Hansen Medical CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: Hansen Medical, (HNSN)

Hansen Medical, Inc. (NASDAQ:HNSN)

Q3 2011 Earnings Conference Call

November 2, 2011 5:00 PM ET

Executives

Peter Mariani – Chief Financial Officer

Bruce Barclay – President and Chief Executive Officer

Analysts

Brooks West – Piper Jaffray

Jeffrey Cohen – Laden, Burke, Thalmann

Chris Pasquale – JP Morgan

Operator

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

This conference is being recorded today, Wednesday, November 2, 2011. I’d now like to turn the conference over to Mr. Pete Mariani, Chief Financial Officer of Hansen Medical. Please go ahead sir.

Pete Mariani

Thank you, Camille. Good afternoon everyone. Welcome to Hansen Medicals 2011 third quarter results conference call. With me today is Bruce Barclay Hansen Medicals President and CEO.

As we begin today’s call please remember that our prepared remarks and responses to questions will contain forward-looking statements that are subject to a number of a risks and uncertainties. All statements other than statements of historical fact are statements that could be deemed forward-looking statements including statements containing the words plan, expects, potential, believes, goal, estimate and similar words. These statements are based on the current estimates and assumptions of our management as of the date of this call and are subject to risks, uncertainties, changes in circumstances and other factors that may cause actual results to differ materially from the information expressed or implied by such forward-looking statements.

Examples of such statements include statements about the potential timing of FDA clearance of our Magellan Robotic System in the U.S. the timing of first cases to be performed with the system, the potential benefit of the system on vascular procedures and the timing of commercializing our Magellan System.

Important factors that could cause actual results to differ materially from those indicated by such forward looking statements include among others engineering regulatory and sales challenges in developing new products and entering new markets, potential safety and regulatory issues that could slow or suspend our sales, the uncertain timelines caused and results of preclinical and clinical trials, the rate of adoption of our systems and the rate of use of our catheters, the scope and validity of intellectual property right applicable to our products, competition from other companies our ability to recruit and retain key personnel, our ability to maintain our remedial actions over previously reported material weaknesses internal control over financial reporting, the effect of credit, financial and economic conditions on capital spending by our potential customers, our ability to manage expenses and obtain additional financing and other risks more fully described in the risk factor section of our quarterly report on Form 10-Q for the quarter ended June 30, 2011 filed with the SEC on our August 8, 2011 and the risks discussed in other reports filed with the SEC.

Given these uncertainties you should not place undue reliance on the forward-looking statements included in our remarks and responses to questions. We undertake no obligation to revise or update information herein to reflect events or circumstance in the future even if new information become available.

And with that I will turn the call over to Hansen Medicals President and CEO Bruce Barclay.

Bruce Barclay

Thanks Pete good afternoon everyone and thank you for joining us today for our third quarter 2011 conference call. I will spend the next several minutes providing an update on the quarter and on recent developments with our new vascular robotic system called the Magellan Robotic System. Pete will then return to provide a review of our third quarter financial results.

As you can see in the press release issued earlier today Hansen Medical had a strong third quarter as we continued to drive momentum in our EP business, enhance our commercial organization and achieve important milestones with our Magellan system. As we have discussed before flexible robotics for vascular applications is a key driver to the growth of Hansen Medical going forward we are focused on launching for vascular platform.

With that in, we are pleased to have now secured CE part for the Magellan Robotic System the NorthStar Robotic Catheter and related accessories. Clearly highlighting the progress we’ve made towards bringing a robotic platform for vascular applications to market. Our initial launch in Europe is well underway.

I’m also pleased to announce the first commercial installation of our Magellan Robotic System at St. Mary’s Hospital in London. The Magellan system accesses peripheral vessels with a proprietary technology that delivers independent distal tip control of a catheter and a sheath, as well as robotic manipulation of a standard guidewire from a centralized, remote workstation. This system has the potential to transform the way endovascular procedures are performed for patients with Peripheral Vascular Disease. The system was designed to assist physicians to effectively and efficiently treat a variety of peripheral diseases, while reducing procedure time, lessening radiation exposure and enabling new procedures. With this installation we will now receive a $3 million from Philips for the final milestone of our joined development agreement.

St. Mary’s is pioneer in the use of flexible robotics in vascular interventions and this is a tremendous opportunity to generate physician experience in order to raise the profile of the Magellan System in advance on a full scale of commercial launch. Several of St. Mary’s physicians and their staff have completed our extensive training program on the system and we expect the first clinical cases will be performed in the coming weeks. We remain very excited about the opportunity in front of us in the vascular market. We spoke with several leading clinicians about the Magellan system many of whom have driven the robot and have expressed strong interest in acquiring one for their hospitals. Our targeted launch is well underway with our European commercial team and many of these positive clinical discussions have transitioned to conversations with hospital administration regarding the potential purchase of a system.

