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4-Traders Homepage  >  Equities  >  Nasdaq  >  HeartWare International Inc    HTWR

Delayed Quote. Delayed  - 07/29 09:39:02 pm
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07/28 HEARTWARE : reports 2Q loss
07/28 HEARTWARE : Reports $68.7 Million In Second Quarter 2016 Revenue
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HEARTWARE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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07/28/2016 | 11:05pm CEST
The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited interim condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q. Certain abbreviated key terms have the meanings
defined elsewhere in this Quarterly Report on Form 10-Q.

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. We have one operating segment,
which designs, manufactures and markets our medical devices. We are
headquartered in Framingham, Massachusetts and have facilities in Miami Lakes,
Florida, Arden Hills, Minnesota and Hannover, Germany.

About Heart Failure


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 then pumps the blood 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, or
CHF.

The HeartWare Ventricular Assist System


HeartWare currently manufactures and sells the HeartWare Ventricular Assist
System (the "HVAD System"), which includes a ventricular assist device ("VAD")
or blood pump, patient accessories and surgical tools, and 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.

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
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. As of June 30, 2016, there have been over 11,000 implants of the
HVAD System in patients at 340 health care sites in 47 countries.

Bridge-to-Transplant


FDA approval for a bridge-to-transplant ("BTT") indication was based on the
results of our 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, as
well as a Continued Access Protocol ("CAP"). 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 94% survival at six
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 were granted by the FDA under a CAP,
encompassing more than 250 additional patients.



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To help assure the continued safety and effectiveness of an approved device, FDA
requires a post-approval study ("PAS") as a condition of approval to assess
device performance in a real-world setting. HeartWare's PAS is a two-year
registry study consisting of 600 patients who received an HVAD post approval and
an additional 600 control patients derived from a contemporaneous group of
patients entered into the INTERMACS database, receiving a continuous flow,
intracorporeal left VAD ("LVAD"). 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 trial 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 for the HVAD System. Designed to enroll up to
450 patients at 50 U.S. hospitals, this non-inferiority study is a randomized,
controlled, unblinded, multicenter 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 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 was followed to the
primary endpoint at two years and will undergo subsequent follow-up for a
five-year period post implant. In April 2015, we announced that ENDURANCE had
achieved its primary endpoint.

In August 2015, we completed enrollment of ENDURANCE2, a supplemental trial to
study the clinical benefits of enhanced management of mean arterial pressure in
patients with an HVAD System. In ENDURANCE2, HeartWare enrolled 310 patients
receiving the HVAD System, as well as 155 control patients using a 2:1
randomization consistent with the original ENDURANCE protocol. HeartWare intends
to incorporate the data from both ENDURANCE and ENDURANCE2 into an anticipated
Premarket Approval Supplement Application seeking approval of the HVAD System
for a destination therapy indication.

Other Clinical Activities


In the fourth quarter of 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 for the HVAD System. Enrollment
was completed in August 2014 with six patients at five clinical sites. All
patients reached the primary endpoint and we are currently preparing the
submission for market authorization for a BTT indication in Japan.

In addition, in the fourth quarter of 2013, HeartWare received conditional approval from the FDA for a prospective, controlled, unblinded, multicenter clinical trial to evaluate the thoracotomy implant technique for the HVAD System. We began enrollment in this study in January 2015 and completed enrollment in April 2016.

MVAD System


Beyond the HVAD System, we are developing 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. The MVAD pump is less than one-half the size of
the HVAD pump and can provide partial or full support. The MVAD System is
designed to allow for a variety of configurations and surgical placements with
the goal of further reducing surgical invasiveness while producing superior
clinical results.

In July 2015, we initiated a multicenter, prospective, non-randomized,
single-arm CE Mark trial to evaluate the clinical safety and performance of the
MVAD System for the treatment of advanced heart failure. In September 2015, we
voluntarily paused the MVAD CE Mark clinical trial to address an MVAD controller
manufacturing issue. Subsequent to that action, during the fourth quarter of
2015 and in consultation with study investigators, we began evaluating MVAD
System performance and reported adverse events in certain clinical trial
patients, including events that showed evidence of pump thrombus. We are
currently evaluating various aspects of the MVAD System design to determine
whether changes should be made. Should design changes be implemented, initiation
of a new trial would likely be required. The timetable for updating affected
regulatory filings and restarting clinical implants cannot be reliably projected
at this time.

