Hansen Medical Inc. (NASDAQ:HNSN)
Barclays 2013 Select Growth Conference
November 18, 2013 9:05 am ET
Bruce Barclay – President, Chief Executive Officer
Dan Sollof – Barclays
Good morning everyone. My name is Dan Sollof from Matt Taylor’s med-tech team here at Barclays. It’s our pleasure to have Hansen Medical with us today. Hansen’s a fast paced, rapidly growing medical robotics company that develop market products for clinical applications in electrophysiology and peripheral vascular disease. It’s Magellan Robotic system, developed in partnership with Philips Medical, represents a new robotic approach designed to enable physicians to remotely and precisely manipulate robotically steerable catheters and standard guide wires using advanced controls and visualization.
So with that, I will turn it over to Bruce.
Thanks Dan, and good morning everyone. Thank you very much for inviting us to participate this year. With me today is Pete Mariani, our CFO as well who will be available for the Q&A. As we are a public company traded on the NASDAQ, the information contained in this slide may contain—or our presentation today may contain forward-looking statements. We encourage you to look at this information carefully as well as our securities filings.
Hansen Medical is a leading provider of intravascular robotics, poised for growth in the $2 billion-plus medical robotics market. We view intravascular robotics at Hansen very much as a platform technology and our intention is to leverage that technology across multiple clinical applications. Currently, we’re focusing our initial efforts on two areas of unmet clinical need, first in electrophysiology, or EP, and the second in vascular. Within EP in 2007, we launched our first intravascular robot in the U.S. and Europe, which we call the Sensei robotic system. Clinical use of this system is growing and has now been used in over 12,000 patients demonstrating favorable clinical outcomes. We’ve generated a significant install base for recurring revenue. Our Sensei system is being used in both the left and right atrium in cardiac arrhythmia procedures and some accounts have begun to use the system in ventricals as well in the experimental treatment of ventricular tachycardia.
Our second clinical application for intravascular robotics is in the peripheral vasculature. Mid-last year, we received FDA clearance to market the Magellan system in the U.S. for peripheral vascular disease, which was preceded by our CE mark in Europe. We’re encouraged by the breadth of clinical cases being performed with our new Magellan robotic system. The system is being used to access multiple clinical targets in both the arterial and venous vasculature. We’re now leveraging this positive clinical experience into a broadened commercial strategy with community hospitals. Finally, our R&D pipeline is full. Our strategy is to develop a suite of catheters to access multiple vessels in the body to expand the markets and clinical targets for use with our vascular systems.
There are a number of clinical segments within the medical robotics industry, making it an exciting business to participate in. More than $2 billion in sales of medical robotics products were generated in 2012. Most of those sales were from intuitive surgical but we’re also in good company with Mako in the orthopedic space to capitalize on this large and growing opportunity. Additionally, our intravascular robotic platform supports multiple clinical specialties, including electrophysiologists and those performing minimally invasive peripheral vascular interventions, namely endovascular surgeons, interventional radiologists and interventional cardiologists. Our technology uniquely addresses the challenges associated with using robotics in the intravascular space.
Let me now walk you through the history of the company a bit. We were founded in 2002 and since that time we’ve developed a number of partnerships with both large and small companies to commercialize our products as well as to develop future applications of our technology. These partners include Philips, as Dan mentioned, but also Siemens and GE in the capital space and St. Jude Medical, Intuitive Surgical and others to help develop product channels, intellectual property, and new technologies. We think these partnerships highlight the vast utility of our technology and validate our unique value proposition in the market.
Our business model is similar to other medical robotics companies like Intuitive and Mako. We earn revenue from capital, which is the robot itself, and recurring revenues from the disposable catheters that we sell, as well as accessories, service contracts, and the like, which you see here on this slide. Intravascular robotics from Hansen give us access to approximately 4 million addressable procedures each year. About half of those procedures are available to us today with our existing products and another 2 million annual procedures from future markets, including neuro, cardiac and structural heart applications. So let’s look at our vascular business first.
Peripheral vascular disease, for those of you who may not know, refers to the disease of blood vessels outside the brain and the heart, which covers a broad range of vascular anatomy. There is a high prevalence of peripheral vascular disease as it affects an estimated 20 million people in the U.S. and Europe, and the prevalence is increasing. These patients tend to be quite sick with systemic vascular disease and have a high rate of morbidity and mortality over time.