However, as we discussed before our goal was to enter the vascular market with a predictable and controllable launch by building partnerships with select physicians. Our goal is that these initial accounts would publish data regarding their clinical experience with the system that is sufficiently compelling to further develop interest from other physicians in hospitals expressing a positive user experience and driving great adoption as the systems become more widely available.

We anticipate that the success of these initial accounts will increase the visibility in the patients and the medical community and will help drive adoption going forward. I now like to provide an update on our status in the U.S. with the FDA with respect to Magellan. As you know on September 7, 2011 we received a letter from the U.S. Food and Drug Administration responding to the company’s April 2011 submission of a 510-K premarket notification application for our Magellan Robotic System and NorthStar Robotic Catheter. The FDA’s initial response indicated that the 510-K approach is an appropriate regulatory pathway and did not request additional clinical testing.

However the FDA’s initial response request with the company answered certain questions regarding the application. The company has developed an approach to provide the FDA with the answers requested, which will include the results of additional preclinical testing. As a result we expect to achieve FDA clearance and begin our initial commercial launch of our Magellan system and NorthStar Catheter in the U.S. in the second quarter of 2012. As you can imagine, this is a high priority for our company we are very confident in our approach and I can assure that we are moving as expeditiously as possible.

Now on to our EP business, revenues for the quarter of $5.4 million are up 1% sequentially and 53% year-over-year primarily due to increased systems revenue. We recognized revenue on five systems in the quarter and sold a record 698 catheters in the quarter, up 2% sequentially and 20% year-over-year. Procedures were essentially flat with Q2 of 2011 at 598 and were down 5% year-over-year while procedures were strong in Europe they were weaker than expected in the U.S. As we discussed last quarter, we are actively upgrading our U.S. sales force as we recruit higher and trained sales professionals with a stronger sales, with stronger sales and vascular backgrounds. Majority of the non-management members of our U.S. sales team started within the last six months and we expect this new team to be fully ramped up by year end. Procedures were particularly slow in July in the U.S. due to some seasonality but also due to this transition. Procedures improved in August and September in the U.S. and are trending well in the current quarter.

Year-to-date we recognized 15 systems as revenue already well past the 12 systems recognized as revenue in all of 2010 and the total number of procedures performed at the end of the quarter is nearly 7000 as patients at key clinical centers around the world are continuing to generate positive data to support benefits of robotic EP procedures.

In fact in support of expanding our EP clinical applications we recently announced the initiation of a physician sponsored clinical trial designed to evaluate our flexible catheter Sensei X Robotic System in patients with ventricular tachycardia or VT. VT is one of the most challenging and complex arrhythmias facing elector physiologist. And this announcement illustrates our commitment to developing innovative technologies to provide benefits not available with traditional manual techniques.

Separately, Dr. Miguel Valderrabano and the team at (Inaudible) in Houston have recently offered a paper on his initial experience with the Sensei in VT. That will be available next month showing early but encouraging data and the potential of the Sensei for this new market opportunity.

In closing, momentum is growing at the company. We are continuing to successfully execute on our strategy of growing our EP business and of developing and launching our vascular platform. Additionally through onsite training and upgrading our sales infrastructure we are positioning ourselves well to continue to grow the Electrophysiology business while ramping up to a full scale commercial launch of Magellan in Europe and eventually in the U.S.

That concludes my prepared remarks with that I will now pass the call over to Pete for a review of the financials. Pete.

Pete Mariani

Thank you, Bruce. As Bruce mentioned earlier we recorded quarterly revenue of $5.4 million primarily on the recognition of revenue on five Sensei systems and the sale of a record 698 catheters. Two of the five systems were shipped in the quarter and three were shipped in previous quarters. Revenue grew 53% over the third quarter of 2010 where we recognized revenue no three systems and sold 581 catheters. Revenue was up 1% compared to second quarter 2011 where we also recognized revenue on five Sensei systems and sold 682 catheters.

On a year-to-date basis we have recorded revenue of $16 million primarily on 15 Sensei systems in a record 2073 catheters. These year-to-date amounts represent year-over-year growth in revenues up 21% systems growth of 50% and catheter growth of 17%. The average selling prices on the two Sensei systems shipped in the quarter inclusive of maintenance was $596,000 compared to $693,000 in the previous quarter and $622,000 in the same quarter of last year. The variance in average selling prices are primarily reflective of the mix of revenue units between those sold directly to end customers and those units sold to our international distributors, which are typically completed at comparatively lower prices.