CircuLite

On December 1, 2013, we acquired CircuLite, Inc., the developer of the CircuLite
Circulatory Support System, a partial-support system designed to treat
less-sick, ambulatory, patients with chronic heart failure who are not yet
inotrope-dependent. The CircuLite Surgical System is designed for long-term
support and is intended to reduce the heart's workload while improving blood
flow to vital



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organs. The CircuLite System experienced issues that arose after its commercial
release and caused the loss of its CE marking in the European Union in March
2014. In January 2015, we discontinued development of the CircuLite micro pump
and have focused our efforts on a version of our MVAD pump for our
partial-assist program. Thus, delays to the development and regulatory approval
of the MVAD System will affect the timing of the development and regulatory
approval of the CircuLite System. The next-generation endovascular system, which
is expected to be implanted collaboratively by cardiologists and surgeons in a
hybrid catheterization ("cath") lab setting, offers an interventional approach
to circulatory support. The CircuLite Circulatory Support System would offer
less-invasive, and ultimately interventional, options to patients with
earlier-stage heart failure.

FDA Warning Letter


We received a warning letter from the FDA, dated June 2, 2014, following an
inspection of our Miami Lakes, Florida facility conducted in January 2014. The
FDA letter cited four categories for us to address: (1) procedures for
validating device design, including device labeling; (2) procedures for
implementing corrective and preventive action (CAPA); (3) maintaining records
related to investigations; and (4) validation of computer software used as part
of production or quality systems. The warning letter did not require any action
by physicians or patients and did not restrict the use of our devices.

We sent the FDA our initial response to the warning letter within the required
fifteen business days of receipt and committed to undertaking certain quality
system improvements and providing the FDA with periodic updates. Since 2014 and
continuing in 2016, we implemented systemic changes and organizational
enhancements to address the four warning letter items and related quality
systems. We have established teams to review and address the items cited by the
FDA and have engaged external subject matter experts to assist in assessment and
remediation efforts. As we continue to evaluate our quality systems, it is
possible that we may need to take additional actions including the possibility
of voluntary product recalls when necessary to ensure patient safety and
effective performance of the HVAD System.

Termination of Valtech Business Combination Agreement


On September 1, 2015, we entered into a Business Combination Agreement (the
"BCA") by and among the Company, Valtech, HW Global, Inc. ("Holdco"), HW Merger
Sub, Inc., Valor Merger Sub Ltd. and Valor Shareholder Representative, LLC,
pursuant to which we and Valtech proposed to effect a strategic combination of
our respective businesses under Holdco, subject to certain closing conditions.
Effective January 28, 2016, we terminated the BCA pursuant to the terms of the
BCA by delivering written notice to the other parties. After entering into the
BCA and pursuant to the terms of the BCA, we loaned Valtech an aggregate
principal amount of $3 million in interim funding at an interest rate of 6% per
annum in $1 million increments in each of November 2015, December 2015 and
January 2016. In connection with the termination provisions of the BCA, we
loaned Valtech an additional $30 million on February 1, 2016 also in the form of
a convertible promissory note with an interest rate of 6% per annum. We have no
current contractual obligations to further fund Valtech.

Pending Transaction with Medtronic


On June 27, 2016, we announced that we entered into an agreement to be acquired
by Medtronic summarized in Note 1 of Notes to Condensed Consolidated Financial
Statements. If the Merger is consummated, we will become a wholly-owned
subsidiary of Medtronic. Accordingly this Quarterly Report on Form 10-Q, which
assumes we remain a standalone business, should be read with the understanding
that, should the Merger be completed, Medtronic will have the power to control
the conduct of our business.

Amended and Restated Bylaws


On June 26, 2016, the Company board amended and restated our bylaws (the
"Bylaws") with immediate effect. The Bylaws were amended and restated to provide
that unless the Company consents in writing to the selection of an alternative
forum, the sole and exclusive forum for (i) any derivative action or proceeding
brought on behalf of the Company, (ii) any action asserting a claim of breach of
a fiduciary duty owed by any director, officer or other employee of the Company
to the Company or the Company's stockholders, (iii) any action asserting a claim
arising pursuant to any provision of the DGCL or the Company's Certificate of
Incorporation (the "Certificate") or Bylaws, (iv) any action to interpret,
apply, enforce or determine the validity of the Certificate or the Bylaws or
(v) any action asserting a claim governed by the internal affairs doctrine shall
be the Court of Chancery of the State of Delaware, or, if the Court of Chancery
of the State of Delaware does not have jurisdiction, the Superior Court of the
State of Delaware.



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Summary of Recent Financial Performance


Second quarter 2016 total revenue improved by 25% compared to the first quarter
of 2016, including sequential improvements of 23% and 28%, in U.S. and
International sales, respectively. Revenue in the U.S. reflected a rebound in
bridge-to-transplantation activity following relatively light implant volumes in
the first quarter, and international revenue improved as a result on an increase
in implant activity in key regions outside of Germany, while German implant
activity was relatively stable compared to the first quarter of 2016. These
results are indicative of volatility we may experience in any given quarter due
to variability in patient implants, as well as factors including competitive
launches and clinical trial activities, and are not necessarily indicators of
long-term trends.