Vascular is forecast to be one of the fastest growing service lines in the hospital over the next few years. Sg2, which is strategic healthcare consulting and advisory firm based in the U.S. forecasts that over the next decade, vascular will be the third fastest growing inpatient and fastest growing outpatient service line within U.S. hospitals. Growth will be driven by demographic factors such as an aging population as well as increasing rates of obesity and diabetes, but also improvements in technology that better enable diagnosis, and more effective and less invasive treatment of peripheral vascular disease will also drive this growth.
Outpatient is growing quickly, like in other services, due to expected movement towards population health management, that is prevention, identification and addressing risk factors, diagnosis for early detection, early intervention, and efforts to reduce unnecessary hospitalizations. We believe robotics fits well into this movement.
Within the vascular service line, procedure growth is expected to continue to be driven by less invasive endovascular procedures which are forecasted to see continued growth while open surgeries we expect to remain flat. We believe this reflects the patient preference for minimally invasive procedures and also the continued evolution in technology making endovascular procedures accessible for more patients and more complex cases, which are specific benefits of robotics.
The vascular service line is also one of the most profitable within a hospital. Sg2 research estimates that the median contribution margin for a vascular case is the second highest among all the service lines within the hospital at around $7,500 per case. There’s evidence to demonstrate how all this plays out economically in a real world environment.
This slide discusses a recent study done with one particular hospital’s vascular program and showed that the vascular service line was not only the most profitable within this hospital from the point of view of contribution margin generated by physician, but also demonstrated a halo effect, namely that new vascular-specific patients referred to the hospital generated significant additional revenue beyond their vascular-specific treatments by utilizing a total of 29 different specialties inside the hospital. We think the study’s conclusion is powerful and we think it speaks to the value of hospitals to invest in their vascular service lines.
We also believe there is a significant unmet clinical need for the use of intravascular robotics in the treatment of peripheral vascular disease. For many interventionalists, including those most skilled, cases can be long, complex, and unpredictable in their duration and their outcome. This unpredictability could lead to lab inefficiencies and costly overruns for the hospital. Second, there could be a wide discrepancy in the training and skill sets among the physicians performing endovascular cases today. Third, given the fact that the operator wears heavy lead and stands next to the C-arm radiation source during the cases day-in and day-out, there are multiple documented cases of physicians suffering from excessive radiation exposure and orthopedic injuries, often leading to unexpected costs and shortened careers. Finally, complex cases can lead to costly complications, including even open surgical procedures which we believe the Magellan robot can reduce due to its ability to raise the skill level of the operator and create more consistency in outcomes from physician to physician.
For those of you not familiar with the Magellan system, it consists of two capital components and a disposable catheter. First on this slide on the upper left hand side, you’ll see the robotic arm, which sits over the patient bed, and there is a disposable catheter that extends from it. The other component of the capital is the workstation that you’ll see on the lower left of this slide. We believe the Magellan has the potential to revolutionize the way endovascular procedures are performed, potentially enabling new procedures and offering less invasive treatment options. Given the platform nature of the robot, there are many potential clinical applications of this system as well, and you’ll see those listed on the right hand side of the slide. The system is also being used by all three different physician specialties, namely vascular surgeons, interventional cardiologists and interventional radiologists.
The next slide here is a video of the actual procedure being performed by a physician. The first thing you’ll see, for those of you that are familiar with the case, is that the physician is seated in the control room at the workstation, outside the patient facility and away from the radiation source. The robotics system drives three different separate components inside the patient: the outer catheter – the sheath; the inner catheter, which is the leader, and then the guide wire, which is a standard guide wire off the shelf available at all hospitals. The physician has the ability to steer those three individual components from this workstation.
The unique thing about our system as well is this ability to steer the inner leader and the outer sheath 360 degrees, which again you’ll see in the video. So the ability to place a catheter inside the system, not exchange catheters over time, to be able to keep it off the artery wall, we think is a pretty unique capability of this system.
The precision, the stability and the control of robotic catheters offer several potential clinical benefits. The precision and intravascular shaping of the system may help enable and simplify the most complex cases, especially those involving tortuous anatomies such as fenestrated endovascular aortic repair cases, or FEVAR cases. The stability of the catheters offer potential to improve the reliability and effectiveness of the subsequent delivery of the therapy such as providing a stable platform for stent delivery, embolization, or crossing occlusions. Off the wall navigation, as I said, or center-line driving as we like to call it, offers the potential to reduce the risk of emboli during the navigation, which can potentially lead to stroke especially when navigating across the aortic arch. Lastly, navigating robotically offers the potential to reduce radiation exposure to the physician and their staff by placing them outside the field of radiation during the most complex part of the procedure.
