Hansen Medical, Inc. (NASDAQ:HNSN)
Lazard Capital Markets Healthcare Conference Call
November 13, 2012 1:30 pm ET
Bruce J Barclay – President and Chief Executive Officer
Karen C. Koski – Lazard Capital Markets LLC
Karen C. Koski – Lazard Capital Markets LLC
Okay, I think we can get started. My name is Karen Koski, and I work on the medical technology team here at Lazard Capital Markets. We’re very pleased to have Hansen Medical here with us today. Presenting on behalf of Hansen is Bruce Barclay, CEO, and Peter Mariani, CFO is also here in the audience.
Bruce will give a brief presentation, and then we can open up to questions at the end. And Bruce, I’ll turn it over to you.
Bruce J Barclay
Great, thanks, Karen. Good afternoon, everyone. Thank you all for being here this afternoon, nice to be back. Thanks for Lazard again for inviting us to be here. So some of the statements I make today may be considered forward-looking statements the slide, as well as our securities filings contain important information and then I would ask you to consider this information very carefully.
So Hansen Medical is the leading provider of intravascular robotics poise for growth in the $2 billion plus medical robotics market. While intravascular robotics is truly a platform technology we believe, where many clinical applications could apply really focusing ourselves on two applications; the first is electrophysiology or EP and the second is vascular. For EP, we launched our first product in 2007 called the Sensei Robotic System. Clinical use of that system is growing and we now use to more than 9,000 patients worldwide. We generate a very significant days of systems having shift over 110 systems since first commercialization.
Our strategy is to leverage this robotics technology into new markets and we’ve made a significant step forward in that by launching, but we considered a very much for platform technology called the Magellan to access much larger vascular market.
In June of this year, we received 510(k) clearance to market that product in the United States for peripheral vascular disease and coupled with our prior CE Mark in Europe. We’re very excited about that opportunity in front of us and we’ll talk more about that a little bit later.
Finally, we continue to invest heavily in R&D. We are developing a full suite of catheters for use in multiple electrophysiology and vascular applications. We’re also developing what we considered to be a game changing technology, which we called FOSSL or Shape Sensing technology and we’ll talk all those in just a minute.
There are number of clinical segments within the medical robotics industry, which we think makes it a new and very exciting business to participate. And as I said earlier, it will be about $2 billion with medical robotics sold in 2012. Most of those sales come from the company on the right with Intuitive Surgical. We’re also in good company with MAKO Surgical, who is focused on the orthopedic space.
Our intravascular robotics platform supports multiple clinical specialties including electrophysiologist, but also minimally invasive peripheral vascular interventions, endovascular surgeons, interventional radiologists and interventional cardiologist. Our technology is uniquely situated to meet the needs of clinicians in that intervascular space.
So we are found in 2002. We went public in 2006. Since that time, we’ve accomplished a number of very significant milestones and develop a number of very important relationships with both large and small companies to help us commercialize our products as well as develop new products for future applications. Our partners are listed here on the slide and include Philips, Siemens and GE in the capital space, St. Jude Medical Intuitive Surgical and others were access to product channels, intellectual property and new technolgies.
Our business model is a classic a razor/razor blade model, not in like that of intuitive in MAKO. Revenue comes from capital, but it’s a robust set from the left hand side. Recurring revenues come from deposable catheters and accessories and then service contracts on the right.
Our leadership team at Hansen Medical has focused the organization around three strategic initiatives to grow our business, which in our path to profitability. The first is to launch and grow our new Magellan Robotics System for vascular. And as I said, we’re in the early phases of that with recent clearance from FDA in June of this year.
The second is to continue to grow our EP business, and I’ll discuss how we are doing that shortly with compelling clinical data, new products, improved execution and outside the U.S., where we have products and our benefits not yet available to us in the U.S., we are looking to expand both our direct and distributor relationships.
