Hansen Medical's (HNSN) CEO Cary Vance on Q2 2014 Results - Earnings Call Transcript

| About: Hansen Medical, (HNSN)

Hansen Medical, Inc. (NASDAQ:HNSN)

Q2 2014 Earnings Conference Call

July 31, 2014 5:00 p.m. ET

Executives

Cary Vance – President & Chief Executive Officer

Chris Lowe – Interim Chief Financial Officer

Analysts

Jon Demchick – Morgan Stanley

Brooks West – Piper Jaffray

Joshua Jennings - Cowen and Company

Jeffrey Cohen – Ladenburg Thalmann

Operator

Good day, and welcome to the Hansen Medical 2014 Second Quarter Results Conference Call. Please note today’s conference is being recorded.

At this time, I would like to turn the conference over to Miss. Carey [inaudible]. Please go ahead, ma’am

Unidentified Participant

Good afternoon, and welcome to Hansen Medical’s second quarter earnings conference call. With me today is Cary Vance, Hansen Medical’s President & CEO; Chris Lowe, Hansen’s Interim CFO.

Before we begin, I would like to inform you that comments made on today’s call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied by such forward-looking statements as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company’s most recent quarterly report on Form 10-Q for the quarter ended March 31, 2014 filed with the Securities and Exchange Commission on May 9, 2014 and other filings with the SEC. These filings can be found through our website or at the SEC’s EDGAR database. Prospective investors are cautioned not to place undue reliance on such forward looking statements. Please note that this conference call will be available for audio replay on our website at hansenmedical.com, under the presentations tab of the investor relation section of our website.

Today’s call will begin with a brief introduction from Cary, who will then provide an update on the progress we’ve made towards our strategic objectives this quarter. Chris will then provide a detailed review of our financial results, and then we will open the call up for your questions.

With that, I'll turn the call over to Cary.

Cary Vance

Thank you. Good afternoon and thank you for joining us today on the call. Before we go further, I'd like to say how pleased I am about the opportunity to join Hansen. I came to Hansen because I believe in the company’s innovative and unique intravascular robots platform. And I'm confident that the successful commercialization of these technologies has the potential to improve patient care and outcomes, increase the productivity of our hospital and physician customers, and contribute to reducing costs in the healthcare system.

Hansen Medical’s intravascular robotics platforms compete in large global markets, with strong growth prospects. We believe our Magellan and Sensei robotic systems and related catheters can access more than 75% of the nearly 2 million peripheral and electrophysiology global procedures occurring each year. Over time, our expanding product lines have the potential to address to more than 4 million intravascular global procedures performed annually, including peripheral, EP, cardiovascular and neurovascular interventions. The breadth and potential our intravascular robotics technologies provide, was one of the main things that attracted me to Hansen, and supports my belief that there’s a compelling growth opportunity ahead for the company.

me now provide an update on the progress we made in the second quarter towards our strategic objectives of growing the installed basis systems, improving the customer experience and driving system utilization, increasing clinical experience and continuing to broaden the product platform. With regard to growing the installed basis systems, we commercialized and sold four systems in the period, one Sensei and three Magellans. We also converted a previously commercialized system from a rental to sale, which demonstrates the potential of the rental sales model.

We strengthened our presence in the Middle East with two sales this quarter, and we also initiated a presence in Japan with two sales to our new distribution partner, Adachi. As previously announced, Hansen entered into a definitive agreement with Adachi Medical Instruments Company to exclusively distribute the Magellan and Sensei robotic systems in Japan. Adachi Medical has proven to be exceptionally adept at selling robotic systems in Japan, and has a long history of success with cutting-edge technology. To initiate the partnership, Adachi has purchased and received two Magellan robotic systems, representing two of the systems commercialized in the second quarter. As part of the distribution agreement, Adachi is committed to obtaining Japanese approval from the Pharmaceuticals and Medical Devices Agency for the Magellan and Sensei robotic systems.

