Cardica's CEO Presents at Lazard Capital Markets 9th Annual Healthcare Conference (Transcript)

| About: Dextera Surgical (DXTR)

Cardica, Inc. (CRDC) Lazard Capital Markets 9th Annual Healthcare Conference November 14, 2012 11:30 AM ET

Executives

Bernard Hausen - President and CEO

Analysts

Karen Koski - Lazard Capital Markets

Karen Koski - Lazard Capital Markets

My name is Karen Koski and I work on the medical technology team here Lazard Capital Markets. We’re very pleased to have Cardica here with us this morning. Presenting on behalf of the company is Bernard Hausen, CEO. I also see Bob Newell, CFO, in the audience. Bernard will go through a presentation and then we can save a couple of minutes at the end for some questions. Bernard I will turn over to you.

Bernard Hausen

Thank you very much. Thanks for the introduction. Welcome to little bit of Cardica show. There will be some blood, so don’t run away. I know it’s before lunch. Safe Harbor statement, Cardica is a company that was started based on technology we developed for vascular and cardiac surgery. One device, passport device approved to various markets including the FDA is an anastomotic device that connects the veins to the aorta without having to place a clamp on the aorta. This is a big deal because every time you place a clamp on the aorta, what you do is you liberate debris or parts of the intima into the bloodstream and that ends up in the head i.e. may cause strokes. So there is about a 2.5% stroke rate in cardiac surgery. Placing clamps in the aorta is a known risk factor for that.

This is how the device works. It’s purely mechanical, a vein bloated onto the device. Its cutter creates a hole and then the vein with the implant is inserted into the aorta and through sure rotation of a knob, the mechanism is started and deploys the implant without an anvil, deploys the inner and outer implant after seating the implant and that concludes the anastomosis. It’s very, very quick. And this video will show this is in vivo, this is the ascending aorta; there is about two vein anastomosis on each heart coronary bypass done. There about 200,000 coronary bypass procedures in the U.S. alone, double that number for the rest of the world.

So this product also facilitates less invasive coronary bypass surgery where you create a much smaller opening in the side of the chest and then you insert the device using a camera to facilitate, looking and seeing what’s happening, you do the same thing, rotate the knob and by doing that you create an anastomosis, all of that through a small incision. From the patient’s perspective there is a big difference. This is the scar after sternotomy, 25 to 30 centimeters long. This is the scar right here after a mini-thoracotomy four to six centimeters cm long, obviously has an impact on the time of recovery.

Then another device that we developed that’s also FDA approved in various formats. It’s approved indirect and it’s called the C-Port device. And this is in micro state. And if I say micro, it’s really micro. These staples are so small they are hard to see, because they have to create an anastomosis between a vein or an artery that is three to four millimeters and in coronary vessels that’s small as a millimeter. This is what the staple line looks from the inside, this is the anastomosis from the outside, this gives you a perspective on size and on what the anastomosis looks like in a (inaudible).

The way the product works, in CO2 [ph] driven. The surgeon creates a little hole to insert the anvil, places a fixture on it, through that hole after the anastomosis he inserts the anvil into the coronary lumen and then all we have to do is press a button. And that button lowers the cartridge, fires the staples, creates the arteriotomy and then disengage the vein or artery from the C-Port device and tie that one stitch and you are done with the anastomosis; very, very quick, extremely reliable and very reproducible.

We have an iteration of this product called Flex-A. This is a product used in da Vinci procedures that’s the robot. The procedure is called totally endoscopic coronary artery bypass. Instead of a incision is done to a little port, and this is how it would look from the surgeon’s view through the console, this is the (inaudible) and this is our device and there’s a robot arm manipulating our product and basically the able sized distance pushes the trigger on the handle that lowers the cartridge, fires the staples, this is real time unedited, un-accelerated and then removes the device and he has now created an anastomosis (inaudible) by himself manually sewing would have about a 25 minute time period needed to accomplish this.

We have a lot of papers that have been published on our technologies, been on the market for 10 years and so from a 40,000 all product together, is the product that is foreseen (ph), that is a very, very good product on the market and we have taken this technology to the next step, a wider market in general surgery where stapling of any type of tissues, we get lung, colon, stomach, appendix, whatever is accomplished using stapling technology.

Stapling technology that we create is extremely different from what’s on the market today. We have two products the XCHANGE 45 and XCHANGE 30. 30 is (inaudible) and we are about to launch that product in Europe. We’re in the middle of the trial and I’ll talk about that little bit later. Let's talk about the market for a second. Market is gigantic. It's in the U.S., alone, it's about a $1 billion in the double deck, just for stapling to about $2 billion worldwide.