Total revenue decreased 7% to $68.7 million for the quarter ended June 30, 2016
compared to $73.6 million during the second quarter of 2015. U.S. revenue
decreased by 5% on a unit sales decline of 5%, while international revenue
decreased by 19% corresponding to a decrease in international unit sales of 10%.
Comparative second quarter revenue was impacted by completion of enrollment in
our ENDURANCE2 clinical trial in August 2015, increased competition from a
competitor's international launch of a new device and continuing enrollment of a
competitor's U.S. IDE study for its new device. Currency changes favorably
impacted total revenue by $0.2 million, or approximately 0.3%, during the second
quarter of 2016.

A total of 715 HVAD Systems were sold during the second quarter of 2016,
compared to 578 units sold during the first quarter of 2016 and 773 units sold
in the second quarter of 2015, reflecting the ongoing commercial launch of a
competitive product internationally and clinical trials in the U.S. Due to these
activities we anticipate that our quarterly revenue and market share may be
subject to greater volatility in the near-term. As of June 30, 2016, we had 134
customers in the United States and 196 customers internationally.

We realized an increase in gross margin percentage, to 65.3% in the second
quarter of 2016 compared to 58.2% in the first quarter of 2016. This increase
compared to the first quarter of 2016 was primarily a result of increased sales
and a $2.3 million field action charge related to the anticipated replacement of
certain controllers that was recorded in the first quarter. Our gross margin
percentage of sales for the second quarter of 2016 decreased compared to 65.7%
in the second quarter of 2015 and was primarily attributable to a decrease in
sales.

Combined selling, general, administrative, research and development expenses in
the second quarter of 2016 increased to $51.3 million, compared to $47.3 million
in the first quarter of 2016. The majority of the increase over the first
quarter of 2016 was due to $2.7 million of Medtronic-related transaction
expenses. Combined operating expenses decreased $4.9 million compared to $56.2
million in the second quarter of 2015, reflecting our intention to narrow the
focus of research and development investments with an emphasis on making
corrections to MVAD, further enhancing HVAD's pump and peripherals performance
and early submission for a PMA approval of HVAD for destination therapy.

Second quarter operating expenses included $0.6 million of expense associated with a change in the estimated fair value of contingent consideration obligations related to our acquisition of CircuLite, and $0.3 million of acquired intangible asset amortization compared to $2.2 million and $0.4 million, respectively in the second quarter of 2015.

These summary results are more fully described in Results of Operations below.

Critical Accounting Policies and Estimates


We prepare our financial statements in accordance with accounting principles
generally accepted in the United States. We are required to adopt various
accounting policies and to make estimates and assumptions in preparing our
financial statements that affect the reported amounts of our assets,
liabilities, revenue and expenses. On an ongoing basis, we evaluate our
estimates and assumptions. We base our estimates on our historical experience to
the extent practicable and on various other assumptions that we believe are
reasonable under the circumstances and at the time they are made. If our
assumptions prove inaccurate or if our future results are not consistent with
our historical experience, we may be required to make adjustments in our
policies that affect our reported results. Our significant accounting policies
are disclosed in Note 3 to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2015 ("2015
Annual Report on Form 10-K") filed with the Securities and Exchange Commission
on February 26, 2016. During the six months ended June 30, 2016, there were no
significant changes to any of our significant accounting policies.

Our most critical accounting policies and estimates include: revenue
recognition, inventory capitalization and valuation, accounting for share-based
compensation, measurement of fair value, valuation of tax assets and
liabilities, reserves, long-lived assets, intangible assets and goodwill, and
contingent consideration. We also have other key accounting policies that are
less subjective and, therefore, their application is less subject to variations
that would have a material impact on our reported results of operations. There
have been no material changes to our critical accounting policies and estimates
from the information provided in Part II, Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, included in our 2015
Annual Report on Form 10-K.



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Results of Operations

Three and six months ended June 30, 2016 and 2015

Revenue, net

In the three and six months ended June 30, 2016 and 2015, we generated revenue through commercial sales and clinical trials.