The catheters sold in the quarter had an average selling price of approximately $1642 essentially flat with the $1638 in the previous quarter and up 2% from the $1610 in the third quarter last year. In the third quarter we conducted 598 procedures, this is essentially flat compared to the 596 procedures performed last quarter and is down 5% when compared to the year ago period. As Bruce noted in his comments the procedure volume was impacted primarily by the transition activities in our U.S. sales force and after a slow July we saw our procedure volumes recover through August and September and have seen that trend continue in the early part of the current quarter.

Additionally, we continue to develop a growing pipeline of interest for new Sensei system purchases. Gross profit was $1.1 million or 20% of third quarter revenues compared to gross profit of $338,000 or 10% of revenues in the third quarter of 2010 and $1.4 million or 26% of revenues in the previous quarter. In the current quarter the company recorded additional charges related to the build of vascular inventory of $524 or approximately $0.01 per share.

Additional variances in the quarterly gross profit percentage are primarily reflective of the variance in the volume and average selling prices of robotic catheter systems, as well as variances in manufacturing activity. We expect that gross margins will continue to vary from quarter-to-quarter as manufacturing levels and revenues fluctuate due to variations in the mix and timing of shipments and revenue recognition on shipped units.

Total operating expenses were $11.5 million in the third quarter compared to $10.4 million in the same quarter of last year and $9.8 million in the previous quarter. These amounts include financial accounting credits for our joint product development agreement with Phillips totaling $2.1 million in the current quarter, $1 million in the same quarter of last year and $2.8 million in the previous quarter.

Q3 2011 operating expenses also include a one-time non-cash charge of $623,000 to record vesting of unvested stock options held by the company’s Chairman as he transitioned to non-employee status. Operating expenses also include a $367,000 non-cash charge to record the acquisition of certain technology rights in exchange for company stock. Together these two charges amounted to approximately $0.02 per share.

Net loss in the third quarter of 2011 including total non-cash stock compensation expense of $1.8 million was $10.1 million or a loss of $0.18 per share. In comparison, net loss for the third quarter of 2010 including total non-cash stock compensation of $1.3 million was $12.1 million or a loss of $0.23 per share. Net loss in the second quarter of 2011 including non-cash stock compensation expense of $679,000 was $8.8 million or $0.16 per share.

Turning to the balance sheet, cash, cash equivalents and short-term investments as of September 30, 2011 were $26 million, a decrease of $11.2 million compared to the $37.2 million balance at the end of the previous quarter. As of September 30, we have $7.3 million of deferred revenue on the balance sheet, which includes eight Sensei systems that have been shipped but which have not completed the revenue recognition process. The majority of the systems currently classified as deferred revenue are with international distributors with whom we cooperate. However, the ultimate timing of revenue recognition is primarily dependent upon their efforts in placing the systems with their end users.

During the quarter, we also paid down our debt by $900,000 leaving a total debt balance of $3.6 million. Finally, in the third quarter our cash used in operations was approximately $10.1 million compared to $9.7 million in the third quarter of last year and $9.1 million in the previous quarter.

In summary, the company continues to manage our overall expenses and cash within planned levels. And as we’ve discussed in the previous quarter our focus is on creating a path to profitability for the company. We know that this path was dependent upon our ability to develop global commercial success with the vascular platform continue to drive EP adoption through clinical data, geographic expansion and improved commercial executing, improved margins through product design and efficiencies and drive operational efficiencies across company. We have tremendous opportunity with these markets and we are working to execute on our strategy and to share our long-term success.

And that concludes our summary of the financials I would like to pass the call back to the operator for Q&A. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) our first question is from the line of Brooks West with Piper Jaffray. Please go ahead.

Brooks West – Piper Jaffray

Hi guys, can you hear me?

Bruce Barclay

No we can’t hi Brooks.

Brooks West – Piper Jaffray

Hi, thanks for taking the question. Bruce you made the statement that you now expect FDA clearance for Magellan in Q2. Can you give a little bit more background on your confidence and what informs your confidence there given the slow FDA and then how confident are you of the labeling you are going for anything you could tell us though.

Bruce Barclay

Yeah sure, we are very confident in our position at this point we have been spending the time since we got the written response from FDA understanding it with both our internal and external regulatory and technical experts. We’ve had conversations directly with the agency to make sure we understood their request directly. If you like these are things that are within our control and things that we can perform on.

So well there is no certainty in the testing that we are doing we think there is good confidence and in fact it is a 510-K pathway no additional clinical testing is required and we’ve had great success with the CE Mark process as well, which of course in different in some respects but again it’s thorough and rigorous and we survived that and went to the extreme. So we have good confidence in this state we understand that the timing is more within our control so we’ve estimated accordingly but we’ve had good confidence there.