If you look at sealing devices, that’s a similar function where our device could be a substitute for, you have about a $4 billion market worldwide. The way surgery is done today, is through trocars. It’s called laparoscopic or thoracoscopic procedures. And what they do is they use different sizes of trocars, depending on what type of instruments they want to insert into the abdomen or chest.

5 millimeters trocars are good for almost every very tool we use with surgeons, eight millimeters or 10 millimeters or a number of other but fewer and then finally the reason they use 12 millimeter trocars is with translating technology, there is no stapler on the market today that will fit to anything smaller than 12 millimeter trocar.

The vision of our company is to get rid of 12 millimeter trocars altogether and why are we you planning to do that? Well the size matters, in this case significantly. If you take a 10 millimeter versus a 12 millimeter trocar, you have reduced the cross section area by one and half fold. If you go down to five millimeter trocar, it's almost a six fold decrease in cross sectional area.

With that, there is far less pain, there is less risk of infusion hernia. The hernia risk with a 12 millimeter is 3.1% versus 0.2% just going down to 10 millimeters. There are no hernias with five and eight millimeters trocars. You don’t have to close incision hole. That’s a big deal for the surgeons. From a patient’s perspective it looks much better, you have less of a scar and it’s a lot less painful. The 12 millimeter trocar size hurts. Five don’t.

So, a five millimeter product is the XCHANGE 30. Our eight millimeter product is the XCHANGE 45 and we have a product conceptually designed for a three millimeter, of course, called the Flex XCHANGE 32 that compares to what's on the market like 12 millimeter trocars.

Now how can we get our technology so much smaller than anyone else on the market, and this is how. This is a conventional cartridge from our competition and it basically has four components. It has what's called the wedge which moves from the left to the right and pushes the driver down, that pushes the staple out of the cartridge through the tissue to form against the anvil, similar to the staples we have on the desk. So if you know your staple arms need to be 3.5 millimeter, which is the medium staple size, a balloon site, if they cough, your driver needs to be this tall and your wedge needs to be this tall and once you are at 12.4 millimeter of cartridge and anvil, there is no way with this context to get smaller given if you have a mandate for a certain staple site. How we got around that, by getting rid of this component, the key component. We have our wedge work directly on the staple. If you look at this staple, this wedge moves from left to right, you just smashed that staple and (inaudible).

So we changed the design of our staple. Our staple looks more like a needle, curved needle that follows through the tissue and then falls on the anvil. In an animation this is what it looks like. The wedge works directly on the staple. The staple goes through the tissue that then interfaces with the anvil and is formed to a close deform or moderated deform something like that.

This allows us to reduce the size of our cartridges from 12 to five millimeters. What that means is, this is a 12 millimeter cartridge, this is a five millimeter cartridge. 12, five; huge difference. If you are a patient, this means that your trocars that we will use will be reduced to five millimeters, versus a 12 millimeter trocar.

Other impacts, once you are inside the abdomen or the chest, having smaller devices; has a big impact? Why? This is a jejunoanastomosis. This is the connection of small intestine that we do in gastric bypasses that we do for gastrectomies or pancreatectomies. For that with the conventional staple you need to create two holes to insert the jaws of the stapler. Now you end up with a big hole that needs to be closed again. With our device having very small jaws, the hole you create is much, much smaller. What needs to be closed is much, much smaller and the amount of sewing you need to do to close it is far less.

Another example, this is the lung. This is a segmentectomy. This is a part of the lung being removed. What you see here is the pulmonary segmental artery and a bronchus and you can see this is our five millimeter staple. Imagine taking something that’s 2.5 times bigger and trying to fix that in there without turning the vessels. It is challenging, it would be very challenging. This is where there is probably the biggest market for us within thoracic surgery because we have now allow the surgeon to get into spaces that would be difficult to get into.

Second goal is how could we improve the usability of our product, not just the size and we do that by increasing the amount of articulation. Conventional staples articulate 35 to 40 degrees. So, if I have to resect this colon down here, this is the rectum. This is the sigmoid and the descending colon. I can’t get around that turn through conventional staples. So what they do is they use an open stapler. This now requires not a trocar but an incision that is about five centimeters long to insert that device so that they can resect it. Well, having 80 degrees or 60 degrees of articulation will allow you to get around that corner and resect. This is a big deal. So, our five millimeter device with 80 degrees articulation is advantageous in ectomies, in parenchymal surgeries, cholecystectomy and in lung surgery. So it’s a big difference, conventional staplers, Cardica staplers.