And finally, we are focused on achieving operational excellence in all that we do by improving our product margins, lowering our expenses, reducing our cash burn and again charting our path to profitability. So [4.47 with that] I go into more detail on the company I believe Hansen represents a compelling investment opportunity. We have a large and growing installed base in the EP market. We are launching new products with improved commercial execution and a body of positive clinical data continues to grow.
All this is supported by our broad and very deep intellectual property base and our new Magellan platform interest of much larger vascular market, where interventionalists perform complex into good procedures that can benefit from the precision and the predictability of direct control of the catheter. This product has been used by multiple specialists in a broad range of procedures. It’s gaining recognition by key opinion leaders in the industry and clinical and executive interest is growing in the product.
Finally, our technology provides hospital was what we believe to be a compelling value proposition in a challenging healthcare environment led us to improve the utilization of their most profitable assets, operating rooms, and cath labs.
Robotics can provide improved precision and outcomes that healthcare providers seek, and our business model provides the opportunity for long-term value creation as clinical adoption increases. So we believe the Magellan system not only has exceptional clinical benefits, which I will talk about in just a second, but also a compelling economic benefit as well.
The Magellan system has a broad value proposition for patients, for hospitals, and physicians. For patients they benefit from predictable procedures and simplified interventions. The improved procedure predictability also allows hospitals to improve utilization and have incremental patient flow through throughput. Robotics also provides hospitals with technological advantage when competing for patients, as well as physicians and medical staff. While the Magellan system, physicians have the opportunity to improve their precision and performance across most of their cases, while potentially converting certain open procedures to minimally invasive procedures.
Additionally, with the robot position is seated comfortably away from the radiation field and has the opportunity to reduce their exposure to radiation and to orthopedic related injuries. So we could help this auto line model that we use with every hospital considering the purchase of Magellan system.
Specifically, our model shows that even with our list price of $1.5 million for the catheter and $4,000 each for the catheters making sure when internal rate of return somewhere in the range of 20% to 40%, and a payback from about two to four years depending upon the specific assumptions made by our hospital. The model examines three different peripheral vascular procedures in three cases, which are low volume, but can be complex and very time consuming, high volume peripheral enabled vascular cases, but cannot afford costly delays.
And third, we call peripheral enabled cases where those cases that would have required costly open procedures without the precision in control of the Magellan system. The model also assumes increased utilization that results from additional patients drawn to a hospital because of the robotics program.
In the model, we specifically demonstrate the potential value of the Magellan program through incremental profit contribution from an increase in patients including better insured patients, savings from avoiding cost of procedure time over rise including staff over time as well, as a result of improved procedure predictability and contribution from improved lab utilization.
We found this model to be very helpful to the hospitals as we demonstrate the potential of the Magellan system to improve the utilization capacity and profitability of their overall in cath lab. Of course, we do have some experience with this model through our Sensei system in electrophysiology.
An important paper was published last year showing the financial payback of the Sensei system with a new user in Arlington, Texas. In the paper, the author showed how the robot a lot of them to grow their patient volume by 76% in the first year, and increased device utilization through less physician fatigue, more clinical case predictability, and increased community awareness to reduce that payback from an anticipated three years to less than one year.
So to the vascular system specifically, so we believe there is a significant unmet clinical need for use of intravascular robotics in the treatment of peripheral vascular disease. For many interventionalists, including those most scaled cases can be long, they can be complex, and can be unpredictable and therefore duration and their outcome. This unpredictability can leave the lab inefficiently and costly overruns.
Second, that can be a widespread discrepancy in terms of training and skill sets among physicians performing endovascular procedures today. Third, given the fact that the operator wears heavy led and stands next to c-arm, which is the radiation source for these cases.
In a multiple documented cases, the physician suffering excessive radiation exposure in orthopedic injuries often leading to unexpected costs and shorten carriers. Finally, complex cases can lead to costly complications, including even open surgical procedures, which we believe the robot can minimize due to its ability to raise its level of the operator and create more consistency in outcomes from physician to physician.
