Medical Device Link.

Originally Published MX September/October 2005

COVER STORY

Interview by Steve Halasey

In the medical technology industry, companies that expect to survive must be not only technologically adept, but also robust—able to endure even the most difficult of challenges that can befall a growing corporate entity.

One leader who knows firsthand the challenges of growing a medtech company with an emerging technology is D. Keith Grossman, who has served as president and CEO of Thoratec Corp. (Pleasanton, CA) since January 1996 and as a member of the company's board of directors since February 1996. A veteran executive with more than 15 years of experience in both medical device and pharmaceutical companies, Grossman has had a great deal to do with establishing Thoratec as the dominant player in the field of cardiac-assist devices.

Thoratec president and CEO D. Keith Grossman on the business of supporting healthcare's sickest patients

As a case in point, consider the protracted market progress of Thoratec's HeartMate left ventricular assist device (LVAD) as a long-term permanent implant—a use that the company terms destination therapy. FDA review and approval took a full year, and the Centers for Medicare and Medicaid Services (CMS; Baltimore) took twice as long, finally issuing a favorable national coverage decision for destination therapy in October 2003.

As a result of such delays, Thoratec endured some difficult moments during 2004. HeartMate's new indication was slow to get off the ground, and the company's share price took a significant hit in the middle of the year, dropping more than a quarter of its value in a single day. But under Grossman's leadership—and on the strength of improved reimbursement coding and two increases in the CMS payment rate for destination therapy—Thoratec's share price has come roaring back. Recently, shares of the company's stock were trading at their highest rate since September 2003.

In August, Grossman announced his intention to step down from his positions as president and CEO. He intends to remain active during the search for and transition to a successor, and will continue serving as a director of the company. In this interview with MX editor-in-chief Steve Halasey, Grossman discusses the elements of Thoratec's business strategy that have enabled the company to maintain its market-dominating position while continuing to develop and improve its lifesaving technology. He describes as well the company's distinctive approaches to IP protection, obtaining reimbursement coverage, and involving the clinical community.

MX: Over the years, Thoratec has had a lot of interaction with reviewers at FDA. How would you gauge the regulatory climate for cardiac-assist devices and how does it affect companies in this field, including those that are working to develop artificial hearts?

D. Keith Grossman: Well, the regulatory climate is of course tough for devices like ours. These are active blood pumps, life-supporting devices, and are very complex technologies. So you would expect a fairly rigorous regulatory environment, which is exactly what we have.

In my view, there is not much of a connection between what FDA does or doesn't do with total artificial heart devices and the world of ventricular-assist devices (VADs). An artificial heart is a very different kind of technology, and it's designed for very different kinds of patients.

We have implanted, on the other hand, in the area of 10,000 pumps over the years, with patients anywhere from a few weeks out to four and five years along.

In general, the regulatory environment is one that, while difficult, is improving. I think it will get better. I expect FDA will continue to look for ways to work with the industry and clinicians to abbreviate the time-to-market for these technologies.

The pivotal trial design for HeartMate II that was recently approved was a great example of this, and is really revolutionary in a number of ways. While certainly we deserve some credit for bringing to FDA a good technology with an innovative trial design, the agency has done a nice job of trying to look for new ways to get these devices approved. I think we will continue to see that particular trend.

How important has Thoratec's progress been for helping FDA to understand cardiac-assist technologies and to devise regulatory approaches appropriate to such devices? Is the expertise at FDA strong enough to understand this field well?

I think so. FDA has to be a jack-of-all-trades, and it is dealing with innovators and trial sponsors who are masters of their own fields. You never expect FDA to know every technology as well as the sponsor of that technology. But given the length of time that LVADs have been in clinical evaluation for uses like bridge-to-transplant and destination therapy and recovery, FDA has had quite a lot of experience looking at the data related to these devices. There are some pretty talented people there who have a lot of experience with these technologies. So I would say they have a pretty thorough understanding.