Turning now to the customer experience, it is our priority to deliver an optimum experience to each customer, including our commitment to improving utilization of existing systems. There are three primary ways that we’re focused on this in the near term. We’re continuing to expand our family of catheters, and expect the expanding roll-out of the 6Fr catheter to drive increased procedural growth in catheter sales in future quarters. In addition, we have implemented several programs, including training new users in existing accounts to allow for multiple physicians to access our robotic platform at a single site. Finally, we’ve identified sites that have underutilized Sensei systems and as we’ll discuss later, we’re putting in place action plans to revitalize the utilization of these systems.

Another area of focus is increasing clinical experience in published data. We continue to build a set of clinical data to demonstrate the breadth of capabilities of our robotic platforms. As detailed in our recent press release, a report published online in the Journal of Vascular Interventional Radiology found the use of the Magellan robotic system in Uterine Artery Embolization or UAE procedures is feasible and appears to be safe. Researchers reviewed the result of five patients treated with robot assisted UAE over a 10 month period at St. Mary’s hospital Imperial College London. Lead investigator Doctor Mohammed Hamady and his colleagues conducted the report to investigate the safety and feasibility of the Magellan 9Fr Robotic Catheter in this torturous arterial bat. The findings from this report highlight the potential for our products in women’s health and we expect that a broad group of patients will be able to benefit from robot assisted embolization procedures.

On our last call, we discussed the completion of the first procedures with our Magellan 6Fr Robotic Catheter in Europe. These procedures are part of an ongoing study at Pompidou hospital in Paris, where we placed the Magellan robot with Professor Marc Sapoval and Dr. Olivier Pellerin for 25 patients’ study of peripheral vascular embolization procedures. Initial cases included Uterine Artery Embolization, Prosthetic Artery Embolization, Transcatheter arterial Chemoembolization and internal iliac aneurysm procedures. The smaller diameter of the 6Fr Catheter has the potential to enable broad applications in women’s health, men’s health and cancer treatment, enabling our physician customers to optimize patient outcomes and patient care. The study with Professor Sapoval is anticipated to continue through the third quarter with manuscript results expected at the end of the year.

Turning to our progress on clinical evidence of our Sensei system, we previously discussed our success at converting our 300 patient dual arm IDE study to a single arm IDE study of the Sensei system in the treatment of atrial fibrillation. The acceleration plan for enrollment in the Sensei system’s IDE study detailed on last quarter’s call is proceeding well. We are pleased with the improvement in enrollment during the second quarter and we continue to anticipate completing enrolment by the end of the calendar year.

The ROVER registry continues as part of Hansen’s long-term data strategy to collect post-market surveillance of both Magellan and Sensei device performance. ROVER acts as a database for the preparation of educational materials, abstracts, manuscripts or presentations that disseminate clinical information to the medical community. Initial published results are anticipated by the end of this year.

Expanding our product offerings is another area of importance to our future success. The Magellan 6Fr Robotic Catheter is the latest addition to the growing family of catheter for use with the Magellan Robotic system. The 6Fr Catheter’s design allows for precise robotic navigation and control in a single 6Fr auto diameter Catheter, enabling use of the Magellan Robotic system in smaller vessels in the peripheral vascular chair. Following FDA clearance of the 6Fr Catheter, we are encouraged by the initial feedback from our experienced users as well as those new to the Magellan system. We expect the expanded roll out of the 6Fr Catheter and broadening applications will drive continued procedure growth and catheter sales throughout 2014 and into 2015.

We also continue to advance our larger profile Magellan 10Fr Robotic Catheter and continue to expect to complete regulatory submissions on this product later this year. This Catheter will potentially assist physicians in the placement of covered stems, larger atherectomy devices and other procedures where a larger diameter catheter is preferred.

Our Sensei platform remains a critical part of our business. We anticipate that we will obtain regulatory approval and we will begin to commercialize the Sensei X2 in the second half of the year. This new version of our Sensei platform offers improvements valued by our customer base and is expected to feature faster processing, enhanced image integration and a slimmer design. The improved processing and imaging capabilities of the Sensei X2 are also expected to be available to users of the current Sensei X upon the release of the X2.