So those of you who not familiar with the Magellan system, it consist of two capital components. First on the upper left of the slide, you’ll see the robotic arm, which sets over the patient and drives the disposable catheter, which you can you see extending from the robotic arm.
The other component is in the lower left in the slide, which is actually the physician workstation, which can be close up to 100 feet away from the patient’s bed, outside the radiation field. We believe that Magellan has the potential to revolutionize the way endovascular procedures are performed. The system has potential to enable new procedures and offer less invasive treatment options that today conducted through open surgery.
Given the platform nature of the robot, there are many potential clinical applications for intervascular robotics. As a result of the clinical cases performed today in hospitals that have the system, you can see how Magellan is truly a vascular platform and those are listed on the right hand side of the slide here.
We’re also pleased that three different physician groups are using the system clinically today again including vascular surgeons and interventional cardiologist and interventional radiologist. The vascular market represents a very large opportunity, although $3 million procedures outperformed each year in the United States and Europe in about 3,500 hospitals, about half of this market is available to us today with our peripheral product and the other half would become available once we get our colonial product on the market.
So, next slide is a video, which shows the system setup in hospital. As you can see, it starts with physician see at outside the cath lab and the control room. You can see the system being setup with the catheter on the robotic arm and then various kinds of physician pushes in order to drive exciting step of catheter both the in and out of catheter have independent control and in the guide way itself. Cannot be manipulated by the joystick, and again that’s unique about the system as disability to stir with both that inner catheter and the outer light catheter 360 degrees.
In addition, early research with the Robotic system and catheter had been showing to cause less vessel wall injury, which we believe it could reduce flat to lodgment and the incidence of resonances future resonances within the artery. This benefit which we call center line driving is the direct result of the distill tip control on our catheter system.
Our strategy for the initial launch of the Magellan in the U.S. is to partner with influential physicians who are thought leaders in this space and who are known early adaptors of new technology. In doing so, we expect to generate positive clinical experiences and data to drive both interest and adoption among other physicians and other hospitals. We also expect these thought leaders to publish their experiences and discuss their results at major conferences to generate interest from other physicians.
Additionally, to help sell more systems sooner, we recently initiated a new limited commercial evaluation program to allow certain key accounts to utilize installed systems for a limited period of time rather purchase contract is being evaluated within the hospital. We believe this limited program will help drive demand for the robotic systems and accelerate the ramp of clinical cases.
So clearly, we have shipped seven, Magellan systems worldwide through the end of the third quarter. We have five clinical systems and two preclinical systems and four of those clinical systems out generating cases today outside the U.S. and in the U.S. We are also pleased to have two successful live cases performed by Dr. Barry Katzen couple of weeks back in TCT. We have another presentations scheduled including four [toxics] this week at the VEITH conference here in New York.
Let’s turn from vascular into electrophysiology, and again like the Magellan system, the Sensei system consists of both the catheter component and the disposable component. The catheter consists of the robotic arm and the workstation and the disposable catheter can be either be or to some extent, which is the catheter on the top right, so both inside United States and outside the United States to work with other systems that are ablation catheters, and then outside the United States, we set our owned robotic ablation catheter, which is called the link system.
EP market is very large and growing. AF is the most common cardiac arrhythmia affecting over 3 million people in the United States alone, but only a fraction of those patients are being treated with catheter ablations today, which many believe our better therapy than drug therapy alone. As such, we believe there is substantial room for this market to grow in the future.
If we look growing body of worldwide clinical evidence and over 20 publications showing the safety and effectiveness of the Sensei system in AF, as well as reduced procedure time and radiation exposure to both patients and physicians with over 2,000 patients now treated in multiple clinical studies. There are currently four studies ongoing.
