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Hansen Medical, Inc. (NASDAQ:HNSN)

Q3 2009 Earnings Call

November 17, 2009 10:00 am ET

Executives

Lasse Glassen – Financial Relations Board

Frederic H. Moll, M.D. – President, Chief Executive Officer & Director

Steven M. Van Dick – Chief Financial Officer & Vice President Finance and Administration

Operator

Welcome to the Hansen Medical, Inc. third quarter 2009 results conference call. At this time all participants are in a listen only mode. Following the formal presentation instructions will be given for the question and answer session. (Operator Instructions) As a reminder, this conference is being recorded today, November 17, 2009. At this time I would now like to turn the conference over to your host Mr. Lasse Glassen from the Financial Relations Board.

Lasse Glassen

Welcome to Hansen Medical’s 2009 third quarter conference call. With us today are Hansen Medical’s Co-Founder, President and Chief Executive Officer Fred Moll and the company’s Chief Financial Officer Steve Van Dick. Before I turn the call over to management please remember that our prepared remarks and responses to questions will contain forward-looking statements.

Words such as may, will, should, expects, believes, estimates, targets, projects, goals, could, scheduled, planned, opportunity, guidance and variations of these words and similar expressions are intended to identify forward-looking statements that are subject to a number of risks and uncertainties. Examples of such statements include statements about our expected operational and financial results, the expected numbers, locations and timing of placement of our Sensei systems and recognition of revenue on systems, the timing and results of our clinical studies, receipt and timing of future regulatory approvals, the expect results of our cost reduction initiatives and the timing of expected product introductions.

Actual results may differ materially from those set forth in these statements due to risks and uncertainties inherent in our business including potential safety and regulatory issues that could slow or suspend our sales, our ability to effectively sell, service and support our products, the rate of adoption of our systems and the rate of the use of our catheters at customers that have purchased our systems, our ability to successfully manage our manufacturing and operating expenses, our reliance on third party manufacturers and suppliers that could adversely affect our ability to manufacture products on a timely basis, scope and validity of intellectual property applicable to our products, competition from other companies, the effects of credit, financial and general economic conditions on potential purchasers of our systems, the ability to obtain additional financing to support our operations, additional cost and resources necessary to address existing shareholder litigation regarding our restatement, potential claims and proceedings related to our restatement such as additional shareholder litigation or actions by our government entity and other risks as detailed in the risk factor section of our periodic SEC filings including our quarterly report on Form 10K for the quarter ended September 30, 2009 as filed with the SEC on November 16, 2009.

We undertake no obligation to revise or update information herein to reflect events or circumstances in the future even if new information becomes available. With that, it’s now my pleasure to turn the call over to Hansen Medical’s President and Chief Executive Officer Fred Mull.

Frederic H. Moll, M.D.

We apologize for holding this call on such short notice, it wasn’t until yesterday afternoon that we completed the previously announced restatement of our financials and filed our quarterly report on Form 10Q for the quarter ended September 30, 2009. On today’s call I will provide a summary of the financial restatement along with our third quarter business overview. Following my comments Steve Van Dick our Chief Financial Officer will provide additional details on our third quarter results. After our prepared remarks, we will open the call to questions.

As previously announced, following an anonymous whistle blower report, Hansen Medical’s audit committee with the assistance of independent counsel investigated the whistle blower report and reviewed our historical revenue recognition practices on the sale of our Sensei Robotic Catheter Systems. This investigation has resulted in the restatement of our financial statements that we filed yesterday.

In total, the restatement impacted revenue recognition on 24 systems sold between the fourth quarter of 2007 through the second quarter of 2009. In the case of 13 of these systems revenue should have been deferred and recognized in a later period than the period in which it was originally recognized. In the case of 10 systems these systems remained as deferred revenue on our balance sheet as of September 30, 2009. Revenue on one system during this period was reversed pending clarification and quantification of our obligations under a letter of intent regarding a potential research study.

With that being said I’d like to highlight several points. First, all of these systems on which we recognized revenue prior to the restatement were shipped under valid purchase orders to legitimate customers. We have received full payment from our customers on all but one of these systems. We expect this system will be paid in full next month. As a result, the restatement is a cash neutral event and it has no impact on our previously reported cash flow.

Second, for the systems that remain as deferred revenue on our balance sheet, we expect to recognize revenue in future periods once outstanding obligations are met. Third, the irregularities that were identified during the investigation occurred outside of Hansen Medical’s accounting department. Finally, while these events are unfortunate, it does indicate that our whistle blower procedures are functioning properly and is an effective tool in helping us uncover issues within our operations. That being said, we’re pleased that the financial restatement is complete and our periodic filings with the SEC remain current.

