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SEC Filings

10-Q
HEARTWARE INTERNATIONAL, INC. filed this Form 10-Q on 11/02/2015
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Table of Contents

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 costs associated with our compliance with FDA regulations. Additional costs include travel, facilities and overhead allocations.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     Change     2015     2014     Change  
     (in thousands)           (in thousands)        

Research and development expenses

   $ 30,386      $ 29,477        3   $ 93,355      $ 88,981        5

% of operating expenses, excluding changes in fair value of contingent consideration

     55     59       57     58  

The net increase of $0.9 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 resulted primarily from increases in clinical and regulatory expenses of $2.1 million, including outside costs associated with FDA warning letter remediation efforts, salaries and related costs associated with headcount growth of $0.5 million and infrastructure-related costs of $0.3 million. Overall research and development project expenses decreased by $1.7 million. All other expenses resulted in a net decrease of approximately $0.3 million.

The net increase of $4.4 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 resulted primarily from increases in salaries and related costs associated with headcount growth of $1.7 million, non-cash share-based compensation expense of $1.1 million, infrastructure-related costs of $1.9 million and restructuring costs of $1.2 million. All other expenses resulted in a decrease of $1.5 million and were primarily due to lower research and development project costs. The restructuring charges associated with the CircuLite acquisition were approximately $2.2 million and $1.1 million in the nine months ended September 30, 2015 and 2014, respectively. The charges recorded in 2015 included fixed asset impairment, contract termination fees and severance costs in connection with our decision to cease activities at our facility in Aachen, Germany. The charges recorded in 2014 included contract termination fees and severance costs.

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 SYNERGY 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 ENDURANCE2 clinical trials. In addition, we continue to incur substantial costs to remediate warning letter-related observations as well as make improvements to our quality systems.

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 securityholders may be entitled to receive additional shares of HeartWare common stock (or cash, in certain cases, at our discretion) upon the achievement of five 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 September 30, 2015, we recorded a $2.4 million adjustment for the increase in the estimated fair value of the contingent consideration since June 30, 2015. In the nine months ended September 30, 2015, we recorded a $6.7 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 nine months ended September 30, 2015 was due to accretion of the liability due to the passage of time.

 

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