FDA investigators are becoming more comfortable with extrapolating results. When you are the first one with a new technology and a new therapy, there is no way to extrapolate from one patient to 10 and from 10 to 100, or from one indication for use to another. Once you have been at it for a while, FDA can start to understand the shorthand of that particular technology. The leap from a success in certain kinds of bridge patients to other, longer-term patients is a smaller and easier leap to make once the agency has that kind of experience.

I think we are going to see a trend more toward defining patients by the level of hemodynamic support needed, and less by their outcomes. We and the whole clinical community are trying to work with the agency toward thinking about these patients in terms of hemodynamic restoration therapy. For example, you have an end-stage heart failure patient who is going to die without some support, who needs blood flow for a few weeks, for a few months, might recover, get a transplant, or live on the device for five years. The outcome is a lesser issue when it comes to evaluating the device. That is where we are headed as an industry.

The companies that are working to develop a permanent artificial heart have a very difficult regulatory pathway ahead of them. Has the absence of an approved device of that sort opened a market for Thoratec, for instance by making the company's destination therapy the only viable long-term or permanent alternative for end-stage cardiac patients?

Not really. We look at the patients this way. There is a population of end-stage heart failure patients who need mechanical assistance. All other things being equal, if you have a VAD that can be used on the left side, the right side, or both sides and can assist the heart for a day, a week, or three years, then you can preserve the natural organ. And then, if the heart recovers—which happens in a fair number of cases—you can take the pumps out. All of that patient's options have remained in place. He might end up getting to transplant, for example. He might recover. He might live on the pumps for some period of time.

But if you take out the heart, you are eliminating all of those options. There will be some patients for whom that is appropriate, but very few. So, the way we look at it, if an artificial heart gets approved, that's fine; and if it doesn't, that's fine too. It really isn't where the market is. We are going where most of these patients are.

So, whether an artificial heart is approved or not really doesn't have an impact on your business plan or your technology strategy?

No, it really doesn't. Our preference would be an environment where FDA is approving devices generally, whether they are competitive or not. We think that is healthy for the therapy and the industry.

Technology Challenges

Cardiac-assist devices have been refined quite a bit in the past decade. In terms of safety and effectiveness, what are the technological challenges in the field now?

They really have been refined. The development of VADs has been, and probably will continue to be, an interesting story. We have come such a long way from early technology development in the 1960s and 1970s.

As we look forward toward what next-generation technologies could do, it really is staggering.

The clinical trials for devices like these were started in the United States in the early 1980s. The hopes then were that you could support patients for days or a few weeks and try to get them to a transplant as fast as possible. I don't think many people at that time were wondering if we could support a patient for 5 or 10 years and thinking that we could send him home—have him go back to work or take a vacation and go fishing. Yet that is what patients are doing now. So the technology has come a long way. As we look forward toward what next-generation technologies could do, it really is staggering.

We are already starting to get a view of some of that with our first-generation products, because that technology has been refined so many ways and so many times, and the clinicians have gotten so proficient at selecting patients and treating patients, that we are beginning to see astounding outcomes with the first-generation products. When we look forward to the next-generation products, we are more than encouraged.

What are the major technological differences, as an example, between the first- and second-generation products?

What makes this technology applicable and effective for the most patients is its increased durability, its ability to support the patient for as long a period of time as possible and to do so in a way that eliminates or dramatically mitigates adverse events and gives the patient a very high quality of life.

When clinical development of early-generation devices was started, patients were in the hospital for two or three months. Oftentimes, they didn't get out. The durability wasn't there. The rate of adverse events, whether they were pump related or surgery related, was quite high. But look at some of the recent publications involving even our first-generation devices as they are currently being used: we are seeing adverse-event rates that have been cut in half or, in some cases, even eliminated. Patients are going home in two weeks from their surgery in some cases, living at home, going back to work. The pump life has grown so that the patients are on the same pump for two years, two and a half years—even three years and longer in a couple of cases.

Extend that to our design for the next-generation HeartMate II device, which is now in a pivotal clinical trial in the United States, and you are looking at a pump that takes half the time for the surgeon to implant. Even in the trial, patients are getting out of the hospital in a couple of weeks. They are going back to work. They can't feel the device. They can't see it. They can't hear it. The device is designed to last somewhere between three and five times as long in the patient as the first-generation technology. And we have seen a very dramatic reduction, yet again, in adverse events. Things like thrombus and stroke and infection and pump-related adverse events—all these things so far have shown dramatic reductions in clinical evaluations.

