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Hansen Medical, Inc. (NASDAQ:HNSN)

Q1 2011 Earnings Call

May 4, 2011 5:00 pm ET

Executives

Matt Clawson – IR, Allen & Caron Inc.

Bruce Barclay – President and CEO

Peter Osborne – Interim CFO

Analysts

Jeffrey Cohen – C.K.Cooper

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Hansen Medical 2011 first quarter results conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. (Operator instructions)

I would now like to turn the conference over to Mr. Matt Clawson, of Allen & Caron. Please go ahead sir.

Matt Clawson

Thank you, Jeremy. Good afternoon, everyone. Welcome to Hansen Medical’s 2011 first quarter results conference call. With us today are Hansen Medical President and CEO, Bruce Barclay; and the Company’s Interim Chief Financial Officer, Peter Osborne.

Before I turn the call over to management, please remember that our prepared remarks and responses to questions will contain forward-looking statements that are subject to a number of risks and uncertainties, the examples of such statements include statements about the expected timing of commercial availability of our vascular robot system, the level of clinical interest in our vascular robotic system, expectations regarding commercial success of our Lynx irrigated catheter and expectations regarding the final accounting treatment in the company’s first quarter transactions with Philips.

Important factors that could cause actual results to differ materially from those indicated by forward-looking statements include, among others, that the development of new products and applications of technology are subject to design, engineering and manufacture challenges that could delays clinical studies.

Regulatory filings and commercialization, potential safety and regulatory issues that could deploy the spend or terminate clinical studies. Regulatory approvals for sales, uncertain timelines, costs, and results of clinical trials and development of new products; our ability to plan, and manage cost reduction or operational efficiency initiatives; the scope and validity of intellectual property rights applicable to products being developed. Our ability to maintain our remedial actions over previously reported material weaknesses and internal controls over financial reporting and our estimates for the relative fair values on the recent agreements with Phillips. May change and change our final reporting financial results.

These and other risks are described in greater detail under the heading Risk Factors contained in our periodic SEC filings, including our annual reports on Form 10-K filed with the SEC on March 16, 2011. Given these uncertainties, you should not place undue reliance on the forward-looking statements in this call. 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 CEO, Bruce Barclay. Good afternoon, Bruce.

Bruce Barclay

Thank you, Matt. Good afternoon everyone. Thank you all for joining us for our first quarter 2011 conference call. We continue to make excellent progress at Hansen Medical in implementing our strategic initiatives. Growing our EP business and developing and eventually commercializing our vascular robotic system.

As we noticed in this afternoon’s press release, the first quarter of 2011 was a solid start to a year that promises to be very important to us as we created a strong position for us to deliver to continue to deliver on our previously stated goals. I will go over some of the highlights of the quarter and then outline some of the expectations we have for the year before I turn the call over to Peter for a detailed look at our financial results.

For a review of the details of our Q1 results, having just completed my third full quarter since joining Hansen, I want to reflect on my short tenure with the company. Less than a year ago I joined Hansen Medical with the expressed desire to spend my first several months analyzing and understanding the business, identifying those things that the company was doing well and those things where improvement was needed and creating an organization focused on execution. Following that initial period of analyzing and understanding, I communicated our strategy, plan for growth and specific metrics from which our progress should be measured by our shareholders.

Since implementing our growth plan I’m proud of the progress the organization has made. For example, I brought in new senior leadership to several parts of the business and together we have grown our EP business to record product utilization, launched new products, improved our training and clinical trial expertise, accomplished multiple key milestones to advance our vascular robotic system to what we now believe is the brink of commercialization. And generated a significant inflow of new non-diluted capital through the sale of non-core intellectual property and generally focus the organization on execution.

You will see from our financial results we are continuing to invest heavily in this business but importantly with the clear understanding that we are doing so with a focused strategy and measurable goals that I believe will strengthen and grow our business long-term. While proud of our progress, the job is far from finished. But I can sincerely tell you that I’m more optimistic today about the eventual success of our company than when I joined just a few months ago.

Turning now to our Q1 results, momentum in our EP business continues to build as we generated consecutive quarterly records in both catheter sales and product utilization. For the third quarter in a row a record number of (Inaudible) procedures were performed with Hansen products. And we broke through the 5000 clinical procedure milestone. That is more than 5000 procedures have been performed on patients with Hansen products since the launch of our initial Sensei Robotic System in 2007.