Before we leave the matter, I think it is important for me to address directly to all shareholders of Hansen three questions surrounding the restatement: first, how did it happen; second, what was involved; and third, what is being done to make sure it does not happen again? With regard to the cause of the restatement it is clear that we did not maintain effective procedures for communicating to all relevant personnel the importance of strict adherence to our revenue recognition and other accounting policies and what data is required to properly apply GAAP to our transactions.

Also, we did not maintain sufficient safe guards to prevent or detect improper conduct and the withholding of relevant information by members of our commercial operations organization with respect to revenue transactions. I will speak about our remediation actions in a moment but first let me describe some examples of revenue transactions that were restated. Approximately half of the transactions that were subject to the restatement involved sales to distributors. For some distributors we recognize revenue upon shipment of systems to the distributors based on our belief at the time that the distributors were independently capable of installing the systems and training end users.

However, through the course of our investigation we determined that Hansen personnel were on site when distributors first installed systems at their customer locations. This contributed to a determination that these distributors were not independently capable of installing systems and training end users. For the immediate future, we plan to recognize revenue on systems sold to these distributors on a sell through basis. That is, we’ll recognize revenue once the system is installed at the distributor’s customer and the distributor’s customer has been trained.

In the future, some of our distributors may demonstrate that they have become fully independent to install systems and conduct training. Despite the fact that there are system sales to distributors in deferred revenue, I want to emphasis that all of our sales to distributors have been paid for. To use another example, we must train our end user clinician prior to recognizing revenue. In a few instances, we had provided training to a clinician who had privileges at a hospital but by the end of the quarter in which we previously recognized revenue we had not yet trained the intended primary user of the system at that hospital.

As a result of this, remaining obligation for the company we delayed revenue recognition for the system in our restated financials until the intended primary user was trained. Unfortunately, there were also some instances where employees in Hansen’s commercial operations group falsified documents, miss represented facts or did not disclose potential side arrangements. We have no tolerance for such behavior and none of the employees responsible for these actions are still with the company.

Now, let me address some of the remedial actions we are taking to correct the material weaknesses we identified. Our plan to strengthen our internal controls in our commercial operations include the following actions. First, as I mentioned a moment ago we have terminated some employees and will be appropriately disciplining other employees for actions related to the restatement. Second, we have reorganized our sales and service organization so that they no longer report to the same vice president in order to reduce the risks of conflicts between oversight and incentive.

Third, we’ll expand our revenue recognition training to involve field clinical and field service personnel and will improve our revenue recognition to include more detailed descriptions of the revenue recognition process. Also, we will take steps to improve communication between our accounting department and our sales, field clinical and field service personnel. Finally, we will demand that more rigorous representations be made by sales personnel and are adopting new representations for our field clinical and field service personnel.

We will also require more detailed documentation regarding elements required for revenue recognition and timely accountability. Going forward, Hansen Medical is committed to maintaining the highest possible standards and financial reporting and we are also committed to being as open and transparent as possible in communications with the financial community.

Now, I’d like to move on and overview our third quarter results. During the third quarter we shipped five Sensei Robotic Catheter systems and recognized revenue on five systems. Contributing to the third quarter revenue were three systems that were shipped during the third quarter and two that have been categorized as deferred revenue as part of the restatement. In addition, two of the five systems shipped in the quarter remain as deferred revenue as of the end of the third quarter.

Of the five systems that contributed to third quarter revenue, one was sold to Hartford Hospital, one to the University of Heidelberg and one unit went to John Radcliffe Hospital in Oxford UK. The two systems that were reclassified from deferred revenue to revenue during the quarter include units sold to Yale University and to a new distributor in South Africa.

With regard to recurring revenues, during the third quarter we sold 497 Artisan Catheters. While catheter sales declined compared to the prior quarter, utilization rates as defined by the actual number of cases performed rose in the quarter. Also, I am pleased to report that through the third quarter we have now converted a total of 46 customers to extended service agreements up from 41 customers at the end of the second quarter.

In general, the current environment remains challenging for products like the Sensei system that are in the early stages of commercialization. Our system sales continue to be adversely affected by general macroeconomic conditions that are significantly impacting our potential customer’s capital spending. However, while the length of the sales cycle has been extended, our pipeline of potential customers is healthy.

Last month we announced that our former Senior Vice President of Commercial Operations had resigned. Ken [Hustead] has been promoted to Vice President of Domestic Sales. Ken has a proven track record of success, he’s ideally suited for this new role and is held in high regard by our senior management team and the sales force. We also believe that this internal promotion will affect a smooth transition and mitigate the potential impact on existing customer relationships and in closing system sales that are in process.

Now, with respect to clinical and product development initiatives, we are pleased with our recent progress. Regarding clinical initiatives, I am happy to report that later this year we’ll be commencing an evaluation of 10 sites for a US arterial fibrillation study as part of our process to expand our current labeling in the US beyond mapping. We currently expect to complete this study later in 2010 and we look forward to updating you on the progress of this initiative in future reports.