Earlier this year in the journal of cardiovascular electrophysiology, there was an important publication of a clinical data of clinical data from a worldwide multi side survey of Hansen robotic cases. In this publication, data from over 1,700 robotic patients showed a low complication rate as compared to manual technique and maybe more importantly showed improvements in treating from AF at 12 months compared to manual technique. But they also showed that as operators being more experience with the system, the advantages of the robotic system will present in both acute and long-term results.
Lastly, we are also expanding the markets in which our product can be used by investigating to use outside of AF. Ventricular tachycardia is an abnormally rapid heartbeat that can lead to sudden cardiac death that affects about 250,000 people each year in United States alone. Patients with VT often receive an ICD or implantable defibrillator that can prevent death, but these devices can also create painful and debilitating shocks.
Early data from the debauchee group published you to show the encouraging results with the Robotic systems to treat VT, and we are all funding a physician study outside the United States for VT as well to further evaluate this opportunity.
As I mentioned, the product has been used over 9,000 clinical cases worldwide through the first three quarters of 2012. Last week, we also announced our Q3 results and we’re very, very pleased that this is the fifth consecutive quarter in which we saw increasing procedure growth.
So we believe we have a very clear path to grow our EP business for developing new products. We’re generating new clinical data. We’re exploring new markets, especially with VT. We’re upgrading or commercial teams and now approving our training and capabilities to get customers up to speed on the technology sooner.
Lastly, just talk to a second about our R&D pipeline. We continue to invest very heavily in R&D. We’re developing multiple catheter systems for use with the Magellan System to truly take advantage of the platform nature and what you see from this slide is where we already there on the left hand side for developing smaller system to eventually get into the corner is larger systems and then particularly large in smaller system eventually we believe to get into the neuro system.
Given our early entrance into the flexible robotics and our heavy investment in R&D, we’ve compiled a very substantial and intellectual property portfolio. We own over 250 patents and patent applications as a result of our direct investment in technology creation. We’ve also licensed hundreds of additional patents from companies like Intuitive Surgical and Luna Innovations. These patents cover several robotics, building blocks including imaging, navigation, and software, in addition to fundamental robotics technologies.
So as quickly look at the financials. We announced our Q3 results last week and that are summarized here again. We’re very happy to see our continued improvement in our gross profit percentage reduction and operating expenses in our improved cash burn for the quarter.
Serving us further validation for the technology, we recently announced an expanded agreement with Intuitive Surgical, the global pioneer in medical robotics. We are extremely pleased to be able to deepen our relationship with Intuitive. We believe this agreement demonstrates the utility of our technology. And importantly the agreement provide with a total of $3 million, $20 million, $20 million from a license fee and $10 million with their purchase of common stock in a private placement. The catheter refer the strength in our balance sheet, where a significant portion of the new catheter being non-dilutive to our current shareholders.
Of course, these resources will be used to further support the launch of the Magellan system. In addition, we are pleased that Intuitive had become our third largest shareholder through the $10 million private placement, and the shares have a 18-month lockup with them as well.
Moving on to dilutive financing, financing is certainly not new to the company. In fact, over the past few years, we bought in more than $80 million of non-dilutive capital through license deals with Intuitive and Philips technology funding deals with Philips, as well as last year’s debt financing.
We ended Q3 with $21.6 million before the $30 million of new capital from Intuitive. Our current cash position provide us with an extension of liquidity and is sufficient to support the launch of the Magellan system and funding additional development projects.
So in summary, I believe Hansen Medical represents a compelling investment opportunity. We have a large and growing installed base of systems in the EP market. We’re lunching new products with improvements in commercial execution and growing, we have a growing body of positive clinical data with a broad and deep intellectual property portfolio.
Our new Magellan system, it is a much larger vascular market, we are complex into good procedures can benefit from the precision and of the predictability of that directive catheter control that I mentioned earlier. Magellan has already been used by multiple specialists in a broad range of procedures and it’s gaining recognition with those clinicians and executives of hospitals.