Before turning the call over to Chris, let me share a few takeaways from my first couple of months at Hansen. My belief is that Hansen has a great market opportunity, an innovative product portfolio and a unique ability to improve patient outcomes. I'm encouraged to see the dedication of our organization to leverage our technology to provide value to patients, physicians, hospitals and the broader healthcare system.

Historically, the global commercialization of our products has been slower than anticipated, and we have encountered many of the challenges that a disruptive technology often faces early in the commercialization effort. We have a number of customers who use this technology as a direct substitute to manual procedures due to its predictability and other benefits. However, we also have users who view this as specialized technology, and only use the technology for the most rigorous procedures. Right now, it is our challenge to make sure all customers utilize our systems in the broadest possible way.

While I'm not yet prepared to share our full plans for accelerating our commercial acceptance, I would like to highlight for you two areas of near-term focus for the organization. First, as I mentioned before, a portion of our installed Sensei systems worldwide are underutilized. This is primarily due to two factors. In some early accounts, Sensei utilization did not progress as physicians did not receive the level of training and support compared with what Hansen offers today. Further, in some accounts, the physician champion who was responsible for the initial purchase of this system left the hospital. We’re addressing these issues proactively and then tend to develop a plan to revitalize underutilized Sensei systems. In some cases, we’ll engage high-volume physicians in these accounts to retrain them on Sensei and ensure they have the proper support to make Sensei a part of their practice. In situations where we can’t find a suitable physician champion, we’ll consider moving the system within the account, or removing the system from the account, reconditioning the system and reselling it to an account where it may be a benefit.

Our second near-term commercial priority is to focus on community hospitals. In the early days of our product launches, Hansen focused primarily on key opinion leaders. Recently, we’ve decided to focus our efforts toward a broader commercial strategy, targeting adoption in community hospitals where intravascular robotics has the potential to bolster the profile and patient volumes of a community hospital by offering advanced technology and improved patient outcomes.

As an example of this, let me share what we’ve observed at Miami Valley Hospital. Earlier this quarter, at the Society of Vascular Surgery’s annual meeting, Dr. John Matsuura reported that approximately 90 days following the installation of a Magellan system, patient volume in his vascular clinic has grown significantly. We believe there’s an opportunity to help our customers grow their business by leveraging new technology and raising awareness with patients in their market. These earlier initiatives are just two examples of how we intend to change our processes in an effort to improve results.

I look forward to sharing more of our plans in future quarters, but for now I want to communicate that our organization is focused on leveraging our technology to ensure our customers have optimum outcomes. We continue to identify opportunities to improve results, develop customer advocates by enhancing the customer experience, drive utilization of our active installed base, reinvigorate the systems that are currently underutilized, and grow the body of clinical and economic validation of our technologies.

With that, I’ll turn the call over to Chris, for a detailed review of our Q2 financial results and then we’ll open the call for your questions. Chris?

Chris Lowe

Thank you, Cary. Good afternoon everyone. As part of our release this afternoon, we announced a financing transaction with existing warrant holders, which is expected to yield the company approximately $23 million in gross proceeds in August. With the completion of this financing, we believe the company will have sufficient resources to execute against the plans that Cary has outlined this afternoon.

Turning to the financial results, second quarter revenue increased 106% to $6.9 million, compared to revenue of $3.3 million in the prior year. We commercialized three Magellan systems and one Sensei in the quarter, compared to one Sensei in the prior year second quarter. We also converted a previously commercialized system from a rental to a sale. As a reminder, the company uses the term commercialized to refer to revenue generating system transactions, including rental transactions.

The company sold 928 catheters in the quarter, representing a 6% increase over the prior year. We estimate that physicians performed approximately 868 Hansen robotic procedures during the second quarter, compared to864 Hansen Robotic Procedures in the same period last year.

Gross profit in the second quarter of 2014 increased 230% to $1.9 million, or 28% of sales as compared to $0.6 million or 17% of sales for the same period in 2013. The improvement in gross margin in the second quarter was driven primarily by increased system sales compared to the prior year period.

