Hansen Medical, Inc. (NASDAQ:HNSN)
32nd Annual JPMorgan Healthcare Conference Call
January 16, 2014 11:30 AM ET
Bruce J. Barclay – President and Chief Executive Officer
Okay. We’re ready to get started with the next presentation. Coming to the stage, now we have Hansen Medical, and presenting for them is the Company’s President and CEO, Bruce Barclay. Bruce?
Bruce J. Barclay
Good morning, everybody. It’s pleasure to be here. Thank you, Chris for inviting us to participate again this year. Thank you all for being here. I also want to introduce our CFO, Pete Mariani who will be available with me for the Q&A immediately following today’s session.
So some of the statements made today during the presentation and the Q&A may be considered forward-looking. I would encourage you to review the information in this slide and also our securities filings and look at that carefully please.
So Hansen Medical is the leading provider of intravascular robotics. We believe we’re poised for growth in the $2 billion plus medical robotics market. We view intravascular robotics very much as a platform technology and we intent to leverage this very significant core competency of ours across multiple clinical applications.
Currently we are in two areas of unmet clinical needs, electrophysiology or EP and vascular. Within EP in 2007 we launched the first intravascular robot in the U.S. and Europe called the Sensei System. Clinical use of this system is growing. It’s now being used in over 13,000 patients, demonstrating favorable clinical outcomes and we’ve generated a significant installed base for recurring revenue going forward.
Our Sensei System is used in both the left and the right atrium for cardiac arrhythmia procedures and also some hospitals are beginning to use the system in ventricles as well for the experimental use in ventricular tachycardia.
Our second clinical application for the intravascular robotics is in the peripheral vasculature. In mid-2012 we received FDA clearance to market the Magellan System in the U.S. for peripheral vascular disease and we have approval to sell the system as well outside the U.S. in several countries including Europe. We’re encouraged by the quality of the cases that we’re seeing, the breadth of cases. Nearly 300 cases have been completed now with the Magellan System. It’s being used in multiple clinical targets both in the arterial system and also in the venous system.
We’re now leveraging this positive clinical experience from our early commercial strategy of approaching early adopters, KOLs into a more community-based hospital setting and we’ll talk about that in just a few minutes. And finally, we have a very good R&D pipeline. Our strategy is to develop a suite of catheters across multiple clinical applications so we can continue to expand the markets that we participate in.
So before I get started with the main presentation, I do want to comment on the press release that we issued on the Monday of this week announcing certain of our preliminary financial information for the quarter and the year. We were pleased to announce that we had met our previously communicated full year 2013 commercial guidance by commercializing six systems in the quarter and 14 systems for the year and 10 of those 14 systems came in the second half of the year. We also met our estimated procedure outlook with 815 procedures estimated for the quarter and 3,210 procedures for the year.
Additionally, we continue to expand our network of U.S. training and reference centers by naming two additional hospitals as Magellan Centers of Excellence. These two hospitals are the Keck Medical Center at USC and the Premier Health Miami Valley Hospital in Dayton, Ohio, which is a community-based hospital. Both of these hospitals have purchased two systems, one of which will be used in the clinical setting and the second will be installed in their respective training and research centers where physicians, medical staff, other hospitals across the country that are considering the purchase of a system can go and do their due diligence, talk with clinicians, talk with administrators about their purchase.
Additionally, we noted that we had made good process with the FDA where we see recursion on our 6 French catheter in December. We’ve responded to that and we believe we are still on path for clearance in Q1 of 2014. So we are very excited about the momentum and the progress we’re making in the vascular space in particular.
So at last year’s JPMorgan Conference we identified a number of key value drivers that we focused on delivering in 2013. In addition to the commercial success I’ve just mentioned, I’m pleased to say we delivered on several important value drivers in the last 12 months and some of those major accomplishments for 2013 are listed on this slide and the next slide.
Key among our goals beginning the year was to grow our commercial organization first and then to also grow sales, both of which we were able to do. In January of 2013 we brought in Bob Cathcart as our SVP of Global Sales. He immediately began to assess talent, make some changes including management changes and then grow the organization. We’ve essentially doubled the number of capital reps in the U.S. over the last 12 months.
Since much of the activity occurred in the first half of the year we didn’t see the benefit of that organization until the second half of the year, and then again we think that’s part of the reason why we saw the momentum we are experiencing in the second half of the year. Again, we delivered 14 commercial systems in the U.S. in 2013, which was the first full year of Magellan in the U.S. and excluding deferred systems sold in prior years and all of 2012 we sold 8 systems, so again encouraged by that momentum that we’re experiencing. We also achieved record catheter in procedures, again in 2013, which was the fourth consecutive year for doing that.
I won’t go through the rest of the accomplishments listed here, but we have been developing new products in both vascular space and the EP space. We had a record year in terms of adding to our already substantial vascular patent portfolio with the filing of 31 new patent applications and issuing 17 new cases in the U.S.