Since approval of the Magellan without clinical data in 2012, we’ve been working diligently with multiple clinicians to build a growing body of evidence to demonstrate this clinical value proposition. There have been now over a dozen peer reviewed publications discussing Magellan and more are expected. We’re also initiating the ROVER registry to study all cases performed plus the additional single-center investigations on specific procedures or topics of interest to the clinical community.
I’ve included a couple of actual clinical cases to show the breadth of the application. Here is an animation of the system being used in a robotic FEVAR or endovascular repair case. Animation simplifies the procedure quite a bit, but the robotic catheter and the wire control is used to help what is often the most challenging part of the system, which is accessing the fenestrations in the graft or the side branches in that graft. Again, you can see from the video the ability to steer the distal tip into the desired artery and not make multiple exchanges of catheters with pre-shaped tips. Being able to reliably cross these fenestrations, even in cases with very stenosed vessels, we think can bring great predictability to the procedure.
Often the cannulation of these vessels can be quite challenging and can often take multiple hours to complete. This particular clinical case, three fenestrations, the SMA, the right and left renal arteries were crossed in a total of eight minutes, which is extraordinary given how long it might take for an actual manual case to perform. We believe this is an example of the type of predictability you can get with the system.
In a second clinical case, this is a stenosed occluded highly calcified renal artery where an attempt to cross this occlusion manually failed the prior week, so they brought the patient back to use the robot. The physician navigated robotically and parked the catheter at the opening of the right renal artery, which is on the left side of the picture here, the patient’s right. Supportive robotic catheters provided enough stability to enable crossing through the occlusion with the guide wire. This was one of several clinical cases where Magellan has been able to cross successfully when manual crossing was not successful.
We’re also building strong momentum at global meetings with our customers. The Magellan system has been used in eight successful live cases at four major meetings in the last year in a variety of different procedure types to help provide important validation of the technology. We also have a tremendous amount of activity planned this week at the Veith Symposium here in New York City.
Intravascular robotics offer a broad value proposition for patients, hospitals and physicians alike. For patients, they may benefit from the improved predictability of procedures and simplified interventions. For hospitals, we believe that our products offer improved procedure predictability, potentially allowing for lower costs and incremental patient throughput. This may allow hospitals to improve the utilization and profitability of their most profitable assets, their operating rooms, their EP labs, and their cath labs. Robotics also provides hospitals with a technological advantage with competing for patients as well as physicians and medical staff. With both the Magellan and the Sensei systems, physicians have the opportunity to improve their precision and performance across most of their cases while potentially converting certain open surgeries to minimally invasive procedures. Additionally, the physician can be seated comfortably away from the radiation field.
We develop an ROI model for use with every hospital considering the purchase of a Magellan system and we believe that it does demonstrate economic value for use of robotics. Specifically, our model demonstrates that by investing in capital and catheters for the robot, the hospital can achieve an internal rate of return from about 20 to 40% and a payback within two to four years, depending on the specific assumptions of course the hospital will make. The model examines three different types of peripheral vascular cases: aortic cases, which can be quite complex; high volume peripheral cases which cannot afford costly delays, and peripherally enabled cases which oftentimes require open surgery to complete. In the model, we specifically demonstrate the potential value of the Magellan program by driving incremental profit, contribution from an increase in patients, including oftentimes better insured patients, savings from avoiding costly procedure time overruns, including staff overtime costs as a result of improved procedure predictability, and contribution from improved lab utilization. We found this model to be very helpful in our discussions with hospital administrators as we demonstrate the potential of the system to improve utilization capacity and profitability in their ORs and their cath labs.
Let’s now look at our electrophysiology business, and like the Magellan system the Sensei X consists of a capital component and a disposable component. The capital consists of the robotic arm and the workstation, and the disposable is the Artisan Extend catheter, and we also sell a catheter called the Links catheter in the lower right hand of this slide, which is a therapeutic device. We’re very encouraged by the momentum that we’re seeing in the utilization of robotic systems. As I mentioned earlier, there have been more than 12,000 cases performed through Q3 of 2013 with our robotic system since first commercial launch. Through Q3 of this year, procedures have grown by 24% over the same period in 2012. Utilization is an important metric for our business as we believe it will ultimately drive more robotic sales.
There’s a growing body of worldwide clinical evidence in over 20 publications showing the safety and effectiveness of the Sensei system in AF as well as reduced procedure time and reduced radiation exposure to both the patient and the physician with over 2,000 patients now treated in clinical studies. Last year, there was an important publication of clinical data from a worldwide multi-site survey of Hansen robotic cases in patients. In this publication, data from over 1,700 Hansen robotic patients showed a slightly lower complication rate as compared to manual technique, and importantly improvement in freedom from atrial fibrillation at 18 months compared to manual technique. The data also showed that as operators perform more procedures, the advantages in robotic technique improved for both acute complications and long-term benefit compared to manual. It’s also important to note that this positive data was observed in some of the earliest Sensei cases in 2007 through 2009 prior to development of our improved training and clinical support teams, which has helped advance robotic technique, and prior to several important technology upgrades and new products that have enhanced the physician’s clinical experience in these EP procedures.