Research and development expenses for the second quarter were $4.8 million compared to $4.5 million in the same period in 2013. This increase in spending was primarily due to increased clinical trial expenses as we broadened the application of our robotic platform into women’s and men’s health oncology and lower limb treatments.

Selling, general and administrative expenses for the second quarter were $8.1 million compared to $8.6 million for the same period of 2013. While our investment in sales and marketing expands, we scrutinize other administrative expenses closely with an objective of either cost reduction of improving the ROI.

Net loss for the second quarter was $12.3 million or $0.11 per share based on average weighted shares outstanding of approximately $112 million. That’s compared to a net loss of $13.4 million or $0.2 per share based on $67.6 million weighted average shares outstanding during the same period of last year.

For the six month period ending June 30, 2014, total revenue increased 68% to $10.6 million compared to $6.3 million in the same period last year.

Net loss for the first six months of 2014 was $26.7 million or $0.25 per share compared to a net loss of $30.6 million or $0.45 per share last year.

Weighted average shares outstanding used to compute diluted net loss per share were $107.7 million for the six month period ending June 30, 2014 compared to $67.5 million in the same period last year.

As of June 30, 2014, our cash, cash equivalents, short term investments and restricted cash balances were $32.2 million compared to $38.4 million as of March 31, 2014 and $35.3 million as of December 31, 2013. These figures exclude the approximately $23 million in proceeds from the warrant swap we announced earlier today.

With that I would like to open the call up to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from David Lewis with Morgan Stanley.

Jon Demchick – Morgan Stanley

Hello. This is actually Jon Demchick in for David. Carey, now that you’ve I guess been at Hansen for a few months and have4 the ability to take a deeper look at the company, was just wondering if there was any key initiatives or changes that you plan to bring with you, whether in regards to sales or procedure targets or anything of that nature.

Cary Vance

Jon, those that I outlined I think in my prepared statement are procedures and initiatives that we are focused on. We have additional initiatives that we’ll be laying out in the coming quarters. We are going through a strategic plan right now and I’m trying to get my arms around the business and trying to make sure we are doing -- we are launching some of these initiatives strategically and that they are well thought out. So in the coming quarter or two I’ll be laying some of those out for you.

Jon Demchick – Morgan Stanley

Okay, thank you, very helpful. And just another one probably more for Chris, but from listening to the discussion on the warrant exchange, I guess my assumption is that you guys all looked around and saw that this was probably the least dilutive way to raise capital. Is that the way to be thinking about this agreement, that it was more a reflection of the company’s need for cash in the near term and not any change in the view of the company’s outlook?

Chris Lowe

Absolutely, John. That’s -- we as a board and as a management team we looked at the options for incremental capital and felt like this was in the best interest of all shareholders.

Jon Demchick – Morgan Stanley

And then just one quick one on SG&A. As we saw it’s ramped up the few quarters as you guys broaden out the sales efforts and build up a sales force. And I was a little surprised to see the drop in total dollars this quarter, especially given the revenue growth. Can you discuss what drove the spending down a little bit for the quarter? And if this is the new run rate that we should probably be assuming going forward.

Chris Lowe

No, absolutely. It’s a good question, John. I think within SG&A there is -- I’ll put it in two broad buckets for you. As it relates to true direct sales and marketing expense, that absolutely continues to grow for various sales support programs. And then really, since the beginning of the year we’ve just been looking at opportunities for cost reductions, enhancing the ROI. And we’ve been fortunate that we’ve got some employees here who have come up with some innovative ideas on how we can be even more efficient and it translated into the bottom line this time, in this quarter. So we feel comfortable with this spend rate.

Operator

And we’ll take our next question from Brooks West with Piper Jaffray.

Brooks West – Piper Jaffray

Hi, thanks. Cary, wanted to explore the -- maybe a new strategy that you might have with Magellan in terms of pursuing some specific labeling. You clicked off quite a few different areas. Do you intent to run trials to pursue specific labeling? And then I’m also wondering if you could talk about the economics of some of those procedures and is there enough room in the payment pockets to bear a $4,000 robotic catheter on top of everything else that goes into the procedures?