The third thing is every time we fire a cartridge, they have to remove the tool and put a new cartridge on outside of the body and insert again, every time. If I’m doing a lung inspection, I’m going to use may be up to 10 cartridges. I am doing that step times 10 steps for each exchange 10 times. Its 100 additional steps the team has to do.

We have a design where because our staple is on the strip until it’s deployed, we can fire the staples as you see here, two pumps, three pumps, it doesn’t matter. Then you have staples in a tissue and now watch what happens. As I advance this lever, like a bicycle chain a new segment of staples is advanced into the front and I’m ready to fire again. There is no cartridge exchange. There are no cartridges on this device. This device has eight fires in its shaft, to be repeatedly use one after another.

Our staple is different. I’ve pointed it out. This is a conventional stapler, this is our staple. From a tissue’s prospective there is no difference. The only difference is that our staple is stronger. Our staple is made up of stainless steel that has twice the modulus, for us non engineers (ph) that’s twice the bending strength than titanium has, which is what conventional staplers are. So, a stronger staple is less likely to unform. Any of you have tried to staple through big stack of papers, you will see how the staple get all meshed up and basically useless.

Well, if you have a stronger staple it’s more likely not to do that. These are some examples, (inaudible) time of the day, this is transection, this is an anastomosis between the esophagus and small intestine. This is what I talked about, connecting two small intestines with one another, this is transecting a vessel. There it is, right, perfectly dry and no bleeding and finally if you are going to transact the lung. The lung is a beautiful organ, very soft, very pliable. You have to be very gentle as you resect. There’s a module in here that’s cancer, it’s getting removed. You can see that even with a small stapler it looks big. The chest is actually very small. Here's another connection.

Our clinical trials, because the FDA required clinical data on stapler that looked different, although it doesn't function any different and it just looks different. After the clinical trial we have to enroll 150 patients or 81 patients today, 200 deployment in open and endoscopic procedures. The trial is focused on gastrointestinal procedures. That’s anything from the stomach down to the colon and we've done, and very well do far, we're very happy with the results. We have another 80 patients to go. We assume we're going to be done by the end of Q1 calendar year 2013. So another four or five months to go. We have used our product in various other procedures that are listed here that include gynecological operation, lung resection, (inaudible) liver surgeon. The product can be used everywhere. The market is changing. It’s a very, very big market.

To summarize, the Microcutter is designed to get rid of 12 millimeter trocars. It articulates twice as much as any product on the market. It is capable of true multiside, no cartridge XCHANGE. In a different version in XCHANGE, XCHANGE 45 there was a cartridge based product. In multiproduct, our express product line, and finally we believe that we have enhanced tissue compression because it’s twice as strong metal.

Regulatory timeline, we complete the trial by the end of Q1 calendar year 2013, we do a submission as a 510-K. This is not a (inaudible). Its 510-K, hopefully we get through the FDA within statutory (inaudible) in 90 days. If not, whatever it takes. And in the meantime, we'll have the next product an eight millimeter shaft, 45 millimeter staple line, ready for C marking by Q3 calendar year 2013.

Thank you for your attention. I appreciate it.

Question-and-Answer Session

Karen Koski - Lazard Capital Markets

We have time for some few questions. Any questions from the audience. I have a question. Given the broad clinical utility of the Microcutter, what markets do you plan focusing on first?

Bernard Hausen

It’s a good question. I think the responses we’ve gotten so far are favorable in almost all markets, including gynecology. I just spoke to a gynecologist who would love to do hysterectomies in advanced cancer with something that is much smaller then what they can use today. I think the most attractive markets for us are thoracic surgery, lung resection. It’s a huge market and lots of stapling and then in general surgery probably appendectomy and liver, pancreas, renal and splenectomy, so a spleen removal type of surgery.

Karen Koski - Lazard Capital Markets

And can you talk a bit about the competitive landscape?

Bernard Hausen

There is two major competitors that probably some of you heard of. One is Johnson & Johnson and the other is Covidien. They own this market. This is a duopoly, virtually no other competition. The market share is about 50/50 if you average it worldwide, as I said it’s about $4 billion market. I think obviously we’re at a disadvantage of company size. I will readily admit that. I think we have a real advantage in terms of product offering. I feel based on the IP we have that would be very difficult for either company to reduce the size of the staple they have. The whole market is moving to less invasive. If you go to almost any surgeon and ask if you could get rid of the 12 millimeter trocar would you like to do that, the answer would probably be yes from every one of them and the reason they use the 12 is because the current staplers are so big. So I think we have a real competitive edge while we a have marketing disadvantage with respect to the size of our company.

Karen Koski - Lazard Capital Markets

Any questions from the audience? Thank you very much for coming.

Bernard Hausen

Thanks a lot. Thanks.

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