                    Three Months Ended                          Six Months Ended
                         June 30,                                   June 30,
                     2016          2015        Change          2016          2015         Change
                      (in thousands)                             (in thousands)
  United States   $   40,984     $ 42,922           (5 )%    $  74,332     $  85,111          (13 )%
  International       27,736       30,647          (10 )%       49,462        58,479          (15 )%

  Total           $   68,720     $ 73,569           (7 )%    $ 123,794     $ 143,590          (14 )%



Total revenue was $68.7 million for the quarter ended June 30, 2016, reflecting
a 5% decrease in revenue in the United States due to completion of the Company's
ENDURANCE2 clinical trial in the third quarter of 2015 and increased competition
from a competitor's clinical trial, as well as a 10% decrease in our
international revenue due, in part, to increased competition from a competitor's
launch of a new device. Currency changes favorably impacted total revenue growth
by approximately $0.2 million, or 0.3%, during the second quarter of 2016.

Our U.S. revenue was $41.0 million for the quarter ended June 30, 2016 compared
to $42.9 million during the quarter ended June 30, 2015. A total of 371 pumps
were sold in the U.S. during the second quarter of 2016 compared to 391 pumps
sold in the same period of 2015. While U.S. revenue trailed the prior year
quarter due clinical trial and competitive reasons, revenue in the U.S.
reflected a rebound in bridge-to-transplantation activity following relatively
light implant volume in the first quarter. U.S. revenue in the period ended
June 30, 2015 included revenue from 45 HVAD Systems sold under the Company's
ENDURANCE2 clinical trial.

Our international revenue was $27.7 million for the quarter ended June 30, 2016
compared to $30.6 million during the quarter ended June 30, 2015. A total of 344
pumps were sold internationally during the second quarter of 2016 compared to
382 pumps sold in the same period of 2015. While international revenue trailed
the prior year quarter primarily due to competitive European market conditions,
international revenue for the second quarter of 2016 increased compared to the
first quarter of 2016, as market activity increased in Europe.

In the second quarter ended June 30, 2016, approximately 40% of our net revenue
was denominated in foreign currencies including principally the Euro and British
pound, which was relatively unchanged compared to the same period in 2015.
Movements in foreign currency exchange rates have had an effect on our reported
revenue amounts in the past and could have a significant favorable or
unfavorable impact on our reported revenue amounts in the future.

We intend to generate and grow commercial revenue from product sales as we
further expand our sales and marketing efforts on a global basis. Future product
sales are dependent on many factors, including perception of product
performance, competition and market acceptance among physicians, patients,
health care payers and the medical community as well as our capacity to meet
customer demand by manufacturing sufficient quantities of our products.

Cost of Revenue

Cost of revenue includes costs associated with manufacturing and distributing our products and consists of direct materials, labor and overhead expenses allocated to the manufacturing process, provisions for excess or obsolete inventory, and shipping costs. Cost of revenue totaled approximately $46.8 million and $47.3 million in the six months ended June 30, 2016 and 2015, respectively.




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Gross profit and gross margin percentage are as follows:



                               Three Months Ended            Six Months Ended
                                    June 30,                     June 30,
                               2016           2015          2016          2015
                                 (in thousands)               (in thousands)
            Gross profit     $  44,894      $ 48,341      $ 76,947      $ 96,322
            Gross margin %        65.3 %        65.7 %        62.2 %        67.1 %

The decrease in gross margin percentage for the six months ended June 30, 2016, compared to the same period in 2015, was primarily a result of field action costs of $3.2 million, and decreased sales volume.

Selling, General and Administrative


Selling, general and administrative expenses include costs associated with
selling and marketing our products and the general corporate administration of
the Company. These costs are primarily related to salaries and wages and related
employee costs, travel, marketing, external consultants and contractors, legal
and accounting fees and general infrastructure costs, and include all operating
costs not associated with or otherwise classified as research and development
costs or cost of revenue.



                                              For the Three Months Ended June 30,                   Six Months Ended June 30,
                                            2016                  2015           Change          2016            2015        Change
                                                  (in thousands)                                   (in thousands)
Selling, general and administrative
expenses                                $      22,780         $      22,247            2 %    $   44,254       $ 44,176            0 %
% of operating expenses, excluding
changes in fair value of contingent
consideration                                      45 %                  41 %                         45 %           41 %


The increase of $0.5 million for the three months ended June 30, 2016 as
compared to the three months ended June 30, 2015 is primarily due to $2.7
million of Medtronic-related transaction costs and $1.0 million of increased
personnel-related costs, partially offset by a $0.9 million reduction in
expenses associated with the suspension of the medical device excise tax, $1.5
million reduction in stock-based compensation expense and a reduction in all
other expenses of $0.7 million.

The increase of $0.1 million for the six months ended June 30, 2016 as compared
to the six months ended June 30, 2015 includes $2.7 million of Medtronic-related
transaction costs and $2.1 million of personnel-related costs. Offsetting
expense decreases include approximately $0.7 million of CircuLite-related
restructuring charges in 2015 resulting from lease exit costs, contract
termination costs, severance costs and asset impairment charges, non-cash
share-based compensation expense of $2.3 million and a $1.8 million reduction in
expenses associated with the suspension of the medical device excise tax. All
other operating expenses increased by approximately $0.2 million.