Cary Vance

Okay, thanks Brooks. Let me just start up by mentioning the three single center studies that we have on Magellan right now. We are currently sponsoring three of them and they include those associated with embolization therapies, chronic total occlusion of the lower leg treatments and then measurement of radiation exposure of healthcare personnel during robotically versus manually navigated abdominal aortic aneurysms and internal iliac artery procedures. Each study ranges between 10 and 15 patients and two of the three are in active enrollment. One is in protocol development. We are definitely going after some of those labeling opportunities and some of those procedures. I think from an economic standpoint if the discussion at the customer is going to be about cost of catheters, it’s going to be a more difficult conversation. I think if you look at total cost of procedures, you look at everything involved with hospital stays, with complications, I think the value preposition tends to make more sense and that’s why we have more of a value discussion rather than a price discussion with our customers.

Brooks West – Piper Jaffray

Okay, and then I guess similar question around that, are you I guess any detail. Is it a throughput or are you going to run a study that is going to give you some foundation to make an economic argument?

Cary Vance

Sure. Part of what we are looking at out there is using the community hospitals and some of our users, our current users to help us develop the economic argument and validation for the system as well as the clinical validation.

Brooks West – Piper Jaffray

Okay. And then maybe just one last one if I could on Sensei, you mentioned a revitalization program. Can you give us a little sense in, what’s the installed base and what percentage of that installed base would you characterize as underutilized or maybe you see an opportunity for revitalization?

Cary Vance

We have 120 systems installed and I would say that we are honestly -- if I were just to guess I’d say half and half at this point in terms of either not being utilized or underutilized. And we’re basically going hospital by hospital to have conversations to understand not only how much they’re being utilized, but why not and what we can do to resolve it.

Brooks West – Piper Jaffray

And would you look at pulling a system out of a hospital and replacing it? Would that be part of the strategy as well?

Cary Vance

Replacing it …

Brooks West – Piper Jaffray

Or placing it at another center.

Cary Vance

Yeah. I mean when I – during my comments, that is one option. So I mean basically, if you have a system that they’re not using, you have a few choices. You can train the physicians, the high volume users to get them that comfortable and excited about what it can offer. You can move it within the same hospital or within the same hospital system potentially where they’ll be better utilized. Or the other option is to take the system out, and find a facility that will take a refurbished system and utilize it there. Because the other piece of this is we’re not just talking about the economics and utilization. We’re talking about relationships and reputation at the hospital. And frankly if they are not using a system, we’ve got some fixing to do there as well, because these are potential Magellan customers, and we need to make sure that relationship is sound.

Operator

And next we’ll move on to Josh Jennings with Cowen and Company.

Joshua Jennings - Cowen and Company

Hi. Thanks sir for taking the questions. I guess, Cary, I just wanted to – first with you taking the leadership of the company, looking into the pipeline, can you just give us a little bit of color about how you’re feeling about the pipeline for Magellan specifically? And how we should think about year-over-year growth and system commercialization for 2014?

Cary Vance

Yeah. First of all, when I look at the pipeline, and when I came here, what I'm most concerned about and most involved in is the quality of the pipeline and the execution of the pipeline. And so the – so what we’ve done is try to implement a lot more rigor, a lot more process and urgency around the pipeline. It helps us to understand how many of these deals can close and how quickly. So I’m satisfied with the amount that we have in the pipeline. To me it's all about execution.

Joshua Jennings - Cowen and Company

Great. The procedure volumes, robotic procedure volumes that you reported, can you give us a sense – I know you don’t want to break out between Sensei and Magellan, but can you just give us a sense of procedure volume growth on the Magellan side of the equation.

Cary Vance

Most of the procedures are Sensei. I mean overwhelmingly they’re Sensei. And that’s just – that’s by virtue of the fact that we have a lot more Sensei systems out there and they’ve been out there for a longer period of time. I think Magellan – when you look at the systems where the Magellans exist, they’ve been with KOLs who are great partners with us to help us understand the capability of the system. But they are not the high-volume users that a lot of these community hospitals are. So I think you see some of that utilization ramp up fairly slowly and as we move to community hospitals where they’re frankly cranking out a lot of procedures week in and week out, I think you’re going to see the ratio of Sensei to Magellan change a bit based on that greater utilization. And then obviously we need to get systems, Magellan systems in place that will allow for that utilization to continue.