We continue to believe that product utilization is a key metric to ultimately growing all aspects of this business. Further our catheter sales of 693 during the quarter were also a record and for the second consecutive quarter we set a new mark in this category.

Financial results for the first quarter are encouraging, as revenue grew compared to Q4 2010 and while operating expense levels grew slightly as well this is still a significant achievement considering the high level of development in other non-selling investments undertaken during the period. Peter will discuss the financial results in just a few minutes.

While growth and utilization is strong evidence but our EP business is gaining acceptance and that the value and safety of our approach continues to be recognized by a growing number of electrophysiology. We shipped only two new systems in the quarter and both of these were international. While our international business continues to perform well, our U.S. business was affected in part by transition in U.S. sales leadership in the first quarter. By the way this is a short-term phenomenon and in fact we have already shipped our first Sensei Robotic System in the U.S. in Q2.

In addition, as a result of an extensive search we took a major step toward improving our commercial success by announcing on January 25, the hiring of Mike MacKinnon, as our Vice President of U.S. Commercial Operations. Mike is a veteran sales executive who has been successful wherever he has worked in medical devices, particularly in building national sales organization. Mike’s focus here has been to understand and then help reshape sales structure and strategy in the EP market. But he also has significant expertise and key physician relationships in the vascular market as well. We report to having Mike as a leading member of our senior team this year as we continued to build on our EP business and move into the U.S. vascular market.

One of those growth initiatives in EP that we’ve discussed previously is launch of new products. In January, at the Boston A Fib Symposium we announced the full commercial availability of the Lynx irrigated ablation catheter throughout the European Union. This new catheter is a smaller profile catheter with the flexible, integrated and irrigated ablation tip designed to first improve the treatment of arrhythmias and second to potentially drive greater adoption of the Sensei X Robotic technology in Europe. We are very enthusiastic about the positive feedback we are getting from physicians now on using Lynx.

In particular, physicians have commented on the lower profile, the ability of the device to facilitate the tranceptal approach and the increased flexibility which allows electrophysiology to reach more difficult anatomy. Lynx is a good example of the broading of our product portfolio and moving into proprietary therapeutic systems. Lynx is also a higher revenue higher margin device than our Artisan catheter, which is critical as we drive toward profitability.

As you know our ARTISAN AF clinical trial is underway in the U.S. and an example of further investment we are making in our EP business. We will ultimately enroll up to 300 patients at 14 leading hospitals in a prospective randomized study of our Sensei X in tandem with the Biosense Webster NAVISTAR THERMOCOOL Catheter in patients with A Fib. The trial was designed to evaluate robotic versus manual technique for the ablation of A Fib. Interest from EPs and their hospitals in being a part of the trial has been strong and we look forward to accelerating enrollment in this important study as the new sides get the necessary approvals.

As you saw from our press release last week, we are expecting to have a busy and productive Heart Rhythm Society Meeting this week in San Francisco. In addition to exhibiting all of our current and new products at the meeting Hansen Medical’s remote navigation robotics will be featured at the networked EP lab designed to showcase state-of-the-art technology and demonstrate the integration of a number of tools for the electrophysiologist.

In addition, it will highlight a recently published case study from a U.S. community based hospital, which demonstrates the significant financial value our flexible robotic system can generate for our customers. This study describes how an (Inaudible) program was developed to fulfill an unmet community and patient need. The use of flexible robotics from Hansen resulted in a 70% plus improvement in left atrial EP patient volume. Case capacity was also optimized which allowed for our increase in device volume and resulted in an increase in the total number of EP patients that were seen at this hospital.

In addition, the hospitals first year experience was improved from its anticipated first year pro forma, net present value of $1.5 million to an NPV of over $2 million. Finally before I turn to our vascular market, I would like to remind everyone of another major milestone we achieved in the quarter. Our license and sub license agreement with Phillips to monetize a portion of our intellectual property or non-core applications outside of robotics.

We received a $29 million upfront payment from Phillips in February for allowing them to develop and commercialize our fiber optic shape sensing and localization technology for fossil or non-robotic applications and for amending the parties previously, previous joint development agreement regarding our vascular robotic system.

Along with the $29 million upfront these agreements have the potential to generate an additional $78 million in future payments based on the successful commercialization or licensing of products containing a fossil technology.