The development goes on, and the results and the outcomes get better and better. What that means is that the technology is going to be applicable and used in a far wider range of patients.

Presumably, some of the key contributions come in the form of advanced materials, more-refined design of the pump mechanisms, significant progress toward smaller and stronger power supplies, and improved methods of distributing power to the pump. Are there other factors?

Those are all important, and there are 20 or 30 more just like them. I have never been in a medical technology segment where domain expertise is as important as this one. Time after time, we have watched new entrants try and fail to get into this space with their first pump.

There is a lot of trial and error, and when something doesn't work you have to have the expertise and the experience to know why. Because you are not going to see an outcome trend in a thousand patients; that is not the nature of the technology or the trials right now. You are going to see something happen in a few patients, something that never happened in animal models.

Part of our competitive advantage here—something that maybe is underappreciated by the outside world—is how very difficult it is—forget the regulatory pathway or market presence—to understand these products and what is necessary to be successful.

IP Positioning

I would imagine that those kinds of advances leave you holding a rather large bag of intellectual properties. Do you file on all of the company's developments, or do you hold them very close? How do you handle those issues?

It really depends. Much of what we have done with our first-generation family of products has been held very close and is not necessarily captured by our patent portfolio. This really goes to the point I just made. Patents have a life of 17 to 20 years, depending on the circumstances, and, in many cases, by the time you have products on the market—at least first-generation products—IP protection is irrelevant.

For example, we have an entire ventricular-assist device franchise with three approved products on the market, yet there are only one or two relevant patents that are important. And, frankly, if those weren't there, the competitive landscape would look no different.

Now, with next-generation pumps we view the IP landscape a little bit differently. We generate an awful lot of intellectual property internally, and we do protect the portion that we think is potentially both critical and able to be replicated by a competitor.

If you are able to hold your fundamental intellectual properties very closely, in theory there is no limit to the protection they offer—even if they are never filed. Does that constitute a significant barrier against potential competitors?

It does. Again, there is kind of a franchise value that is greater than in any other business I have been associated with. And it comes from having hundreds of years of collective experience in this industry in our research and development department alone, people who have developed more than one pump and have seen them through to approval. The ideas that they have, and also the knowledge that we incorporate into our design but that never makes it into a patent, are absolutely priceless.

This expertise enables us to avoid countless mistakes in design development and clinical trial design. And when we do have things to correct, it saves months or years in learning how to correct them and getting a product back on track.

How do you develop your strategy about whether to file patents on a particular group of intellectual properties? Do you do that all internally? Do you work with an IP firm? A little of both?

We have an inside legal department and we also work with outside patent counsel. We have kind of a stable of patent attorneys that we use, depending on the technology and the issue at hand.

Funding Growth

Thoratec has grown quite a bit in the past year. The company achieved 15% top-line growth in 2004, and has also developed significant cash reserves. How do you go about figuring out what you want to do with the funding that is available to you and where the company's money would be best spent?

We are very focused on optimizing the business that we own today. We think we have a unique opportunity with our VAD business. We have three successful products on the market, a market that we think is going to be far larger than it is today. We have a next-generation product in the HeartMate II that we think has just leapfrogged the field in terms of clinical trial results thus far. We are approaching 100 patients already treated with that device, and enrollment is going faster, so far, than in any VAD trial that I know of in the past 10 years, because of the outcomes.

We believe that we have a very strong competitive position in a market that is going to be very large. We think our competitive position will only become better with time. What do you do when you're in a position like that? Do you run out and think of 10 other things to do, or do you focus on maintaining that advantage and trying to accelerate the opportunity? We are more focused on the latter than the former.

So what do we do with $150 million to $200 million in cash? We are very focused on doing anything we can to guarantee that we maintain a commanding leadership position in this business two years from now, five years from now, 10 years from now. That may mean investing in market development. It might mean investing in even more R&D. Or it might mean the acquisition of other technologies, patents, or businesses that directly support or supplement the VAD franchise.