Research and Development


Research and development expenses are the direct and indirect costs associated
with developing our products prior to commercialization, including the costs of
operating clinical trials, and are expensed as incurred. These expenses
fluctuate based on project-level activity and consist primarily of salaries and
wages and related employee costs of our research and development, clinical and
regulatory staffs, external research and development costs, and materials and
expenses associated with clinical trials. Research and development expenses also
include most costs associated with our compliance with FDA regulations.
Additional costs include travel, facilities and overhead allocations.



                                             For the Three Months Ended June 30,                  Six Months Ended June 30,
                                           2016                2015            Change         2016           2015         Change
                                                (in thousands)                                  (in thousands)

Research and development expenses $ 27,878 $ 31,702

        -12 %    $  53,099      $ 62,969           -16 %
% of operating expenses, excluding
changes in fair value of contingent
consideration                                    55 %                59 %                          55 %          59 %


The net decrease of $3.8 million for the three months ended June 30, 2016 as
compared to the three months ended June 30, 2015 resulted from a decrease in
overall research and development project expenses of $1.6 million, clinical
trial costs of $1.4 million and share-based compensation of $0.9 million. All
other expenses net to a decrease of 0.1 million. In general, these decreases
reflect our intention to narrow the focus of research and development
investments with an emphasis on making corrections to MVAD, further enhancing
HVAD's pump and peripherals performance and working toward early submission for
a PMA approval of HVAD for destination therapy.



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The net decrease of $9.9 million for the six months ended June 30, 2016 as
compared to the six months ended June 30, 2015 resulted primarily from decreases
in overall research and development project expenses of $4.3 million, clinical
trial costs of $1.9 million, non-cash share-based compensation expense of $1.8
million and restructuring costs of $2.2 million. All other expenses resulted in
an increase of $0.3 million. The restructuring charges associated with the
CircuLite acquisition were $0 and $2.2 million in the six months ended June 30,
2016 and 2015, respectively. The charges recorded in 2015 included fixed asset
impairment, contract termination fees, severance costs and lease exit costs in
connection with our decision to cease activities at our facility in Aachen,
Germany.

We expect that research and development expenses will continue to represent a
significant portion of our operating expenses for the foreseeable future as we
continue to incur substantial development costs related to our next-generation
products, including the Pal controller, the MVAD System, the CircuLite System
and certain early research initiatives. We also expect to incur substantial
costs for clinical trials for the HVAD System in new markets and expanded
indications and for the MVAD System both in Europe and the United States, as
well as ongoing clinical trial expenses associated with bridge-to-transplant
post-approval study requirements and ongoing patient follow-up related to the
ENDURANCE and LATERAL clinical trials.

Change in Fair Value of Contingent Consideration


On December 1, 2013, we acquired CircuLite, Inc. using a combination of cash and
stock. In addition to initial consideration paid at closing, the former
CircuLite security-holders may be entitled to receive additional shares of
HeartWare common stock (or cash, in certain cases, at our discretion) upon the
achievement of certain specified performance milestones and royalty payments. We
calculate the estimated fair value of the contingent consideration on a
quarterly basis.

In the three months ended June 30, 2016, we recorded a $0.6 million charge for
the increase in the estimated fair value of the contingent consideration since
March 31, 2016. In the six months ended June 30, 2016, we recorded a $1.2
million adjustment for the increase in the estimated fair value of the
contingent consideration since December 31, 2015. The change in the fair value
of the contingent consideration in the three and six months ended June 30, 2016
was due to the effect of the passage of time on the fair value measurement.

In the three months ended June 30, 2015, we recorded a $2.2 million adjustment
for the increase in the estimated fair value of the contingent consideration
since March 31, 2015. In the six months ended June 30, 2015, we recorded a $4.3
million adjustment for the increase in the estimated fair value of the
contingent consideration since December 31, 2014. The change in the fair value
of the contingent consideration in the three and six months ended June 30, 2015
was due to accretion of the liability due to the passage of time.

Determining the estimated fair value of the contingent consideration requires
significant management judgment or estimation. The estimated fair value is
calculated using the income approach, with significant inputs that include
various revenue assumptions, discount rates and applying a probability to each
outcome. Material changes in any of these inputs could result in a significantly
higher or lower fair value measurement. Potential valuation adjustments will be
made in future accounting periods as additional information becomes available,
including, among other items, progress toward developing the CircuLite System,
as well as revenue and milestone targets as compared to our current projections.
Adjustments associated with changes in the estimated fair value of the
contingent consideration are presented on a separate line item on our
consolidated statements of operations.