Now let’s move on to our vascular robotic program. As discussed previously the vascular market is an exciting new and markedly larger market for Hansen Medical. Driven by an ageing population the prevalence of diabetes and obesity and an increase in disease awareness we believe the vascular market maybe up to 10 times as large as the current catheter based (Inaudible) market. Of the 2 million vascular procedures done each year approximately one-third to one half of them are potentially addressable by our vascular system. We continue to gather evidence from our target physician customers in vascular surgery that they may be far more receptive to flexible robotics than the EP market.

The early data show that our flexible catheter vascular robotic compared to manual technique has the potential to improve catheter navigation, reduced in Vessel Trauma during catheter manipulation, reduced radiation exposure to physicians and patients, less in physician fatigue and improved access to some vascular. The result also show that our robot has the potential to standardize catheter navigation and level the playing field among physicians with different levels of endovascular experience, which may lead to more predictable procedures.

Maybe most importantly as a result of our innovative digital tip control of both the inner and outer catheters, many physicians are encouraged at the possibility of reducing the number of open surgeries they perform to enable more endovascular procedures with all the benefits that come from those. We continue to be on track towards gaining regulatory approval in the U.S. and Europe and launching the vascular system in the second half of 2011. Our first significant event toward commercialization came in the fall of 2010 when we completed our first at man clinical study in Europe during which 20 endovascular procedures were successfully performed demonstrating an early version of our systems potential to allow physicians to safely, effectively and efficiently treat vascular disease.

In November at the VEITHsymposium several leading clinicians presented our clinical and preclinical data to physicians attending that meeting. In April of this year we exhibited our vascular robotic system for the first time at the 33rd Annual Charing Cross International Symposium in London. Interest from physicians and other attendees at this meeting was strong. Also in April, we submitted 510(k) applications with the FDA.

Progress toward our CE market in Europe is also proceeding as planned and towards that end we have established a new European headquarters in London that will service the hub for our commercial, training and physicians support activities for all business outside the U.S. including the possible launch of our flexible catheter vascular robotic system.

It’s nice to see the growing interest in our vascular platform among physicians and other constituents in recent weeks and months. In summary, it’s an exciting plan to Hansen Medical as our momentum is building in both EP and vascular. We are investing heavily in our business, but with a laser focus on those areas which we believe will drive the most value for our shareholders. We look forward to updating you on our progress as the year unfolds.

Now, I would like to ask Peter to walkthrough the details of our first quarter financial results. Peter?

Peter Osborne

Thank you, Bruce. Let’s begin with some additional insight into our first quarter income statements. We reported quarterly revenue of $5.3 million, primarily on the recognition of revenue on five Sensei systems and the sale of 693 catheters. First quarter revenues increased 95%, compared to the $2.7 million of revenue in the same period in 2010 where we recognized revenue on one Sensei system and 637 catheters.

Four of the Sensei systems recognized in the quarter has been shipped in prior quarters of 2010 and 2009. As of March 31, 2011 the company had a total deferred revenue balance of $9.9 million. The company has shipped 13 Sensei systems that have not yet been recognized as revenue. As Bruce mentioned in his remarks, we shipped a total of two Sensei systems during the quarter both to international distributors and revenue was recognized on one of the systems in the first quarter.

I should note here that we are able to recognize one of the systems shipped in the first quarter as a result of a change in accounting guidance. As disclosed in our 2010 Form 10-K effective January 1, 2011 the company prospectively adopted the financial accounting standard towards new accounting guidance related to revenue recognition for multiple deliverable revenue arrangements. The adoption of the new accounting guidance in the quarter resulted in one system shipment in the quarter qualifying for revenue recognition.

The average selling price inclusive of maintenance was two systems shipped in the quarter was approximately $500,000 this compares to an ASP of approximately $605,000 in the previous quarter and approximately $690,000 in the same quarter in 2010. The comparable declines in ASP are primarily attributable to expected lower price deals to our distributors in the quarter.

The catheter sold in the quarter at an average selling price of approximately $1620 similar to the $1630 in the previous quarter and the $1650 in the first quarter last year. Gross profit was $817,000 or 15% of first quarter revenues compared to a gross loss of $859,000 or negative 32% of revenues in the same quarter in 2010.

We expect that cut of revenues but as a percentage of revenue and on a dollar basis will continue to vary from quarter-to-quarter as manufacturing levels fluctuate. And as revenues fluctuate due to changes in product mix the timing of shipments of systems, the timing of revenue recognition on shipped systems and average sales prices per system and per catheter.

Prior to providing you with the details of our first quarter operating expenses I would like to remind you of the financial accounting of our joint product development agreement with Phillips, which comes into context the comparison of quarterly results. Our joint product development agreement priced for uneven cash receipts along certain milestones estimated to occur through Q3 2011, which accounted for on a contingency adjusted performance model as an offset to R&D expense.