However, you can invest only so much. There comes a point of diminishing returns in investing in market development or R&D. Our task as fiduciaries is to try to find that point where the returns begin to diminish, so that we are providing the best possible return for shareholders while at the same time doing the right thing by the market and our customers and the technology and future growth.

Even with unlimited funding, technology development often means walking at a measured pace to ensure that matters are conducted in the proper order. To what extent do you receive feedback about your budget decisions—to spend on R&D, or market development, or anything else—as they might affect opportunities to advance the company's technology incrementally?

Well, that is a matter of culture and management style. We are still, despite our growth, a relatively small company. We have the luxury of being able to make decisions pretty quickly.

To give an example, we came into this year with an operating plan that we designed for 2005, but a matter of months into the year realized that some of the fundamental assumptions had changed—fortunately in almost every case positively. So we made some adjustments in spending. We shifted some dollars around from one project to another. We accelerated investment in market development efforts where we thought we could see some traction.

It was a matter of just a handful of management discussions and meetings to get that done. So we are pretty responsive. We are at that size where changes in direction based on return on investment are still pretty easy to make.

Overall, how much does Thoratec spend on R&D?

We will spend close to $30 million on research and development this year. That is somewhere between 14 and 16% of revenue, which is still pretty aggressive.

I suppose that R&D spending at such a high percentage of sales is what one would expect of a growing technology company. But it is not typical of many more-settled companies in the industry.

It really depends on a company's return, what it needs to do to be competitive, and how big the company thinks its opportunity is.

In our case, we want to maintain a commanding position in the face of a market we think is going to be far larger than its current size. We are profitable, we have cash, and we can afford to make that investment.

Do you go through an annual process to evaluate your opportunities? How do you structure your thinking?

We do have an annual process where we look at and reevaluate the long-term strategic fundamentals of our business—our markets and our competitors and the progress of the company. That then quickly leads to more of a short-term annual planning horizon. Usually, by right around the end of the calendar year, we like to have our plan for the coming calendar year pretty much put together.

But we evaluate it on a regular basis. We evaluate where we are in market development and sales growth. We look at our projects on a little less-formal, real-time basis. There are more-formal mechanisms monthly and quarterly for looking at our performance and questioning our decisions and our assumptions, but for the most part we are looking at those things in real time.

Do you watch an established group of key market, technology, or competitive indicators? For instance, what occurred earlier this year to make you alter your business planning and change the ways you intended to spend the company's funding?

Well, we saw a couple of things begin to happen this year. One was the HeartMate II trial, which has been a real pleasant surprise. Not that we weren't planning on a successful trial; obviously, we were. But the success that we have seen so far in the HeartMate II trial has been pretty exhilarating for this organization. We have seen our customers, our investigators, moving quickly to embrace this trial, to screen patients and enroll them.

And so we looked at where we were investing and thought that we could get a better return for our shareholders and for this technology by stepping up the investment in that clinical trial. We made the decision to put a little bit more support behind that trial because of the results and the enrollment pace that we were seeing.

Another factor is the adoption of commercially approved VADs today in the United States. A year ago we were expecting to see a very clear distinction and delineation between bridge-to-transplant and destination therapy, for example. But what the customers are telling us is very clear: they are more interested in using VADs for hemodynamic restoration therapy, or HDRT as we call it, to support patients who need support. If they get bridged, fine; if they become long-term destination patients, fine; but they are not really interested in putting those patients in categories. So we had to look differently at our markets and our patient definitions and how we were investing in certain programs.

Reimbursement

Thoratec has conducted a lot of clinical research and has had success using its clinical data to obtain Medicare reimbursement coverage and expand that coverage over a period of time. Take us back to the company's initial trials: Apart from issues of safety and efficacy, what kinds of performance did you think you would need to demonstrate strictly for reimbursement purposes?

That is a good question, particularly these days in our industry. The clinical trials that we have designed have been primarily geared toward generating data that are relevant to the therapy itself. One of the things that we learned when we first started working with CMS regarding destination therapy was how very important the data set that we had was to the agency's decision.