Foreign Exchange


We generate a substantial portion of our revenue and collect receivables in
foreign currencies. Fluctuations in the exchange rate of the U.S. dollar against
the Euro, British Pound and Australian dollar can result in foreign currency
exchange gains and losses that may significantly affect our financial results.
Continued fluctuation of these exchange rates could result in financial results
that are not comparable from quarter to quarter. The "Brexit" referendum,
whereupon Britain voted to leave the European Economic Community (EU), caused
the British Pound to fall approximately 10% against the U.S. dollar. This
decline may have an ongoing negative impact on our United Kingdom sales, which
comprised approximately 7% of our first half 2016 international revenues.

In the three months ended June 30, 2016, our net foreign exchange loss totaled
approximately $1.4 million, compared to a net gain of approximately $0.8 million
in the same period of 2015.

In the six months ended June 30, 2016, our net foreign exchange loss totaled approximately $0.5 million, compared to net foreign exchange losses of approximately $2.9 million in the same period of 2015.

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In 2016 and 2015, the majority of our realized and unrealized foreign exchange
gains and losses resulted from the settlement of certain balance sheet accounts,
primarily accounts receivable that were denominated in foreign currencies, and
the remeasurement to U.S. dollars at period end of certain balance sheet
accounts, denominated in foreign currencies, primarily the Euro. We expect to
continue to realize foreign exchange gains and losses for the foreseeable future
as a significant portion of our sales is denominated in foreign currencies. We
do not currently utilize foreign currency contracts to manage foreign exchange
risks.

Interest Expense

Interest expense primarily consists of interest incurred on the principal amount
of our convertible senior notes issued in December 2010 and May 2015,
amortization of the related discount and amortization of the portion of the
deferred financing costs allocated to the debt component. The discount on the
convertible senior notes and the deferred financing costs are being amortized to
interest expense through the maturity dates of the convertible senior notes
using the effective interest method.

In the three months ended June 30, 2016, interest expense was approximately $3.8
million, which included $1.3 million of interest incurred on the principal
amount of the convertible notes and $2.5 million of non-cash amortization of the
discount and deferred financing costs.

In the three months ended June 30, 2015, interest expense was approximately $3.5
million, which included $1.3 million of interest incurred on the principal
amount of the convertible notes and $2.2 million of non-cash amortization of the
discount and deferred financing costs.

In the six months ended June 30, 2016, interest expense was approximately $7.5
million, which included $2.5 million of interest incurred on the principal
amount of the convertible notes at the stated coupon rates and $5.0 million of
non-cash amortization of the discount and deferred financing costs.

In the six months ended June 30, 2015, interest expense was approximately $7.0
million, which included $2.6 million of interest incurred on the principal
amount of the convertible notes at the stated coupon rates and $4.4 million of
non-cash amortization of the discount and deferred financing costs.

Investment Income, net


Investment income is primarily derived from the outstanding Valtech Convertible
Notes, financial investments and cash and short-term deposit accounts held in
the U.S. The amortization of premium on our financial investments is also
included in investment income, net. Investment income, net was approximately
$0.9 million and $1.6 million, respectively, in the three and six months ended
June 30, 2016, compared to $0.1 million and $0.3 million, respectively, in the
same period in the prior year, the increase of which is primarily due to net
interest related to the outstanding Valtech Convertible Notes. We continue to
experience low interest rates on our deposits and available-for-sale
investments.

Income Taxes


We are subject to taxation in the United States and jurisdictions outside of the
United States. These jurisdictions have different marginal tax rates. Foreign
earnings are considered to be permanently reinvested in operations outside the
U.S. and therefore are not subject to U.S. income taxes until repatriated. As of
December 31, 2015, we had no unrepatriated foreign earnings. We have incurred
significant U.S. losses since inception, however, changes in issued capital and
share ownership, as well as other factors, may limit our ability to utilize any
net operating loss carry-forwards, and therefore a 100% valuation allowance has
been recorded against our net deferred tax assets in the United States and
Australia. For the three and six months ended June 30, 2016, our tax provision
includes estimated foreign taxes in jurisdictions where wholly owned
subsidiaries may be subject to current taxes.

Liquidity and Capital Resources

As of June 30, 2016, our cash and cash equivalents combined with short-term available-for-sale investments were approximately $185.0 million as compared to $243.6 million at December 31, 2015.