Cash collected from milestones is generally amortized over the remaining product development period. Reporting there are five financial accounting for the funding from Phillips will result in quarterly fluctuations in reported costs. Total operating expenses were $12.2 million in the first quarter, compared to $12.5 million of expense in the first quarter last year after adjusting for the gain on litigation settlement.

Included in operating expenses of credits to R&D expense of $2 million and $188,000 in each of the respective first quarters in 2011 and 2010 under the company’s joint product development agreement with Phillips. These reductions were partially offset by the non-recurring cost of the Phillips transaction increased employee related expenses associated with stock compensation as a result of the higher stock price, increased employee related and upright services expenses associated with the ongoing development of the company’s vascular system platform, submission of regulatory filing and engineering activities to support the fossil technology.

Other income for the first quarter was $89,000 compared to other expense in it of $192,000 in the same period in 2010. The decreased expenses primarily due to higher interest income earned on the company’s short-term investment.

At the bottom line net income for the first quarter of 2011 including total non-cash stock compensation expense of $2.3 million was less than $57 [ph] million or income of $0.22 per basic and $0.21 for diluted share. These got average basic and diluted share outstanding of 54.1 million and 55.5 million shares respectively. In comparison the net loss for the first quarter 2010 including non-cash stock compensation expense of $1.3 was $3.8 million or a loss of $0.10 per basic and diluted share, based on average basic and diluted shares outstanding of $37.5 million.

The 2011 first quarter net income was primarily attributable to a $23 million gain on the sale of the non-robotic rights associated with the fossil technology and we currently do not expect to achieve quarterly net income again this year over the year as a whole. As noticed in our earnings press release, the company is completing its estimate of relative fair values of its recent agreements with Phillips on possible technology and vascular robotic development to which is proceed to $29 million.

As our independent quarter just complete the review their review of a finalized financial statements, it could be changes to the fair value allocation between the fossil and vascular robotic development agreements. And as a result there may be some changes to research and development expenses and gain on non-robotic rights described earlier and in our earnings release. However, what is most important to note about the Philips transaction is that regardless of the ultimate P&L accounting treatments Phillips has made a significant financial commitments to the company’s technology development and the cash from Phillips has been received by the company.

Turning to the balance sheet, as mentioned previously we have $9.9 million of deferred revenue on the balance sheet, which includes 13 Sensei systems, which we have shipped but have not yet completed the revenue recognition process. The majority of the systems currently classified as deferred revenue are with international distributors, which whom we cooperate.

However the ultimate timing of revenue recognition is based on their efforts in placing the systems with end users. Cash, cash equivalents and short term investments, as of March 31, 2011 were $45.1 million compared to $28.0 million as of December 31, 2010. The increase in cash resources is due primarily to $29 million received from our recent transaction with Phillips.

We have an existing debt facility with Silicon Valley Bank that converted to turn installment debts in 2010. During the quarter, we paid down the debt by approximately $900,000, leaving a total balance of approximately $5.3 million as of the end of the first quarter. During the first quarter, our cash used by operations after adjusting for the gain on the sale of our robotic rights to Phillips for the fossil technology and for the offset R&D expenses under the Phillips joint development agreement was approximately $12 million, compared to approximately $6.2 million in the fourth quarter of 2010 and 6.5 million in the comparable first quarter in 2010.

The sequential comparable quarter increases from cash used by operations was due to number factors including lower than planned shipments of Sensei systems, lower cash collections from systems previously shipped. Increased expense in vascular robotic system development and the timing of payments to reduce accounts payable during the first quarter. Contributing to the cash used in operations were two customers who we expected to receive payments from before the quarter end. And we subsequently receive payments from both customers.

Plus we are managing our overall operating expenses within planned levels to deliver our non commercial milestones on EP and vascular commitments as Bruce described earlier we continued to critically challenge operating expenses and then program activities that are not part of our current school focus.

That concludes our prepared remarks. Thank you for your attention and at this time we would like to open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jeffrey Cohen with C.K.Cooper, please go ahead.

Jeffrey Cohen – C.K.Cooper

Hi guys, thanks for taking my call. A number of questions, so first of all timing of the quarterly filing, do you have an estimate?

Peter Osborne

The 10-Q you are talking about Jeff.

Jeffrey Cohen – C.K.Cooper

Yes.