We received a positive national coverage decision for destination therapy after we went to CMS with the data from the Rematch trial. What was so important to the agency was the thoroughness of that trial, the compelling nature of the outcomes—and, obviously, hitting the end points. But we had a wealth of very pristine data, very well collected, that we were able to take to Medicare. It really made it a lot easier to talk to them.

Medicare struggles with these decisions, particularly a national coverage decision, and frequently is being asked to make them on the basis of incomplete data or data that were designed only to get an FDA approval or support a certain marketing claim. With Rematch, we learned that what we had in that trial was a great help in getting the reimbursement decisions that we have since gotten. We learned a lot in that process and have structured subsequent trials differently so that we will continue to enjoy that kind of success with payers.

We have made an awful lot of progress in reimbursement over the past two or three years. It is due in part to the data from the clinical trials, but it is also due to the fact that we decided early on to resource that effort very heavily, and we went to Medicare early. We have talked to them about trial design at about the same time we were talking to FDA.

We staffed that department internally instead of relying solely on external consultants, and we have worked very closely with the clinical community. In fact, when we made our submission for the national coverage decision, that submission was actually made by our investigators. We were there right next to them, but they were the petitioners for that decision. We worked very closely with our clinicians all along the way, and we have had terrific results with improved reimbursement for this therapy over the past couple years.

It's still fairly uncommon for a medical device company to go to CMS at the same time that it is beginning to talk with FDA. And it is also rare for companies to have a fully staffed in-house reimbursement function.

Yes, but it is becoming more common. When many of these early trials were started, there wasn't an appreciation of how important reimbursement would be. So, in fairness, a company that started a trial five or six years ago without a crystal ball probably didn't have the same understanding of how important it would be when they got out to the back end of the trial.

But anybody going now into a clinical trial where payers will be important—and of course that is most of them—ought to be going to Medicare very early, getting their input and understanding how they will interpret the end points of the clinical trial. Because if they have a clinical trial that gets them FDA approval but Medicare can't interpret the end points, or they don't believe the end points, or the end points aren't important to them from an economic outcome standpoint, then that company is not going to have much success. So they have to be part of the process early.

If you are going to be successful, you have to build up that expertise internally, just like medical device companies learned 20 and 30 years ago regarding their work with FDA. If you wanted to be successful in what was then a new FDA environment, you better have had that expertise internally. It needs to be second nature. You need to have your own in-house expertise and understand that environment very well, just as you do with FDA.

What is the learning curve for new technologies like at CMS? When you first approached the agency about designing and conducting a clinical trial, did you feel that CMS personnel understood what you were doing in the same way that FDA does? Have they improved their understanding over the years?

I think they have improved. Our experience working with the folks at CMS has been quite positive. In general, the people at CMS work there for a reason. They work there because they enjoy being part of getting new therapies and new technologies properly covered and paid for. They are not there to say no to everyone, which is the model the industry sometimes thinks they employ.

We found very bright, very energetic, very cooperative people at CMS. Of course, they want good data, and they are going to make independent decisions. But as long as you understand that and work within that construct, the people there are quite cooperative.

Has CMS input enabled you to combine clinical trials for safety and efficacy with outcomes research that might be necessary to support reimbursement applications?

I think so. It certainly helps. If you know how your submission is going to be evaluated and how the test is going to be graded at the end of the process, it certainly helps you prepare. And if you ask CMS to weigh in on your trial design, or your data collection method, or the primary and secondary end points that you will be showing them, or the case you will be making, they will indeed weigh in. They will usually give you a fair amount of help.

Building Clinical Support

Beyond the support that you had from your clinical investigators, how did you build support in the general clinical community?

Actually, we worked with one of our customers to form an alliance called the Hospital Alliance for VADs, which represented most of the active VAD-implanting centers throughout the country. The alliance allowed them to be part of the process, to be kept up to speed on it, and to contribute to the approach to Medicare. Meanwhile, it offered us a unique window into how they thought and how they would feel about the way we positioned this technology with Medicare, as well as their particular needs on coding and payment, and their particular take on the way costs had been analyzed and collected in the Rematch trial, and lots of very important nuances that we frankly would have missed if we had just run into CMS all by ourselves.