Regarding product development, we are pleased with the recent efforts in developing improvements to the Hansen platform. During the quarter we received US Food & Drug Administration clearance for our next generation Sensei X Robotic Catheter system and the Artisan Extend Catheter. Also during the quarter we introduced the Lynx Robotic Ablation Catheter, a small flexible irrigated ablation catheter which we plan to launch in Europe in the first quarter of 2010.

The Sensei X system extends the procedural capabilities of robotic catheter control by providing advanced levels of instinctive control, accuracy and ease of use. Benefits of the next generation platform include tighter bend and workspace capabilities along with accelerated set up and procedure work flow as well as more sophisticated navigation features. This new platform supports the next generation Artisan Extend Catheter to enhance robotic capabilities during complex arrhythmia procedures.

The feedback from Sensei X users have been very positive with Raul Doshi, M.D., director of the arrhythmia services at Saint Jude Medical Center in Fullerton California commenting, “During evaluation of the Sensei X system, we were able to navigate and control the catheter in 3D with greater stability and enhanced responsiveness which improved our ability to perform complex arrhythmia mapping procedures safely and successfully.” Also Amin Al-Ahmad, assistant profession or cardiology at Stanford University who also evaluated the new Artisan Extend Catheter commented, “The improved flexibility and bend radius of the Artisan Extend Catheter allows access to the right inferior pulmonary vein and other cardiac targets that are typically harder to reach when mapping with manual technique.”

The new Lynx Robotic Ablation Catheter which we plan to launch in the European market is supported by the Sensei X platform and incorporates a smaller and more flexible integrated profile for the treatment of arterial fibrillation and other electrophysiology disorders. Offering a 7 French irrigated ablation tip with a standard size sheath the new Lynx Catheter has six degrees of freedom that facilitates placement in difficult to reach anatomic locations. Pending CE Mark approval, the Lynx Catheter is expected to be available in the European Union during the first quarter of 2010.

Testing in Europe of the new Lynx Catheter has been very positive. Josef Kautzner, M.D. head of the department of Cardiology at the Institute for Clinical & Experimental Medicine in Prague comments, “The Lynx Catheter is thinner and safe and its ablations were consistent with my prior experience with other ablation devices. In addition, the learning curve for the new catheter may be shorter which I believe will help a broader group of physicians to perform complex ablation procedures for the treatment of AF with greater effectiveness.” We believe the Sensei X platform together with the Extend and Lynx product introductions will help drive strong adoption of our system in 2010.

I would like now to take the opportunity to update you on the progress related to our new vascular platform. As I have described in the past, we are very excited about the opportunity to introduce Hansen robots and catheters for use in the arterial vascular system. We believe this new system and its capability will open up significant markets in vascular surgery including procedure targets in peripheral vascular, abdominal and the thoracic aorta and in the developing procedures in structural heart disease.

Recently, Dr. Lumsden and his colleagues at The Methodist Hospital in Houston used the Hansen system to stent and occluded pulmonary artery in a 72 year old patient recovering from a lung transplant. The procedure was a great success and this was the first robotic procedure of its kind and is a great example of the versatility and the clinical capability of Hansen’s technology for the use in procedures outside the chambers in the heart. We are progressing nicely with the development of vascular system and plan first human trials in 2010.

We believe that the opportunity to enter the significant market for interventional procedures will provide and important source of revenue in 2011 as we focus on our path to profitability. We look forward to updating you on our progress of the vascular initiative in future reports.

In summary, we are confident of the benefits of our technology and that they present compelling value propositions to hospitals and payers. Furthermore, we believe that our pipeline of perspective customers remains healthy and the recent challenges and disappointing system sales results are not reflective of Hansen Medical’s longer term business opportunity. With that, I will now turn the call over to Steve Van Dick, our Chief Financial Officer for a closer look at our third quarter financial details.

Steven M. Van Dick

My comments this morning will focus on details of our third quarter financial results. Please keep in mind that the prior period comparisons reflect the financial restatement completed just yesterday. With that, let’s now move to our third quarter 2009 income statement. We recorded quarterly revenue of $4.6 million primarily on the sale of five Sensei systems and 497 Artisan Control Catheters. This represents a 52% decrease compared to the $9.6 million of revenue in the same period in 2008 where we sold 12 Sensei systems and 413 Artisan Catheters.

The average selling price for the five systems sold during the third quarter of 2009 was approximately $601,000. This compares to an ASP of approximately $671,000 in the previous quarter and approximately $728,000 in the same quarter last year. Our average selling price of the Sensei system in the third quarter of 2009 were negatively impacted by pressures related to the general economic and capital market conditions which have resulted in discounting and by the impact of unfavorable movements in exchange rates. The Artisan Control Catheters sold in the quarter had an average selling price of approximately $1,700 compared to $1,600 in the previous quarter and down from approximately $1,800 in the third quarter last year.