Peter Osborne

We expect to pass on time within the allotted time period.

Jeffrey Cohen – C.K.Cooper

Okay. Could you talk about the 6 million piece of the $29 million as you’ve recognized the 23 for the quarter, can you talk about the 6 and when that comes and how it comes?

Bruce Barclay

So I need to step back a little bit for financial and accounting purposes, we have to spare relatively better value each of those two elements. And as the press release highlighted, restore in process of finalizing that sort of relative fair value allocation. In terms of the accounting once that determination is finalized the amount attributable to the JDA is basically analyzed between here and Q3 2011 on a straight line basis as I mentioned in my remarks in the call.

Jeffrey Cohen – C.K.Cooper

Okay, so it could be straight line throughout the nine month period?

Peter Osborne

During the next, this month from here, yes.

Jeffrey Cohen – C.K.Cooper

Okay, okay, got it. Thank you. Okay, can you talk about so there was the $2 million on the R&D line, so is that just say then not counting of your R&D would have been $6.2 million for the quarter, correct?

Peter Osborne

On a gross basis that’s correct.

Jeffrey Cohen – C.K.Cooper

Okay, any insight into what you expect that to look like over the subsequent few quarters?

Peter Osborne

I think as we mentioned in our year end outlook and this basically overall expense trends to be very similar in 2011 compared to 2010.

Jeffrey Cohen – C.K.Cooper

Okay, okay. And the R&D for ‘10 was 18.2, okay, got it. Could you, you talked about the ASP’s where 511 on the two units that were sent out for the quarter, right? So the two systems were 511 each?

Bruce Barclay

That’s an average.

Jeffrey Cohen – C.K.Cooper

Okay. And the catheters were $1620 were they Lynx sales in Q1 and if so, do you dispose them in your Q.

Bruce Barclay

We do not separately disclose the breakout between orders and then Lynx so that’s an aggregate putting all capitals sold.

Jeffrey Cohen – C.K.Cooper

Okay. Were there any Lynx sales in Q1?

Bruce Barclay

Yeah, absolutely, yes.

Jeffrey Cohen – C.K.Cooper

And the income statement, do you have this bucket of $89,000 for other income expenses will you be breaking out in the queue the interest income and interest expense from that?

Bruce Barclay

Yes.

Jeffrey Cohen – C.K.Cooper

Okay, so that would be in the filing. Okay, and you said it looks like you received a payment received in this current quarter from both units as referred to that, was that both in you?

Peter Osborne

No, one domestic, one international.

Jeffrey Cohen – C.K.Cooper

Okay, so is it fair to say that Q2 will contain at least two sales that were recognized as revenue based upon those two.

Peter Osborne

So I just want to be clear are you referring to the cash we received or the shipments we made?

Jeffrey Cohen – C.K.Cooper

Neither, at the end of your comments you were talking about the payment received from both units that were too so that you expected from Q1 that sell into Q2.

Peter Osborne

Okay. That was two ends where previous were included in revenues in previous quarters.

Jeffrey Cohen – C.K.Cooper

Okay. Got it. Just a couple more, so is 9.9 the deferred revenue currently on 13 systems. And do you disclose how many of those are EU and how many are U.S?

Peter Osborne

We do not disclose that and also as that our deferred revenue also includes maintenance agreements and other minor items as well.

Jeffrey Cohen – C.K.Cooper

Which nullifies my next question which is 13 divided by 9 is 761,000. Okay, so Barclay is there a name yet for the vascular platform?

Bruce Barclay

I am sorry, Jeff could you ask your question again.

Jeffrey Cohen – C.K.Cooper

Is there name for the endovascular platform yet?

Bruce Barclay

We are close to finalizing that, we hope to release that here in the next 30 days, we anticipate exhibiting the product at SPS in Chicago next month and we hope to have a name finalized and released before then, so if I could ask you just to stay tuned for a little while longer we are very closed.

Jeffrey Cohen – C.K.Cooper

Okay, that concludes it for me, thanks very much.

Bruce Barclay

Thanks for entering the call.

Operator

(Operator Instructions) And Mr. Barclay, I don’t show any further questions in queue.

Bruce Barclay

Okay, very good. Thanks Jeremy. Thank you all again for joining us on our Q1 2011 results conference call and for your interest in and support of the company. Look forward to updating you on progress against our initiatives and to provide further evidence of our new focus that will serve the company well going forward. I look forward to updating you in August, when we review our Q2 results. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect.

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