htw who

Bioshares Report 26 Oct......I really like the bit about possible future divi payments (nice).

Ventracor....Success Now Within Reach

Ventracor (VCR: 62.5 cents) has trod a long and difficult road since the company first
launched plans to develop its own mechanical heart pump in 1998. Having spent over $150
million since the company was formed, with the majority to fund the development of the
VentrAssist device, the reality of having created a successful international medical device
business is now within reach. Bioshares attended the company’s AGM in Brisbane this
week where talk of even payment of dividends to the company’s patient shareholders was
being entertained as an approaching issue for the company to consider.
Up to 270 implants this year
As of Tuesday this week, the company had implanted 158 of its left ventricular assist
devices (LVADs) to patients with end stage heart failure. This financial year is likely to be
a pivotal year for the company, the ‘tipping point’, as it expects to implant between 170 –
270 heart pumps, generating as estimated revenue stream of between $17 million – $27
million for the year working on a device sale price of $100,000.
It is a brave move by the company to be forecasting future sales of its devices. This is
likely being driven by the confidence the company has in achieving the target range it has
released, but also by the company’s poorly performing share price, which has fallen by
50% this year.
One of the problems the company has is its large cash burn, generating a loss of $36
million last year, and the need to revisit the market on a regular basis to fund its development
work. Our estimate is that this burn rate will fall during the course of this year
although will still leave the company with a net loss of around $25 million at the end of this
financial year with about $23 million in cash reserves.
To bring the company to a breakeven point, we estimate it will need to sell approximately
600 pumps a year. For the company to become highly successful it needs the LVAD market
to break open and there are a number of factors in its favour that may stimulate this market
demand.
US market driver
The US market is clearly vital for Ventracor. This is because the LVAD and the implant
procedure are fully reimbursed by the healthcare system. There are approximately 2000
heart transplants conducted in the US each year and about 40% of those patients are
implanted with an LVAD device.
However, that market is set for strong growth with the expected approval of the Heartmate
II for bridge to transplant from Ventracor’s competitor Thoratec. There are two categories
of LVAD procedures: the bridge to transplant (BTT), which is a temporary implant for
patients awaiting a heart transplant; and destination therapy (DT) as a permanent implant.
The Heartmate II is a significant improvement upon existing approved LVADs in the US.
And arguably the Ventracor device is an improvement on the
Heartmate II device, being a third generation device.
Ventracor’s heart pump is approved for sale in Europe and Australia
and in the US it is about two years behind the Thoratec
Heartmate II in being approved for bridge to transplant use.
The market for BTT recipients is not limited to the 2000 heart
transplants conducted each year. Some patients are too ill to be
considered for a heart transplant, but an LVAD has the potential
to improve their health and make them viable for a heart transplant.
Once reliable LVADs become available for BTT, the indication
between BTT and destination therapy could become blurred
as cardiologists become more comfortable with recommending
LVAD use.
In 2006, Thoratec generated revenue of US$105 million from LVAD
sales. With destination therapy use, the market may potentially
increase to over US$500 million in coming years. Both Throratec
and Ventracor are very well placed, being the two clear leaders in
this market.
Ventracor is currently conducting a 140 patient BTT trial in the
US, where payment for each device implanted is received and 11
patients have so far been enrolled. In the DT trial, five patients
have been enrolled with an expected 120 from the 180 patients to
be enrolled to receive a VentrAssist system. Devices used in all
US trials generate full product income for Ventracor.
European market
In the last financial year, about 400 LVADs were sold into Europe
in a market that has the capacity to increase 10-fold. Last year
Ventracor sold 23 LVADs into Europe and so far this year has sold
16, gaining market share from competitors. Both Thoratec and
Berlin Heart are existing competitors in this market. However, sales
are restricted by the lack of reimbursement, with reimbursement
currently in the UK, Germany and Scandinavia. Nevertheless, there
is a push to see the products reimbursed in France, The Netherlands
and Belgium, and Ventracor is behind the push to put on
additional centers to conduct the LVAD implants. Ventracor has
put trained people in13 centres in Europe to conduct the implant
procedure since the device was approved there in December 2006.
Other markets
There are four centers in Australia that conduct the LVAD procedure.
The devices are currently paid out of the hospital budget
which has a set limit of LVAD implants they can conduct each
year, estimated at around 40 in total. The company is currently in
the process of gaining reimbursement for the device and procedure
in Australia, where it would be covered by private health
insurers if it is successful. There is also an intention to explore
new opportunities in Honk Kong and India.
Future improvements
As the market grows for LVADs, more funds will go towards building
next generation devices, which include improvements such as
fully implantable systems and improved battery life. Infection remains
an issue for recipients, with the site of the cable connection
through the skin being the main cause, although the company says it is becoming better at reducing the incidence. Recent improvements
in the device have included a detachable external cable,
which previously has caused serious problems when caught
by external objects, and a large reduction in the external back pack
carried by the patient.
Summary
Ventracor is currently capitalized $188 million with an estimated
$38 million in cash. The market for LVADs currently supports the
development of the VentrAssist device, however it is the anticipated
growth in this market that has the potential to turn Ventracor
into a very successful medical device business. There are two
leading players in this market, being the established Thoratec and
the emerging Ventracor business, which will be very competitive
against the market leader.
The Ventracor LVAD device appears to work very well and reliably,
having been implanted now into almost 160 recipients. In previous
trials it has shown to increase one year survival to 74% in end
stage heart failure patient recipients, where 50% survival might be
historically expected. Significantly, it has also been shown to improve
some patients to a level where the device can be explanted
once the natural heart has been unloaded and allowed to repair.
The competition from stem cell treatment is real, although may be
another five to ten years away from being an established therapy,
and may also be used in conjunction with LVADs to remove loading
from the heart as the heart muscle regrows.
Ventracor is a well managed business that is moving into the final
stage of building a profitable and successful international medical
business. That the development of this program has been achieved
in only nine years is an impressive effort. The share price weakness
over the year provides an attractive investment option into
this later stage medical device stock.
It is still not without risks, including the need to grow the current
market for such devices, risk from the US regulatory approval process,
the risk from competitors and the risk associated with the use
and sale of such life support devices.

Bioshares recommendation: Speculative Buy Class A
Ventracor has been added to the Bioshares Model Portfolio at 62.5 cents.