Joshua Jennings - Cowen and Company

And just how should we be thinking about the flattish estimated procedure volumes in the second quarter here? Are Sensei procedures declining and that’s part of your – part of – in your prepared remarks talking about revitalizing your Sensei customer base and utilization levels in each account? Or is it that we’re seeing flattish procedures in both Sensei and Magellan year over year?

Cary Vance

I would say that they’re both flattish. I mean I think that our Sensei utilization might be up a little bit, and our Magellan is not up that much either, because there’s just not a lot of systems out there. So I would say right now they’re both flattish. And if you take a look at a couple of these initiatives, I think we’re going to drive utilization and revitalization of our Sensei systems and we’re going to drive utilization of our new Magellan users, particularly those in community hospitals that are doing a lot of procedures.

Joshua Jennings - Cowen and Company

And maybe just last question for me, just with you evaluating the opportunity here at Hansen and taking the role, taking the CEO seat, just your outlook obviously has to be optimistic about the eventual role of the Magellan and of after procedures. But can you just help us share a little bit about what got you over the hump for you to take this seat. Thanks a lot and congratulation on your first quarter.

Cary Vance

Thank you. There a couple of things. If I just had to point to a couple of things as to why I took the job and then how that same belief has been validated and strengthened over the last couple of months. It starts with the technology and frankly since I got here it ends with the people. And whether that’s the people I think we have extremely bright and talented and passionate people developing this technology. Not only brilliant in terms of the robotics technology, but passionate about where the technology goes and they are passionate about helping the patient. And for us I think if we focus on the patient everything else will fall in place.

In addition we added a number of sales people last year and the beginning of this year that are now starting to ramp up, fully trained, I think understanding the cycle, understanding the call point and extremely talented group of individuals in the field. And so for me, we’ve got great technology. We’ve got great IP. We own the space. We’ve got great people here that are passionate about it who have a great level of accountability and are aggressively pursuing the goals we have as a company.

Operator

(Operator instructions) We’ll take our next question from Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen – Ladenburg Thalmann

Just a few questions. Could you tell us how many centers that your study has enrolled in the 300 patient IDE?

Cary Vance

Yeah. We currently have approximately about eight to 10 centers and we have a plan very quickly to add an incremental handful I’ll say to that. We probably end up at about 12 to 15 range.

Jeffrey Cohen – Ladenburg Thalmann

Okay, got it. Could you talk a little bit about -- so there are four sales and one conversion, two in Japan, one of each, one Sensei, one Magellan and what was the composition of the other two? Where did they go?

Cary Vance

I’m sorry. So we had two Magellans that went to Japan. A Magellan and a Sensei that went to the Middle East and the rental conversion was a Magellan.

Jeffrey Cohen – Ladenburg Thalmann

Okay, got it. And could you talk a little further about the composition of catheter between the two platforms for the quarter?

Cary Vance

Jeff, it’s 90% plus Sensei catheters.

Jeffrey Cohen – Ladenburg Thalmann

Okay. And one more if I may. Are the new units coming with some portion of catheters? Is the revenue number, the topline revenue number just from the unit or does that include any of the catheters, the 5.5 for the product line?

Chris Lowe

Right. So on the revenue there’s a mix associated with the system itself. Sometimes there are catheter sales involved. Sometimes there’s not. It depends on the transaction. And then there can be a service element, an installation and training element as well, which are all small minorities of the overall purchase price.

Jeffrey Cohen – Ladenburg Thalmann

Okay. Would you say that ASPs for both platforms were somewhat unchanged relative to the first quarter?

Cary Vance

Yes.

Operator

And that concludes today’s question and answer session at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Cary Vance

Thank you, operator, and thank you all for joining us today. We appreciate your interest in Hansen Medical and look forward to updating you on our progress throughout 2014. Thanks.

Operator

This concludes today’s conference. We thank you for your participation.

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