockholders. We are also subject to
Section 203 of the Delaware General Corporation Law, which in general prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder
became an interested stockholder, unless certain conditions specified therein are satisfied. These provisions could have the effect of depriving our stockholders of an opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.
We may undergo an “ownership
change” for U.S. federal income tax purposes, which would limit our ability to utilize net operating losses from prior tax years.
For U.S. federal income tax purposes, we have incurred net losses since our inception. If we undergo an “ownership change” for
U.S. federal income tax purposes, our ability to utilize net operating loss carry-forwards from prior years to reduce taxable income in future tax years might be limited by operation of the Internal Revenue Code, either by limiting the amount
of net operating losses that can be utilized to offset taxable income in a given year, or in total over the entire carry-forward period. Certain changes in the ownership of our common stock may result in an ownership change sufficient to limit the
availability of our net operating losses.