Brooks West – Piper Jaffray

And then any thoughts on the label.

Bruce Barclay

No, the question that came back from FDA at least at this point have less of a label claim as we requested initially, which is all peripheral vascular anatomy, which is yet another positive for us.

Brooks West – Piper Jaffray

Okay, then another question you know the training program for Magellan versus Sensei, which arguably was not as robust as maybe it could have been and maybe caused some problems post launch with that product. Can you talk about differently just go around with Magellan.

Bruce Barclay

Yes, absolute several things. One is we have a VP of Training and Clinical Affairs now Rita Jacob that has been with us for nearly a year now. She and her team have done a terrific job of creating materials, working with physicians to create materials necessarily to define a robust training process. We’ve been through that training with our European team, we’ve been through the training with the physicians and staff at St. Mary’s and all that’s gone exceedingly well. So we’d feel like the training organization and the training materials are in place are very strong for us.

Secondly, I would say we have a benefit of time when the Sensei was originally launched in 2007 it was a brand new product in its category and as with any new product there is a learning curve with the product. While Magellan is a different system than the Sensei system it does leverage a lot of the same capabilities, technology and so given the clinical education and learning that we’ve benefited from in those nearly 7000 procedures with the Sensei much of that is directly applicable to the Magellan again it’s a good running process.

I think the other event is well we’ve been hopeful about is the fact that we are doing this control deliberate launch of the Magellan system in Europe and actually in the U.S. to make sure that the, it’s been an uptime on sides training the physicians, training the staff and bring the cases supporting them as best we can to make sure that they have early clinic successes and then build upon that success as we go forward with additional system placement. So I think our training has actually been a real positive for the organization in the last 12 months. I credit Rita and her team with a lot of that but frankly much of the organization is aligned around that and attributable to it as well so.

Brooks West – Piper Jaffray

Okay, thanks. And then last question Pete for you just on the balance sheet. Not a lot of cash left and maybe two questions can you just kind of review your options again on what you might do to bridge funding to approval and then also can you test the $7.3 million deferred revenue on the international side as earnings, is there any risk of that not coming to vision given some of the problems over in Europe. Thanks.

Pete Mariani

Yeah certainly, first of all just a reminder we do have $26 million of cash on the balance sheet at the end of the quarter and that in itself in addition to the Phillips $3 million that we will receive here shortly will be sufficient to get us through Q2, which gets us through the commercial launch in Europe and should get us through the 510-K clearance in the U.S. But that being said we do continue to evaluate opportunities to raise additional capital and those options include potential strategic financing similar to the Phillips transaction we completed in February of this year, as well as opportunities for debt and or equity financing.

And although I’m not able to comment on the status of any of that right now until something might come to completion I can assure you that we continue to work on those opportunities and we are confident in our ability to continue to raise capital. Then your second question on the $7 million of deferred revenue, keep in mind I believe every single one of those systems have already been paid for. So from a cash perspective we have received the cash and as we continue to work those systems and work with those distributors we are confident that all of those will be coming into revenue in the coming quarters.

Brooks West – Piper Jaffray

Great, thanks guys.

Bruce Barclay

Thanks for the call.

Operator

Thank you. And our next question is from the line of Jeffrey Cohen with Laden, Burke, Thalmann. Please go ahead.

Jeffrey Cohen – Laden, Burke, Thalmann

Well, thanks for taking my question. Can you hear me okay?

Bruce Barclay

Yeah, we can.

Jeffrey Cohen – Laden, Burke, Thalmann

Okay, just two questions I guess for Bruce and Pete. So first the systems sold to St. Mary’s the first Magellan was that, was any revenue recognized during Q3 or it was shipped there and not recognized as revenue there?

Bruce Barclay

No, it’s a Q4 transaction.

Jeffrey Cohen – Laden, Burke, Thalmann

Okay.

Bruce Barclay

And yeah we didn’t ship it until Q4 so no nothing is in Q3.

Jeffrey Cohen – Laden, Burke, Thalmann

Okay, got it any comments about Lynx for the quarter how Lynx sales were in Europe and mostly wherever you are seeing that has ASPs.

Bruce Barclay

Product continues to do well. We have not broken Lynx out yet in our financial prepared remarks as you noticed. But product continues to do well we continue to get good feedback on it and we are not forgetting to collect the data generated as well in Europe and hopefully there will be a publication at some point in the future on the data that we are collecting but beyond that, probably nothing else to report.