Cost of goods sold for the quarter was $3.3 million and included non-cash stock compensation expense of $180,000. Gross profit for the quarter was $1.3 million yielding a gross margin of 28.4%. This compares to a gross profit of $3.4 million and a gross margin of 35% for the same period in 2008. For the remainder of 2009 we expect that cost of goods sold both as a percentage of revenue and on a dollar basis will continue to vary significantly from quarter-to-quarter due to a variety of factors including revenue levels, fluctuations in the ASPs, the product mix and manufacturing levels and yield fluctuations.

In reviewing the key expense line items on the income statement, research and development expenses for the third quarter were $4.9 million including non-cash stock compensation expense of $.6 million. In the same period last year, R&D expense was $7.2 million which included non-cash stock compensation expense of $.7 million. The decrease in research and development expenses was primarily the result of decreases in employee related expenses due primarily to a lower average headcount and a one week furlough.

On a sequential quarterly basis, R&D expenses were relatively flat with the last quarter. For the remainder of 2009 we anticipate research and development expenses to continue to decline relative to the levels in 2008 as we carefully manage expenses related to the development efforts for the EP market and other applications and realize savings from our reductions in force and the one week per quarter furlough.

Selling, general and administrative expenses during the third quarter were $8.2 million and included non-cash stock compensation expense of $.8 million, $1.3 million of Luna litigation expense and $.5 million of legal costs due to the engagement of independent outside counsel to investigate the whistle blower report. This compares to SG&A expenses of $8.9 million for the same period in 2008 which included non-cash stock compensation expense of $1.8 million and $.4 million of Luna litigation expenses.

The decrease in selling, general and administrative expenses was primarily due to decreases in employee related expenses related to lower average headcount and a one week furlough and a decrease in non-cash stock compensation expense. This was partially offset by our increased legal costs. On a sequential quarter basis, after backing out expenses related to the Luna litigation in both period and the incremental legal costs related to the whistle blower investigation in the third quarter, the third quarter SG&A expenses were lower by approximately $2.2 million compared to the second quarter of 2009.

For the remainder of 2009 we expect selling, general and administration expenses to decline from 2008 levels primarily due to reduced employee costs including the effects of the quarterly one week furloughs partially offset by costs related to the Luna dispute and the investigation of our whistle blower report. As previously mentioned, Hansen has already implemented a number of cost saving measures in each of its departments. Hansen will continue to evaluate the effect and extent of these measures against future economic conditions and actual revenue results for the remainder of 2009 and will consider the implementation of additional cost reductions for the remainder of the year as circumstances warrant.

Other expense net for the three months ended September 30, 2009 was $194,000 compared to the other expense net of $28,000 for the same period in 2008. The change is primarily due to higher interest expense due to the company’s borrowings under its equipment line of credit in addition to lower interest income related to the lower interest rate returns on the company’s balances of cash, cash equivalents and short term investments. Going forward, we expect our interest expense to decrease gradually as we begin to pay down our equipment loan and our interest income to remain constant.

Net loss for the third quarter of 2009 including total non-cash stock compensation expense of $1.6 million was $11.9 million or $0.32 per basic and diluted share based on average and basic diluted shares outstanding of 37.4 million shares. Net loss for the third quarter of 2008 including non-cash stock compensation expense of $2.7 million was $12.9 million or $0.52 per basic and diluted share based on average basic diluted shares outstanding of 25.1 million.

Turning to the balance sheet cash, cash equivalents and short term investments as of September 30, 2009 were $40.4 million compared to the $35.2 million as of September 31, 2008. The higher cash balance was due to the company’s net proceeds of approximately $35.3 million raised from the financing completed in April partially offset by operating expenses. In addition, we have an existing debt facility with Silicon Valley Bank which included an equivalent line of credit that converted to installment debt beginning April 1, 2009. During the quarter we paid down the debt by approximately $.9 million leaving a balance of approximately $10.7 million as of the end of the third quarter.

Our recent challenges continue to demonstrate how precarious the current economic times are and how difficult it is to predict the timing of customer orders. We continue to be encouraged by clinician interest in our technology but given the uncertainty around the length and severity of the current economic recession and the impact it is having on our potential customer’s purchase decisions, similar to last quarter we will continue to suspend our practice of providing specific quantitative guidance on the number of units we expect to recognize in revenue in future periods. At such time we feel we have more visibility, we will revisit our guidance policy.

I thank you for your attention and at this time I’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this time I’m showing no questions. I would like to turn the call back over to management.

Frederic H. Moll, M.D.

Thank you everyone for your attention. We look forward to speaking with you again at our next earnings call.

Operator

Ladies and gentlemen this does conclude our conference call for today. We do thank you for your participation. You may now disconnect.

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