We continue to invest heavily in clinical research and we’ll do that again in 2014, very happy with the clinical data that we’re generating. You’ll see us start to leverage that more and more. Number of presentations and publications, especially in the vascular space is growing. Again you’ll see that continue in 2014 and you’ll see the other items listed there. I’ll talk about the cash position in just a few minutes.
So there are a number of clinical segments in the medical robotics industry, which make it a very exciting business in which to participate. As I said, more than $2 billion in sales in 2013 in medical robots, most of those of course come from Intuitive Surgical that MAKO and Mazor Robotics in the orthopedic space are also doing well. We believe we’re in a very good position to capitalize on this large and growing medical robotics market.
Additionally, our vascular platform supports multiple clinical specialties, including electrophysiologists and then most physicians performing vascular cases interventional cardiologists, radiologists and endovascular surgeons. And we do believe our technology uniquely addresses the challenges associated with using robotics in the intravascular space.
Our business model is the one you’re familiar with. With other medical robotics companies we generate revenue from the capital on the left hand side of the slide and then recurring revenues from disposable catheters and accessories, and then service revenue from our contracts on our capital equipment.
Intravascular robotics from Hansen Medical gives us access to approximately 4 million addressable procedures each year. About half of those procedures are available to us today on the left hand of this slide in the EP market, the peripheral vascular market and then peripheral embolization and then access to 2 million future procedures from neuro, cardiac and structural heart applications.
So let’s talk about the vascular opportunity, in particular the Magellan System. The market for this product is large and growing. The economic rationale, we believe, for a hospital to buy a Magellan System, it’s very compelling. Peripheral vascular disease refers to disease of blood vessels outside the brain and the heart, which covers a very broad range of clinical anatomy. There is a high prevalence of PVD. It affects approximately 20 million people in both the U.S. and Europe and prevalence is increasing given the significance of the aging population growth in diabetes, growth in obesity. Patients tend to be quite sick with systemic vascular disease and have a very high rate of morbidity and mortality over time.
So as we talk to a hospital about purchasing a robot many hospitals have already seen the data I’m about to show to you. In that vascular within their hospital is very important to them to grow their business. For those hospitals that aren’t as familiar with it, we equip our sales team with data that says vascular is a real opportunity for that hospital to grow its business. Vascular is forecasted to be one of the fastest growing service lines in the hospital over the next few years.
We use a group called Sg2 research, which is a healthcare consulting and advisory firm for this data and they forecasted over the next decade vascular will be the third fastest growing inpatient and the single fastest growing outpatient service line within U.S. hospitals. Growth will be driven by demographic factors, as I said, aging population, obesity, diabetes, but also improvements in technology that better enable diagnosis and minimally invasive treatment.
Outpatient is growing quickly in all of these clinical specialties as you can see due to expected movement towards population health management, prevention, identification and addressing risk factors, early diagnosis, early intervention and efforts to reduce unnecessary hospitalizations.
The vascular service line is also one of the most profitable within the hospital. Again Sg2 research estimates that the median contribution margin for a vascular case is the second highest among all service lines within the hospital at around $7,500 per case. And there is evidence to demonstrate how all this plays out in the real world environment.
This slide discusses a recent study done with one particular hospital and their vascular program, which showed that the vascular service line was not only the most profitable within the hospital from the point of view of contribution margin for 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 additional specialty services over time. And we do think this study’s conclusion is powerful one and speaks to the value of hospitals to invest in their vascular line.
So once they’ve decided to invest in vascular why robotics? We do believe there is a significant unmet clinical need for the use of the intravascular robotics in the treatment of peripheral vascular disease. For many interventionalists, including those most skilled, cases can be long. They can be complex; they can be very unpredictable in their duration and their outcome. This unpredictability can lead to lab inefficiencies, costly overruns for the hospital. Second, there can be a wide discrepancy in training and skill sets among the physicians at hospitals.
Third, given the fact that the operator wears heavy lead, stands next to the C-arm radiation source day-in and day-out, there are multiple documented cases of physicians suffering from excessive radiation exposure, orthopedic injuries, often leading to unexpected costs and shortened careers. And finally, complex cases can lead to costly complications, including even more open surgical procedures, which we believe the Magellan can reduce due to its ability to raise this level of skill.
For those of you not familiar with the Magellan System, it consists of two capital components and a disposable catheter. First on the upper left hand of this slide you’ll see the robotic arm, which sits over the patient bed and drives the disposable catheter that you see extending from the arm. The other component is on the lower left here, which is the workstation, which allows the physician to sit comfortably up to 100 feet away from the patient typically in the control room.
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. And again, we’ve talked before about the platform, nature of the technology. You can see on the right hand side a number of the clinical targets that have been performed in patients with the system, which we are very, very encouraged by.