And of course, we have some valuable real work experience demonstrating the economic benefit of our Sensei system in hospitals. This paper was published in 2011, showing the financial payback of the Sensei system for a new user in Arlington, Texas. I the paper, the authors show how the robot allowed them to grow patient volume by 76% in the first year and increased device utilization through increased clinical case predictability, increased community awareness, and reduced physician fatigue. All of this contributed to improving their payback from an anticipated three-year period to less than one year.
Let’s talk about R&D for a second. We continue to invest heavily in R&D, and the next slide will summarize some of our pipeline activities. We are developing, as I mentioned earlier, a suite of catheters for use with the Magellan system to truly take advantage of this platform potential of the system. I’ll talk in a minute about our next generation catheter, but in the future we may develop and launch both large and smaller diameter catheters for use in TAVI or valve repair, neurovascular and other clinical anatomy.
We’re very excited about this next generation catheter, which we call the Magellan 6-French robotic catheter. We expect this lower diameter catheter will open up new markets and clinical applications by allowing more physicians preferring a smaller femoral access puncture site to use the system to give them access to smaller vessels not reachable today by the current 9-French system. These new clinical targets include smaller vessels in the lower extremity for peripheral vascular disease and also aortic side branches, among others.
Given our early entrance into flexible robotics and our heavy investment in R&D, we have compiled a substantial and very valuable patent portfolio, and it does continue to grow. We own over 250 patents and patent applications as a result of our direct investment in technology creation, and we have in-licensed hundreds of important additional patents from others, including Intuitive Surgical, Luna Innovations, and the like. These patents cover several robotics building blocks, including imaging, navigation, and software in addition to fundamental robotics technologies.
Lastly, let’s look at our financials. Given that we just announced our Q3 results on November 6, I won’t spend a lot of time on this other than to say we delivered a strong quarter with a shipment of five systems in the quarter, four of which we commercialized and recognized as revenue. We also have a very strong balance sheet at the end of Q3 with $47.1 million in the bank. This is the result of our recent financing activities, which are outlined on this next slide. It was in Q3 when we improved our balance sheet and created the fundamental foundation for long-term capital for the business. In the quarter, we received $39 million of the up to $93 million private placement transaction with some of our largest shareholders and board members and other investors. We also closed a $33 million long-term interest-only debt facility. These two transactions have significantly strengthened the company by removing the near-term financing overhang from the company. These transactions have also added increased confidence of our customers, our employees, our suppliers and other partners critical to our ultimate success. Additionally, we have further surrounded ourselves with accomplished investors with a long-term view of this business.
So in summary, I believe Hansen Medical represents a compelling investment opportunity. We have a large and growing install base of system, we’re launching new products with improved commercial execution, and the body of positive clinical data continues to grow. All this is supported by a broad and deep portfolio with intellectual property. Our new Magellan platform allows us to enter the much larger vascular market which is over 20 times larger with over 4 million estimated annual procedures. Magellan is gaining recognition by key opinion leaders and clinical and executive interest is growing. Finally, we have a strong business model and offer a compelling value proposition in a challenging healthcare environment.
Thank you all again for your interest in the company. We’d be happy to answer any questions that anyone might have.
Question and Answer Session
Yes, maybe to start off, I know you talked about the value proposition to the hospital and the ROI. Can you just discuss maybe the—how you characterize the hospital CAPEX environment, how are these conversations now versus a few years ago, and how that’s changed?
Sure. Well, there’s no doubt that the current environment is difficult. There certainly are some headwinds, not only on the CAPEX side but the uncertainty in hospitals relative to implementation of the Affordable Care Act also has some hospitals standing on the sidelines until they can figure all this out. I would say for us and what we’ve talked before about is there is a strong interest in hospitals in growing their vascular service line, as we went through some of that data today.
Capital is available, either at the hospital. We’re also presenting, I would say, to an increased number of foundations for hospitals that have funds that would like to invest in the vascular service line, so we are seeing capital available for the systems, for the transactions that we’re talking about. It does take longer, though, than what it was taking a few years ago. Oftentimes you’ll come back and present two or three or four times, sometimes to the same people, sometimes to a broader group of people; but at least in the small world that we live in or the transactions that we’re dealing with directly, there is capital available.