Getting that kind of broader industry buy-in was very helpful to us because, at the end of the day, our customers are the experts on how these products are used, not us. It helped us a great deal in terms of putting something coherent in front of Medicare.

Did building that community of support with an early product help you with subsequent trials and the adoption of additional products? For instance, have some of the clinicians that you discovered through the hospital alliance become investigators in subsequent trials?

They absolutely have, and part of what we think will make us successful is not just innovating and bringing to market the best products for this indication, but it is surrounding our customers with the kind of support and infrastructure they are going to need when the day comes that they don't have 10 or 20 VAD patients living at home but have 1000 living at home on VADs. How will they be supported? How will they work with their payers? How will they work with local nursing agencies? Who will make sure that their economic returns are as good as their clinical outcomes?

The message we are sending to our customers is that we want to be that kind of partner and make that kind of investment, and, in fact, that is what we are doing. We continue to work with them in supporting their work not just with Medicare but with private payers as well, where they need a lot of support and we are in a position to be able to give it to them.

The community of professionals relevant to Thoratec's products is relatively small. Is it also international? Do you have international sites in your current trial?

We do have European sites in our current HeartMate II clinical trial. Now, the VAD business is probably about two-thirds to three-fourths in the United States; of the balance, most is in Europe. Fortunately, Thoratec enjoys about 90% of the U.S. market and probably close to 60% of the European market. So we have a very strong presence wherever VADs are used.

We will probably see the bulk of our growth come from the U.S. market for the next few years, though I still expect to see attractive growth rates in our European market. And beyond the next couple or three years, with next-generation products, we are going to begin to see other, rest-of-world markets, particularly in Asia, become very significant for this therapy.

What is the market climate for VADs like in Japan?

I think Japan will end up being a very good market.

The first-generation technologies are relatively large devices. For a population of relatively smaller patients, that can more frequently be problematic. Also, Japan has never had cardiac transplantation as a prevalent therapy in its healthcare system, so these devices haven't been able to be used as a bridge-to-transplant. But that will change as devices become more durable, are used in place of transplants, and become much, much smaller like the HeartMate II. Then we are going to see the Asian market, particularly Japan, really start to open up.

The Product Pipeline

You have mentioned the clinical trials for the HeartMate II, and that is clearly your next leap into the marketplace. What else is in the pipeline?

We actually have a HeartMate III in the product pipeline. It is currently in animal trials and is likely to be in the clinical trial environment sometime in the next year, year and a half, or so. And we just very recently introduced a newer version of our original Thoratec VAD product, an implantable version called the Thoratec IVAD. The original Thoratec VAD is worn outside the body.

Then we are also doing a lot of really interesting work in thinking about how VADs will be used as part of a larger set of therapeutic options for heart failure patients. By that I mean that VADs serve the purpose of effectively unloading the sick ventricle. There has been a lot of interesting thought and work involving using VADs with other therapies like stem cells, skeletal myocytes, and other pharmacological and biological agents, and we are beginning to participate in much of it. The rationale is that, if the VAD can unload the heart and allow the remodeling process to reverse itself, if that treatment is combined with another therapeutic agent, then there is tremendous opportunity here for adjunctive therapy between VADs and other technologies.

We are participating in some interesting work with cells and growth factors and drugs. In the long run, though, we are going to find VADs being used with lots of other therapies, and that may end up holding the largest potential yet for Thoratec down the road.

In terms of helping you to support that research, does it help that you are based in California, where the state has a commitment to fund stem cell research?

It may at some point. I really can't honestly say there has been any visible difference in that regard. We have done some work—in fact, most of the adjunctive therapy or recovery work that we have done with VADs themselves—outside of California. But that state decision may make a difference at some point.

There is a lot of talk now about the use of information technologies for remote monitoring. As you have more destination therapy patients who are returning to work and so on, will advanced information technologies find a place in VADs for monitoring either the condition of the device or the condition of the patient?