And then, again at the bottom here the three different physician specialties that are using the system, which again can help us as we go to a hospital, looking to identify budgets to pay for a robot, they can come from multiple departments.
So this slide is a video. It shows how the system works in the hospital. Again, you can see the patient sitting at the workstation, away from the operator – sitting at the workstation and the control room away from the patient. Disposable catheter sets on the arm. We can independently manipulate three different components in this system. The guide wire, which is a standard off-the-shelf guide wire, 18,000, 35,000 and then just recently we got approved to 14,000 guide wire.
And then the catheter itself is an inner catheter and outer catheter and both of those can operate independently as well. You can manipulate the adjustable tip of that catheter. Each of those catheters inside the body in a left and right fashion here, but also in a 360 degree fashion. So you can imagine those two catheters working together can get into a variety of different shapes. Again, this is all within the body, don’t need to exchange catheters, you don’t need to appreciate, you don’t need to do anything that is typical in the manual setting.
So the precision, the stability, the control of robotic catheters offers several potential clinical benefits we believe. The precision and intravascular shaping of robotic catheters may help, enable and simplify more complex procedures, especially those involving torturous anatomy and challenging navigation such as fenestrated endovascular cases. The stability of robotic catheters offers the potential to improve the reliability and effectiveness of subsequent therapy delivery as it provides a very stable platform to deliver stents, embolization technologies or crossing occlusions with the guide wire.
The off the wall navigation or center-line driving capabilities, as well call, offers the ability to reduce emboli during navigation, which can potentially lead to stroke, especially when navigating across the aortic arch. And navigating robotically offers the potential to reduce radiation exposure for the physician and staff by placing them outside the radiation field, especially during complex procedures.
Since approval of the Magellan in the U.S. and Europe was accomplished without clinical data we’ve been working hard to generate clinical data and we are building a very substantial body of evidence to demonstrate this clinical value proposition. As I mentioned earlier, there are now over 20 publications discussing the benefits of the Magellan System. We expect many more this year and beyond. We’ve also initiated a registry we call ROVER, where all of our sites are putting our data into that and then publications will begin to come out of that as early as 2014 we believe.
So I’ve included a couple of actual clinical cases to show you the breath of the clinical application and this one with the animation on the left hand side simplifies things a bit, but it does show the robotic catheter and the wire control used in the most challenging and time consuming part of these fenestrated endograft cases, which is accessing the fenestrations in the graft, the side branches in the graft. Once all the side branches are crossed these covered stents can be delivered.
Being able to reliably access these side branches with the precision and the stability offered by robotic catheters even in cases where you might have stenosed vessels or very torturous anatomy can help bring predictability to what is a very, very complex procedure. Often the cannulation of these side branches can take hours. In this case the operator was able to access three separate branches, the mesenteric in the left and right, renal arteries for a total of eight minutes and that won’t happen every time, but this was certainly a great example of the benefits of the technology in these very complex procedures.
This case is one of a stenosed occluded highly calcified renal artery and you can see the calcium in the white there coming off of the aorta. This was the procedure that was tried manually, was failed. The patient was sent home and then came back and used the robot. Physician used the robot to access the ostium of that side branch where the most white is there, as you can see, and was very successful in getting the wire across and the lesion treated. And again, this was the case that would likely have gone to surgery or may have gone untreated because it was not able to be accessed manually.
We’re also building strong momentum at global conferences of our customers. The Magellan System is now being used in nine successful live cases at major meetings listed here. We have a very busy Q1 as well with the number of conferences. We are expecting up to three live cases next week by Dr. Katzen at the ISET meeting in Miami, Baptist.
Intravascular robotics from Hansen offer a broad value proposition for patients, hospitals and physicians. For patients, they may benefit from improved predictable procedures and simplified interventions. For hospitals, we believe that our products improve procedure predictability, potentially allowing for lower costs and incremental patient throughput. This may allow hospitals to improve utilization of one of their most profitable and expensive assets, their operating rooms, hybrid ORs [ph], EP labs, cath labs.
Robotics also provides hospitals with a technological advantage when competing for patients as well as physicians and medical staff. With both 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 into minimally invasive procedures. And again, as we said before, the robot allows the physician to be seated comfortably not wearing lead away from the radiation source.
So we’ve developed an ROI model that we use with every hospital considering the purchase of a Magellan System to demonstrate the economic value that intravascular robotics can bring and specifically, our model demonstrates that by investing in both the capital and catheters required for the procedure, the hospital can achieve an internal rate of return anywhere from 20% to 40% and a payback of two to four years depending on their specific assumptions made. In the model we look at potential value a Magellan program can bring to an incremental profit contribution by increasing the number of patients with the same fixed asset through the hospital, and typically these are or can be oftentimes better insured patients because they come from longer distance to enjoy the benefits of the robotic technology.