Going back to, I guess, the equity raise, now that you’ve shored up that balance sheet, can you talk a little bit more about the use of capital as you are in a better position now, obviously?
Yes, of course. Well, we are still consuming cash. Our operations are such that we anticipate that will continue for at least for the foreseeable future here. We continue to invest heavily in R&D. In 2013 we’ve made a significant investment in our commercial structure both in the U.S. and Europe, although it’s mostly been in the U.S. We’ve also made a significant investment in our capital sales team in the U.S. as well, and we believe that’s appropriate given the amount of interest. A lot of the early KOLs that are using the system are publishing on the data now. We’ll have several publications here at the Veith Symposium.
So the general use of the cash is to continue to run the business as we chart our path to profitability, but we believe that continued investment in R&D, continued investment in the commercial structure while we continue to be as efficient as we can be in all parts of the business is important to us. We’re also making a lot of good progress on the cost of products side. You’re not seeing a lot of that on the income statement right now simply because of the volumes that we’re at, but as we start to scale the volumes, we are very confident that you’ll see the results of the hard work that the team has been putting in on reducing the cost of product right now.
I guess I’ll do one more. So when we think about the capital system sales and then the catheters—the more disposable line, are you at a level where you really—I think your install base, and I forget the exact number, but are you looking to kind of get to a comfortable install base number and then look to more focus on the disposable side, or are you kind of more comfortable on the capital side and now you’re really trying to focus on those kind of catheters? And I kind of ask because when I look at your pipeline, you really see a full suite there on the disposable side, so.
We really do. Utilization of the catheters ultimately drives this business, I’m convinced. As more physicians use the system, like the system, publish on the data from the system, more and more physicians will be interested in it, and also we’re also demonstrating the value proposition with more and more hospitals that use the system.
So right now, everything is important to use. We’re focusing hard on selling capital, we’re focusing hard on selling catheters and driving the utilization, but early on in any company that sells capital, it is the sales of the capital that drives the revenue line for us. So I mentioned earlier our investment in our capital sales organization has been important to us because we want to make sure that we’re driving those capital sales as best we can right now. As the business scales, and there are obviously good examples in our space with Intuitive Surgical and Mako Surgical, then you really begin to see the benefit of the sale of disposable products, this recurring revenue, and also the service as well. Those become quite significant numbers and very, very profitable as the volume goes up as well.
So focusing on everything, but it’s really, I think, capital in the short term here that will drive the success of the company.
How long is a typical sales cycle, and has it changed in the last few years in terms of as your install base has gone up, have you seen any meaningful difference in that? And when do you expect break-even profitability to be achieved in your business model?
Thank you. So we talk frequently about the sales cycle taking anywhere from six to 18 months. As I mentioned in the previous question, we’re seeing a lot fewer of those completing at six months and more like 12 to 18 months, just because of the environment that we’re in right now, uncertainty in the marketplace, uncertainty with some of the administration and some of the current policies, and again oftentimes we’ll present to foundations that typically take longer to get those transactions completed. But typically six to 18, more like 12 to 18 months.
In terms of profitability, we haven’t given specific guidance on that. We will be considering what our outlook will look like going forward in our Q4 call, which is in February, and we’ll announce then whether we’ll provide specific guidance or not or any outlook at that time. But it’s important to remember that as we continue to focus on the cost line of the business and the operating expense line, we believe we will drive sales going forward so we do certainly expect our cash burn number to go down over time, and we believe that the current infusion of cash gets us a long way down the road. So that’s about as much as I can say at this point.
I’ll just do one more. You mentioned the Affordable Care Act. As we look to 2014 as it relates to you guys specifically and more on the CAPEX side, do you see that as a tailwind or kind of a non-issue as we look into ’14?
I think the biggest headwind right now that we’re seeing is just the uncertainty. There is some paralysis in the system that if we had clarity in either direction, either positive or negative, we could react to that. More so right now, we’re just seeing some uncertainty around its implementation. As I’ve said before, we’ve had a number of transactions in the pipeline for upcoming nine to 12 months that we believe we’re going to be able to get done here in the near future, and so that’s really our focus right now. But long term, the Affordable Care Act has more patients coming into the system. We think there will be a premium on efficiency within hospitals. We presented some of the data earlier today about the strong prevalence in every service line within the hospital to outpatient procedures, which we think the robot fits well into in terms of predictability, maybe avoiding open surgery, avoiding protracted admissions into the hospital. We think that fits really well into this efficiency which is going to be driven by the Affordable Care Act.
I think we’re good. Bruce and Pete, thank you guys very, very much.
Thanks Dan. Thanks for having us.
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