Over time that will become very important. We have some of those capabilities already, in that our device does capture a fair amount of history which can be downloaded and transmitted. I do envision a day when there will be more patients and they will be in farther-flung locations. Thus, hooking into a network, or creating a network of some sort for home monitoring, will become more important. That is something we have certainly begun thinking about. Whether it involves creating our own network or participating in another one that exists remains to be seen.

Information technologies seem to have very broad applicability to medical products, but not a lot of companies are thinking much about how they can make use of them.

They will be, though. In our market segment, most of the companies are still thinking about how to make a VAD work and how to get one approved. That will change. There will be a lot of people thinking about and working on those issues, which will be a positive thing for the whole industry and for Thoratec.

Are there any disruptive technologies on the horizon that have the potential to undo the entire market for VADs?

Nothing we have seen, and we spend a lot of time looking out at that horizon as far as we can. In fact, we even made a small investment in a company that plays in the cellular therapy area, primarily so that we would have a little better vision for viewing that horizon.

There is an awful lot of work being done in the area of heart failure, and most of that work is about improving the way we treat earlier-stage patients, helping them live a little bit longer, prolonging their decline, alleviating their symptoms. But none of these advances are curing heart failure. One of the things we are finding is that some of them are helping patients feel better. In some cases, they are preventing patients from dying of their disease earlier in its progression. Heart failure is an awfully big market, and over the next 10 or 20 years it is going to get much, much bigger.

Historically, a lot of these patients have died in earlier stages of the disease, of Class II and Class III heart failure. We have become much more effective at keeping those patients alive, whether with devices or drugs or some kind of combination, and what we are beginning to see—what we will see for years to come—is that, as the heart failure patient population gets larger, the Class IV, or end-stage, heart failure population will very likely get disproportionately larger. And absent a cure for heart failure, this is going to become a very real issue. What do we do with these end-stage heart failure patients now that we have so many of them?

VADs are going to play a key role there. We are keeping a close eye on cellular therapies; we think that there is some opportunity for them to play a role in end-stage heart failure therapy. Frankly, we think it is a long way away. But we also, more importantly, think that there is a chance to combine cellular therapy and assist-device therapy in an effective way.

Do you think that genetic or cellular therapies will always be adjunctive, or is there also potential for true combination devices, where a VAD in some way helps to deliver or enhance a drug that is being used?

That is something we have actually thought and talked a little bit about internally. Truthfully, the answer is, we don't know. Cells are very interesting. We have a long way to go, and there is an awful lot that we don't know yet. The answers to questions like that will become more evident over the next 3, 5, 10 years.

Independence

Thoratec has emerged and grown as an independent company, and seemingly does not face the pressure to be acquired by a larger player that a lot of emerging companies encounter. Growing such a company from the ground up is pretty rare in the medical device industry nowadays.

It is. It was rare when we started, and it is more rare now for a lot of reasons. We have had an unusual opportunity here because of a couple of things.

The market was to be found in the United States primarily and to some extent in Europe, but it wasn't a market that, to build the company, required us to be in 30 countries to really be effective. We could focus on just two populations—and mainly the United States—to find a large market in which to base a growth company.

The other thing is that we have actually built a VAD business on the bridge-to-transplant indication. There are only 130 approved transplant centers in the United States, so the universe of centers is fairly easy to address. We know who these surgeons are. We know where they are. We know who is doing transplants. And the decision to treat a particular patient has been pretty easily controlled. In other words, the surgeon usually makes that decision, and he has control over the patient at that point, at least for the most part. That has been a great luxury. We have been able to build a market and handle our own sales and marketing, and we have done it very effectively.

Now we are in an interesting position as we build the destination therapy market—meaning patients who are not necessarily on the transplant waiting list—where our traditional customers aren't necessarily the ones who know where those patients are. If the patient is not a transplant candidate, the surgeon probably doesn't know about him. So we have an interesting challenge in front of us right now, which is to get out to thousands of heart failure specialists and educate them on VADs, on destination therapy, and persuade them to refer patients to the surgeon for evaluation. We have really invested a lot of time and resources in this.