Savings from avoiding costly procedures and un-timed overruns, including overtime cost of staff, and then contribution from improved lab utilization. Again we’ve talked with many hospitals that would say that as utilization of their hybrid rooms or operating rooms gets to about 70%, they start thinking about building another one and we believe that if we can better schedule, better time, better use that asset they can push that out even further.
So we created a great detailed commercialization strategy. And again, given the momentum that we’ve experienced in the last six months we believe we are executing successfully to that. As I mentioned, we got a new commercial team now. We’re going to continue to leverage that and add to it opportunistically in 2014. We are expanding our customers targeting from these early adopters, KOLs into more community-based hospitals. We’ll continue to invest heavily on the clinical side, launching new products, especially the 6 French, which I’ll talk about in just a minute, training and then expanding our geographic footprint outside the United States.
As we’ve said in the past, the time it takes from initial clinical interest in a robot to closing the transaction on average takes from about nine to 18 months. As this slide shows, when you compare the number of Magellan robots commercialized in the U.S. within the first 18 months after FDA clearance with two other robotic system companies MAKO and Mazor in this particular case, we’re actually ahead of schedule for systems commercialized in the U.S. for years one and two after the initial FDA clearance. Through our first 18 months we’ve commercialized nine Magellan Systems in the U.S. compared with five for MAKO in their first 18 months and eight systems for Mazor in their first 24 months. We do believe we’re on track here.
So let’s talk quickly about our EP business. Again, like the Magellan System that consists of this capital component and a disposable product, the capital is the robotic arm, sits over the patient bed and in the workstation. And then we have two disposable catheters; the Artisan catheter, which we sell around the world and we also have a therapeutic AF device called the Lynx catheter, which we sell in selected markets outside the U.S.
Again, very encouraged by the momentum. As I mentioned, over 13,000 patients successfully treated through the end of the 2013 and 90% growth year-over-year. Again, a significant and growing body of data on the EP side. We’ve now had over 2,000 patients treated in multiple clinical studies, very pleased with our success in 2013 by the approval from the FDA of a single arm study, converting our randomized study into a single arm study. It allows to broaden our label claim in the U.S. to the treatment of atrial fibrillation. And again, we’ve talked in the past about the 2012 paper listed here where 1,700 Hansen robotic patients compared to manual showed a slightly lower complication rate acutely, but improvement in freedom from atrial fibrillation at 18 months compared to manual technique and these improvements actually became statistically significant the more the operators use the systems over time.
And again, we have real-world experience showing the economic benefit. This is publication out of one of our users in Arlington Memorial Hospital, down in Dallas. They were able to grow patients 76% year-over-year within their first year with the robot, same fixed asset, same single physician doing these cases that originally modeled a three-year payback for the robot. This data showed that they actually were able to pay it back in less than one year.
When we quickly talk about our R&D pipeline we continue to invest very heavily in R&D. So the busy slide on left hand side is our current 9 French catheter. We’ll be launching our 6 French in 2014. We’ll talk about that more in just a minute. And then we expect to make larger and smaller catheters for our TAVI applications, coronary, neuro and other clinical anatomy.
So we’re very excited about the next generation 6 French catheter. We expect this is a lower diameter catheter. We expect it will open up new markets for us, new clinical applications. There are a number of physicians, especially interventional cardiologists and radiologists that prefer a smaller femoral artery puncture site and we know we’ll be interested in this product, very, very creative product and a real success, I think to the engineering team that’s developed this. It is a single catheter that has two bending sections in it as opposed to what we have today with two separate catheters, each with a single bending section. And again, we expect it to open up new markets for us going forward.
Intellectual property is a real strength of the company. We continue to invest very heavily in R&D. We’ve invested in R&D for a number of years. As an early participant, we got over 250 patents and patent applications owned by the company. We’ve also licensed in hundreds of patents in the space from Intuitive Surgical, Mitsubishi, Luna Innovations and other companies and the areas in which these paradigms cover are listed here on the right hand side. I won’t go through all of those.
Financials will be just a second here. The last published financials were our Q3. We’ll announce our Q4 results next month. As we said, we did pre-release, the announcement of six commercial systems in Q4, 10 for the second half of the year and again we’ll update these for you next month.
A very strong balance sheet. We ended Q3 with $47 million in the bank, and we had talked before about our Q3 financing where we were able to draw $39 million down initially and then the ability to draw up to $93 million total over the next couple of years. We also closed in Q3 of last year our $33 million interest-only debt facility.
So I’m getting the hook. Just in conclusion, we believe that Hansen represents a very compelling investment opportunity for the reasons listed here; large installed base, broadening clinical application especially in vascular and much, much larger markets and opportunities.
So, thank you very much for the opportunity to be here and look forward to answering your questions.
[No Q&A session for this event]
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