Finally, our technology provides hospitals with what we believe as a compelling value proposition in a challenging healthcare environment, allowing them to improved utilization of their most profitable assets with cath labs and operating rooms. And we believe the business model provides for a long-term value. Our ultimate goal is profitability, and we are taking a number of key steps as we chart our path to profitability.
With that, I would like to thank you again for your attendance today and your participation. Happy to answer any questions.
Karen C. Koski – Lazard Capital Markets LLC
Do we have any question from the audience? Go ahead.
Bruce J Barclay
You talked about this, you mentioned this placements that you have. What you find are the biggest challenges to getting those placements? And what’s your expectation for your kind of a trial used program by the blades while you kept up the rates?
Bruce J Barclay
So I would say, the biggest challenge for us in the United States is simply the time. We just got clearance in June, so we just completed September 30, our first full quarter with the system in the United States. The clinical interest has been incredibly positive maybe more or so than we expected, it’s being supplemented by the clinical data and the conference presentation for live cases that we’re seeing at TCT. But it does take time to work the system through the executive side of hospital.
We’ve often said, about six to 18 months to typical timeframe to get capital through a hospital and I would say that’s especially true when you’re off budget cycle, which is what we are right now having been improved kind of midyear and that was really one of the drivers for this evaluation program that we put in place. It’s limited in terms of hospital, limited in terms timeframe in which that will be evaluating the system.
As long as we saw strong executive interest in the system that way they were working through those systems as quickly as they could. And as long as we see continued and regular use for the system in the hospital, we believe that’s a win-win for both sides as continue to help them, see the benefits of the system while we’re generating cases. So very excite about where we are, but really U.S. has been simply just taking time to working through the system.
And what a nice quarter as far as cutting expenses and reducing your cash burn, can you talk a bit about your strategy to balance your growth with cutting expenses and reducing cash?
Bruce J Barclay
Yeah, it’s really important for us as we continue to move forward that we invest more on the commercial side of the business and that’s what we intend to do as we said that our commercial launch strategy is really to focus our sales on key physician, key accounts and that’s going quite well that we do see in 2013 and need to continue to invest more on our commercial operation.
So, we’ll have to take very closer look at other expenses inside the organization. But we do believe that we continue to invest commercially now managing the rest of the business including technology development for us. Much of our success depends upon our ability to continue to innovate and develop new technology, to develop our pattern portfolio and so we’ll continue to look at that as well.
But the additional cash infusion from intuitive obviously was very helpful. We’re also taking great steps as we said in the conference call to reduce expenses and also we really starting to see the benefits of our lean manufacturing as well. We implemented a little over a year-ago and you saw some of that in the improved gross margin line for the business. So a lot of moving parts, but we believe we can continue to manage that successfully. We announced into the first half that we expected cash burn to be down, in the second half of the year, we continue to believe that’s the case.
Okay. And marketing is definitely helped other companies in the space to gain traction. And any of the early placements you had in Magellan? Have they talked about marketing campaigns? And if so, is that something you would have at the hospital zone?
Bruce J Barclay
We do, yeah, we actually have a marketing teams that’s very active with hospitals that we’re either have systems or we’re talking to, we have a marketing package that we offer to hospitals that they can take and customize, we share ideas with them, but we are seeing the successful in other parts of the country outside the United States and then they choose their marketing program.
But we very much believe that robotics can drive incremental patients, but that comes to the marketing planning and it’s what obviously Intuitive Surgical done such a good job with. We’ve also seen on our EP side as well, the paper that I mentioned from our own with doctor and nurse, but that robot was the centerpiece of its marketing through peripheral campaigns, morning tox shows in the Dallas area any number of different things that he has done to help grow this patient business. And really I think is that draw the new technologies and the benefits that we believe will present with robotics system helps patients one of you part of that. So we do offer assistance to everyone that like it.
Karen C. Koski – Lazard Capital Markets LLC
I think we are out of time. Thank you so much.
Bruce J Barclay
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