Heart Assist Companies Position for Longevity

Recently, all three major players in the ventricular assist device market have consolidated. In May of this year, Baxter International merged its Novacor VAD business into World Heart. Not long after, Thoratec Laboratories acquired the ThermoCardiosystems division of Thermo Electron. Each deal had a different primary motive, but the companies all share a common goal of positioning their businesses for a long and expensive development process.

In medical devices today, consolidation tends to happen for two reasons. In mature product segments, successful companies consolidate from a position of strength to maintain their market dominance. In nascent segments, lesser players often merge in order to gain the resources to withstand high R&D costs and the expense of building market share. Generally, one type of deal precedes the other, but lately, the ventricular assist device (VAD) market has seen both kinds of deals at once, evidencing the rapid evolution of the market, and pointing out just how little time small players have to achieve critical mass.

Recently, all three major players in the ventricular assist device market have consolidated. In May of this year, Baxter International Inc. merged its Novacor VAD business into publicly traded Canadian company World Heart Corp. [See Deal]. Not long after, Thoratec Laboratories Corp. acquired the Thermo Cardiosystems Inc. (TCI) division of Thermo Electron Corp. [See Deal]. Each deal had a different primary motive; but the companies all share a common goal of positioning their businesses for a long and expensive development process.

Ventricular assist devices are implants designed to perform the pumping of the left and sometimes the right ventricles of the heart, in congestive heart failure patients where hearts are gradually losing their ability to function. First generation devices like Thoratec's biventricular VAD System, two versions of Thermo Cardiosystems' HeartMateleft ventricular assist device (LVAD) and Baxter's Novacor pump are partially implanted, with certain components on the outside of the body. These devices have only received FDA approval for temporary uses, such as recovery following open-heart surgery or sustaining the lives of patients who are candidates for heart transplantation while they wait for a donor heart. This last market theoretically includes 44,000 patients in the US that compete for 2,000 donor hearts each year, but the market is really much more complex. The VAD patient population is winnowed down by ineligibility factors like co-morbidities.

Companies are beginning to realize that the bridge-to-transplant indication, which has created a market with real revenues of $100 million and products targeted to transplant centers, is but a bridge to a much larger market that can be served by some of the same technologies, i.e. the alternative to transplant market. Here, companies are not only after the proportion of the 44,000 patients that need, but don't get, donor hearts, but also a chunk of the 4-5 million congestive heart failure patients in the US, 50% of whom are likely to die within 5 years if they don't get a new heart.

Recently, two major events have occurred to begin to make the alternative to transplant indication a reality. Thermo Cardiosystems has almost completed the arduous enrollment process for a major clinical trial—it has recruited 106 out of 140 patients, for its REMATCH (Randomized Evaluation of Mechanical Assistance for the Treatment of Congestive Heart Failure) trial, designed to evaluate the efficacy, safety and cost-effectiveness of the TCI VAD in patients that are not eligible for heart transplant due to age or disease. TCI hopes the trial will provide the basis for FDA approval of its electric HeartMate IIleft ventricular assist system as an alternative to transplant. Enrollment in the trial has been a slow process for TCI, but the Health Care Financing Administration's recent policy providing Medicare reimbursement for patients in clinical trials is a boon for the company, particularly since it seeks to enroll patients between the ages of 65 and 72.

But the movement of the VAD field towards long-term, even permanent implants presents technological challenges. For permanent devices, what's required is an entirely implantable device without infection-prone tubes or wires that protrude from the body. Furthermore, the mechanical demands of a permanent implant that does what the heart does are many, requiring a great deal of time and investment. World Heart reports that it has spend $66.5 million on R&D for its HeartSaver VAD, which is still in preclinical trials. Thoratec reckons it will need $75 million to complete the projects it has slated for development and Edwards Lifesciences Corp. was spending $7 million a year on development of future generations of Novacor.

In fact, boosting earnings per share by off-loading an R&D intensive product was the motivating force behind Edwards' deal with World Heart. World Heart is building a completely implantable pulsatile ventricular assist device that has been long in development. While clinical debate continues about whether miniature rotary flow pumps that provide blood continuously will be safe and efficacious over the long term, World Heart is taking the more difficult route of providing pulsatile blood flow that duplicates that of the heart in a device that is wireless. The company is on its sixth prototype, having had to work out a variety of issues including a problem with the biomaterial used for device membranes. For its part, Edwards' first generation Novacordevice suffered from the perception that it had a higher rate of thromboembolic events than other devices. Its worldwide sales were only $10 million, $5 million in the US.

In a deal that gets NovacorR&D expenses off the P&L and still gives Edwards future rights to products, Edwards will provide World Heart with $20 million in cash, and get stock in its US subsidiary that is exchangeable for almost 25% of the company, which has no sales force of its own. The deal also grants worldwide distribution rights for the devices of both companies to Edwards.

Thoratec's deal with Thermo Cardiosystems likewise had a certain financial motivation to it but represents a different kind of consolidation: two leading companies solidifying a strong marketing position through a combined effort. The deal, a tax-free exchange of stock which results in Thoratec shareholders holding 43% of the new company, creates a new company that holds 95% of the bridge to transplant market, with combined sales across all product lines of $130-$140 million. Keith Grossman, president and CEO of Thoratec, says the deal was driven by the opportunity to create strategic critical mass, both in terms of financial market capitalization and in the cardiovascular market. "The combination gives us a spectrum of solutions for congestive heart failure that translates into diverse customer call points with cardiologists," he says. Thoratec has the only approved VAD that offers biventricular support; it is also one of the best options for smaller patients, since the bulk of the device remains on the outside of the body. In development, it has an implantable rotary flow pump, acquired when it purchased Nimbus Inc. in 1996. In addition to two versions of HeartMateon the market, Thermo Cardiosystems is developing a third-generation HeartMate III, an implantable centrifugal pump that uses non-contacting, magnetic bearings. Grossman believes the company is thus positioned to serve a variety of types of patients with a breadth of options for cardiologists.

Opportunistically, Abiomed Inc. , developer of an artificial heart replacement, which overlaps somewhat with the VAD market, also recently acquired a financially strapped competitor, BeneCor Heart Systems, a spin-off from Pennsylvania State University . [See Deal]. If this trend continues, there will be plenty of deal fodder in the fifteen or so other developers of permanent VAD implant developers in academia and industry, including MicroMed Technology Inc. , MicroMedical Inc.of Australia, MedQuest Products Inc. , Kriton Medical Inc. , Terumo Corp. , Arrow International Inc. , Jarvik Research Inc. , and the Cleveland Clinic Foundation .