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Following is a summary of our cash flow activities for the six months ended
June 30, 2016 and 2015:



                                                              Six Months Ended June 30,
                                                               2016                2015
                                                                   (in thousands)
Net cash used in operating activities                      $     (25,387 )       $  (2,501 )
Net cash (used in) provided by investing activities              (20,628 )  

2,842

Net cash provided by financing activities                             -     

75,659

Effect of exchange rate changes on cash and cash
equivalents                                                          209    

2,276

Net (decrease) increase in cash and cash equivalents $ (45,806 )

$ 78,276

Cash Used in Operating Activities


For the six months ended June 30, 2016, cash used in operating activities
included a net loss of approximately $28.3 million, adjustments for non-cash
items totaling $19.4 million and cash used in working capital of $16.5 million.
The net loss was driven by normal operating activities including the sale of the
HVAD System in the United States and abroad, a charge for the increase in the
fair value of contingent consideration, interest expense and foreign exchange
losses. Adjustments for non-cash items primarily consisted of $8.6 million of
share-based compensation, $4.1 million of depreciation and amortization on
long-lived assets, $4.7 million of amortization of the discount on our
convertible notes and $1.2 million for the increase in the fair value of
contingent consideration related to the CircuLite acquisition. The decrease in
cash from changes in working capital primarily included $11.7 million for the
decrease in accrued liabilities driven by various field actions and payout of
2015 bonuses, an increase in accounts receivable of $3.1 million primarily due
to increased revenues, and an increase in prepaid expenses and other assets of
$3.6 million due to inventory prepayments and long-term receivables. These
amounts were partially offset by a decrease in inventories of $2.3 million.

For the six months ended June 30, 2015, cash used in operating activities
included a net loss of approximately $41.9 million, adjustments for non-cash
items totaling $44.2 million and cash used in working capital of $4.8 million.
The net loss was driven by normal operating activities including the sale of the
HVAD System in the United States and abroad, the loss on extinguishment of
long-term debt, a charge for the increase in the fair value of contingent
consideration, interest expense and foreign exchanges losses. Adjustments for
non-cash items primarily consisted of $12.7 million of share-based compensation,
$4.4 million of depreciation and amortization on long-lived assets, $4.2 million
of amortization of the discount on our convertible notes, $4.3 million for the
increase in the fair value of contingent consideration related to the CircuLite
acquisition and $1.1 million for the impairment of fixed assets. The decrease in
cash from changes in working capital included $4.9 million for the decrease in
accrued liabilities, $2.4 million for the payment of trade accounts payable, and
an increase in prepaid expenses and other assets of $0.4 million. These amounts
were partially offset by decreases in accounts receivable and inventory totaling
$2.7 million.

Cash Used in Investing Activities


In the six months ended June 30, 2016, net cash used in investing activities
included loans to Valtech aggregating $31.0 million, net maturities of
securities aggregating $13.2 million, $2.4 million to acquire property, plant
and equipment and $0.7 million for intellectual property.

In the six months ended June 30, 2015, net cash provided by investing activities
included maturities of available-for-sale securities (net of purchases)
aggregating $5.5 million. This amount was partially offset by cash usages of
$2.1 million to acquire property, plant and equipment and $0.8 million for
intellectual property.

Cash Provided by Financing Activities


In the six months ended June 30, 2015, cash provided by financing activities was
primarily the result of the net cash proceeds from the issuance of our 1.75%,
2021 Notes. In May 2015, we issued our 1.75%, 2021 Notes with an aggregate
principal amount of $202.4 million in exchange for a portion of our outstanding
3.5%, 2017 Notes with an aggregate principal amount $101.3 million and net cash
proceeds of approximately $75.5 million, after paying offering costs. Interest
on the 2021 Notes is payable semiannually in arrears on June 15 and December 15
of each year, beginning on December 15, 2015. The 2021 Notes will mature on
December 15, 2021, unless earlier repurchased by the Company, converted, or
redeemed.

The exercise of stock options in the six months ended June 30, 2016 and 2015 resulted in cash proceeds of approximately $0 million and $0.03 million, respectively.




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Operating Capital and Capital Expenditure Requirements


We have incurred operating losses to date and anticipate that we will continue
to consume cash and incur substantial net losses as we expand our sales and
marketing capabilities, develop new products and seek regulatory approvals for
expanded indications of the HVAD System in the United States. For the remainder
of 2016, cash on hand is expected to be used primarily to fund our ongoing
operations, including:



  •   expanding our sales and marketing capabilities on a global basis;




  •   growing market penetration, particularly in the U.S.;



• continued product development, including development of the MVAD pump and

         Pal controller;




    •    preclinical and clinical costs relating to the MVAD pump, and clinical
         trials related to expanded indications of the HVAD System;




  •   post-approval monitoring related to the HVAD System;



• regulatory and other compliance functions, including activities to enhance

our quality systems in response to the warning letter we received from the

         FDA in June 2014;




    •    replacement of product in the field as a result of ongoing and potential
         future field actions;




  •   responding to litigation claims;




    •    expand work-in-process and finished goods inventory to support ongoing
         operations;



• strategic activities intended to expand our access to new technologies;




  •   transaction costs associated with Medtronic merger




  •   planned investments in infrastructure to support our growth; and




  •   general working capital.