Jeffrey Cohen – Laden, Burke, Thalmann

Okay. And then one more, when you were speaking about the catheter vehicles for the quarter. As far as the sales force are you is it a natural upgrade or sales force now in the field or is it a increase in sales force now in the field.

Bruce Barclay

We’ve done both but basically it’s changing the skill sets we’ve gone from a, or going from an organization on the disposable side that was more clinically focused to an organization that is both clinically and sales focused. And in addition several of the people we are bringing in over the last several months have vascular backgrounds specifically. So we are training them on the EP side and then we are also going to be leveraging their vascular experience when they come on board and the product gets cleared in the U.S. so it’s a combination of those things.

Jeffrey Cohen – Laden, Burke, Thalmann

Got it. Okay, thanks for taking the questions.

Bruce Barclay

You bet, thanks for the call.

Operator

Thank you. (Operator Instructions) our next question is from the line of Chris Pasquale with JP Morgan. Please go ahead.

Chris Pasquale – JP Morgan

Thanks. Bruce, when you talk to prospective Magellan customers what’s the value message that you are delivering, what drives the economic returns for the hospital and how does that math work. And of all the potential benefits for technology what do you think is really what appeals to them the most?

Bruce Barclay

Thanks Chris for the question. We’ve been in dozens and dozens of these conversations and there are certain themes that come out of them, one of the things though that I think is unique about these conversations is that many of the physicians have different benefits or attributes that they think are most important to them. Those range from really being able to enable new procedures. So procedures that might either get converted to open surgery or would take so long to be able to cross with the guidewire they have to go to open surgery eventually. It’s probably one of the main benefits.

Given the technology that we have which has the ability to control the distal tip of the inner leader catheter and the outer sheath independently by rotating that distal tip 360 degrees is very unique. And we think pretty much enables these cases so that’s probably a big driver. We’ve also got data that shows that you know the from the bench, on the animal testing that shows reduced procedure times, quicker access to vessels compared to manual certainly the ability to set outside the radiation field and not we are lead is also the best to sit down.

And we’ve talked before about the paper that got published in the summer of 2011 from one of our sites that have a Sensei system for Electrophysiology. And in that paper he talks about the financial benefits, the payback that his hospital saw with the system from the ability to predict the length of cases more accurate to schedule OR time more efficiently, so he has a position not having to stand on his feet for eight to ten hours wearing lead and being seated, being less fatigue, being more sharp, being able to essentially increase the patient volume through his center more than he could through manual technique. And at least in that particular case it saw a payback of this is a robot in less than a year, which was very significant for them obviously.

So a number of different benefits to the system and we got some preclinical data, we’ve got some clinical data from Europe getting ready to generate some additional clinical data through the same Barry’s Placement. We will continue to add to that body of data going forward but the payback I think, the challenge for us the job for us is to create both a clinical benefit and a financial benefit and we think that we could do that as we continue to collect more data.

Chris Pasquale – JP Morgan

Thanks. What’s the status of the Artisan trial why haven’t you guys talked about that in a while?

Bruce Barclay

Yes, the Artisan trial is continuing to enroll. We got the unconditional approval from FDA to increase the number of sites from the one initial to the 14 that we now have clearance for at late last year. So we’ve been actively going to sites putting new sites and going through the IRME process there to get IRME approval and then essentially a signed agreement. So we are continuing to add sites, enroll patients. It has taken longer than we had originally hoped or planned that it would but that remains an active trial for us and an important trial for us.

Chris Pasquale – JP Morgan

Is there a reason why that’s taking longer is the patients don’t want to be randomized or the centers low to participate for some reason.

Bruce Barclay

No neither one I would say it has just been a matter of going through the IRBs and the agreement process. It just, it takes several months to do that and then getting the number of sites in place to them start the recruitment process is a several month lag.

Chris Pasquale – JP Morgan

At this point any idea whether you might see results from that segment?

Bruce Barclay

Probably still too early to say we hope that we could have it enrolled by the end of 2013 I think is what we have said in our Q filing our 10-Q. We will promise if we are trying to do better than that we can’t.

Chris Pasquale – JP Morgan

Great thanks.

Operator

Thank you and there are no further questions at this time I would now like to turn the call back over to Mr. Barclay for closing remarks.

Bruce Barclay

Thanks, operator, and thanks to everyone for joining us today for our third quarter 2011 conference call. We look forward to providing you with the results of our Q4 and year end results in February of next year.

Operator

Ladies and gentlemen, this concludes the Hansen Medical 2011 third quarter results conference call. If you would like to listen to a replay of today’s conference please dial 1-877-870-5176 with the access code of 4485113. Thank you for your participation. You may now disconnect.

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