We have put in place a lot of innovative programs to educate cardiologists, to support our customers as they reach out to educate their own community. In fact, we are even piloting a small specialty sales force in some key geographies now whose sole job it is to get out to these referring doctors and educate them. We are investing a lot of marketing dollars in this as well.

So we are evaluating a fair number of tactics right now. Those that are successful will be those that we expand coming into 2006. We have a lot of exciting opportunities and a lot of interesting challenges in the area of market development.

You have alluded to some strategic investments that Thoratec has made. Is the company actively pursuing partners or strategic alliances? What kinds of interaction do you have with other companies, and for what purposes?

Well, for the most part the partnerships and alliances that we have taken on have been driven by business need. One was a vascular access graft that wasn't related to the VAD business. It was used by the vascular surgeon, not the cardiac surgeon, and was a very interesting technology, one that we thought deserved to see the light of day in the market. It had been developed at Thoratec some years ago, but clearly was not something that played a central role in our strategy.

So we founded a partnership with another company that is distributing that product along with another partner in Japan, and they have done a very good job. It has been a nice partnership, but not necessarily one that has been central to our strategy. It has been there, in fact, because the technology wasn't central to our strategy.

I mentioned earlier that we made an investment in a small company that allowed us kind of a window into the evolving world of cellular treatments. That has been effective. I view that investment as tuition. It was meant to provide us a learning opportunity, so we could try to see around some corners with these technologies. It was not necessarily meant to put us in the cell business, but rather to allow us to see what was happening in that business.

Also, we have done, and will probably continue to do, some partnering with our vendors that, in some cases, are very important to our product and our technology and what we do.

What we haven't done, at least up to this point, is to partner with some of the large consolidator-type presences in the industry—the familiar names—in terms of market development or technology development. We haven't needed to, and we may not need to going forward. Something that the big companies are very good at is market development, but we have been very good at that in our own market. However, as this market gets bigger we will continue to evaluate whether or not we need or want partnerships in that area as well. Up to this point, we have done pretty well on our own.

Down the Road

What is the long-term outlook for Thoratec and its market? In five years, for instance, will Thoratec still be an independent company? What will have changed in cardiac-assist technologies? What will have changed in the marketplace?

That is obviously difficult to predict. We are a public company and we offer a pretty exciting franchise in end-stage heart failure, which is a market where lots of companies want to contribute. As that franchise grows and becomes more visible, I expect there will be interest from a lot of people, including larger companies, and those are things we will deal with at the time.

The good news is, we don't have to make that happen. If it is the best thing for our shareholders, that is different. But we are a stand-alone, independent, profitable, well-financed company, and we will continue to operate that way until we know we shouldn't.

What does the future look like? I think for us the future is pretty encouraging. We are satisfied with the evolution of our first-generation products and the programs we have in place to support our customers. The reimbursement environment is already quite favorable for the therapy, and will become even more favorable on October 1, when CMS will put into effect 26 new Healthcare Common Procedure Coding System (HCPCS) outpatient reimbursement codes for VAD supplies and accessories. And we are encouraged by the progress of our next-generation technologies.

We think the future is one in which patients will be treated for very long periods of time with VADs, with a very high quality of life outside of the hospital. They will number well into the thousands, and there will come a day, we believe, when they are counted in the tens of thousands. That is a market in which we intend to continue to lead.

And, as you have indicated, a growing market, and probably a market growing with competitors as well.

I think so. And that is a very healthy sign. Growing a new market and a new therapy at the same time by yourself is not easy, nor is it inexpensive. There are certain synergies and efficiencies that come when you have good, credible, well-financed competitors, and there are not a lot of those out there right now. But there will be, and I think it will help us develop this market.

In the future we will also begin to see VADs being used as a mainstream adjunctive therapy in a lot of other types of patients alongside their principal therapies. Some of the work that we are doing now is going to lead to some pretty important indications for these devices over the next decade. It will be exciting to watch.

Clearly, you expect to remain out on the front edge of the group of companies doing business in this field.

We absolutely expect to.

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