Our convertible notes bear interest at a rate of 1.75% or 3.5% per annum,
payable semi-annually in arrears on June 15 and December 15 of each year. To
date, all interest payments have been paid on a timely basis. Based on the
outstanding principal amount of our convertible senior notes at June 30, 2016,
the next semi-annual interest payment is due on December 15, 2016 and will be
approximately $2.5 million. This amount is expected to be paid from cash on hand
if the notes are not earlier redeemed.

We believe cash on hand and investment balances as of June 30, 2016 are
sufficient to support our planned operations for at least the next twelve
months. At June 30, 2016, approximately $3.9 million of our cash on hand was
held in foreign locations, including Australia, Germany and the United Kingdom.
To date, the Company has not had unremitted foreign earnings and has not
incurred U.S. federal and state income taxes related to repatriated earnings. As
our operations in our foreign subsidiaries grow, we may generate foreign
earnings. Any repatriation of those earnings to the United States would likely
result in us incurring federal and state income taxes. We currently plan to
permanently reinvest any earnings of our foreign subsidiaries.

Because of the numerous risks and uncertainties associated with the development
of medical devices, we are unable to estimate the exact amounts of capital
outlays and operating expenditures necessary to maintain regulatory approvals,
fund commercial expansion, and develop and obtain regulatory approvals for new
products. Our future capital requirements will depend on many factors, including
but not limited to the following:



• implementation of systemic improvements necessary to satisfactorily

         address the observations cited in the June 2, 2014 warning letter we
         received from the FDA;



• commercial acceptance of our products and our response to competitive

         pressures;



• reimbursement of our products by governmental agencies and third-party

         payers;



• costs to manufacture and ensure regulatory compliance of our products;




  •   expenses required to operate multiple clinical trials;



• further product research and development for next-generation products and

expanding indications for our products as well as efforts to sustain and

         implement incremental improvements to existing products;




  •   expanding our sales and marketing capabilities on a global basis;




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• broadening our infrastructure in order to meet the needs of our growing

         operations, including regulatory compliance;




    •    replacement of product in the field as a result of ongoing and potential
         future field actions;



• expenses related to funding and integrating strategic investments,

         acquisitions and collaborative arrangements;




    •    payment, if the moratorium is lifted, of the 2.3% excise tax on gross

revenue from the sale of our medical devices in the United States imposed

         by the Patient Protection and Affordable Care Act;




    •    payment of our convertible notes upon maturity, if not converted or
         refinanced; and



• complying with the requirements related to being a public company in the

         U.S.


Contractual Obligations

With the exception of the items discussed below during the six months ended
June 30, 2016, there were no material changes outside the ordinary course of
business to material contractual obligations provided in Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and included in our 2015 Annual Report on Form 10-K filed with the
SEC on February 26, 2016.

Pending Transaction with Medtronic


On June 27, 2016, we announced that we entered into an agreement to be acquired
by Medtronic summarized in Note 1 of Notes to Condensed Consolidated Financial
Statements.

Amendments to Employment Agreements


On June 26, 2016, the Company and Heartware, Inc., the Company's wholly-owned
subsidiary, entered into letter amendments ("Letter Amendments") to the
employment agreements with each of the Company's senior officers. Pursuant to
the Letter Amendments, the amount of severance payable to each senior officer if
he or she is terminated without "Cause" or for "Good Reason" coincident with or
within 18 months after a "Change in Control" (each as defined in the applicable
employment agreement) is calculated based on the officer's current base salary
plus current target annual cash bonus assuming 100% corporate and individual
achievement. Prior to the letter amendments, the amount payable upon such a
termination of employment was calculated based on current base salary plus the
amount most recently paid as an annual bonus. This description is qualified in
its entirety by reference to the copies of the Letter Amendments filed as
Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, and 10.7 to the Company's Current
Report on Form 8-K filed with the SEC on June 27, 2016.



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EBIT 2016 -49,3 M
Net income 2016 -63,3 M
Debt 2016 56,3 M
Yield 2016 -
P/E ratio 2016 -
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Number of Analysts 13
Average target price 50,1 $
Spread / Average Target -13%
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Douglas Evan Godshall President, CEO, Executive Director & MD
Ray Larkin Chairman
Peter F. McAree Chief Financial Officer, Treasurer & Senior VP
Jeffrey A. LaRose Chief Scientific Officer & Executive VP
Katrin Leadley Chief Medical Officer
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