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Hansen Medical, Inc. (NASDAQ:HNSN)

Q4 2011 Earnings Call

February 22, 2012 5:00 pm ET

Executives

Bruce J Barclay – President and Chief Executive Officer

Peter J. Mariani – Chief Financial Officer

Analysts

Jeffrey Cohen – Ladenburg Thalmann & Co.

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Hansen Medical 2011 Fourth 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 questions. (Operator instructions) This conference is being recorded today Wednesday, February 22, 2012.

I’d now like to turn the conference over to Mr. Pete Mariani, Chief Financial Officer. Please go ahead, sir.

Peter J. Mariani

Thank you, Camille, good afternoon everyone. Welcome to Hansen Medical’s 2011 fourth quarter and year end results conference call. With me today is Bruce Barclay, Hansen’s President and Chief Executive Officer.

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 risks and uncertainties. All statements other than statements of historical fact could be deemed forward-looking statements, including statements containing the words; plan, expects, potential, believe, goal, estimate, anticipate 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 and 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 future clinical cases to be performed with the System, the potential benefits of the System on vascular procedures, and the timing of commercializing our Magellan System; as well as statements about the anticipated increase in adoption of our Sensei platform for electrophysiology procedures.

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, costs and results of pre-clinical 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 rights applicable to our products; competition from other companies; our ability to maintain our remedial actions over previously reported material weaknesses in internal controls 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 Factors section of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 filed with the SEC on November 7, 2011, and the risks discussed in our 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 circumstances in the future, even if new information becomes available.

And with that, I’ll turn the call over to Bruce.

Bruce J. Barclay

Thank you, Pete. Good afternoon, everyone. Thank you all for joining us today for our fourth quarter and year end 2011 conference call. In today’s call, I will provide an update on our strategic imperatives, our achievements for the fourth quarter and 2011 calendar year, and a discussion of our outlook for 2012. I’ll then turn the call over to Pete, he’ll provide a review of our financial results.

As you’ve seen from the summary of last year’s business highlights set out in today’s press release, 2011 was an exceptional year for Hansen Medical, and the fourth quarter demonstrated continued momentum in the execution of our strategy. For example in the fourth quarter alone, we shipped six systems, four Sensei systems, one Magellan System in Europe and one Vascular Research system in the U.S., and recognized revenue on eight systems. This brings us to 13 systems shipped in total during 2011 with revenue recognized on 23 systems, a 92% increase over the 12 systems recognized in 2010.

Revenue for the quarter were $6.2 million, which is up 77% from the year ago quarterly period. These results flow from our three strategic imperatives, developing and launching the Magellan Robotic platform, growing the electrophysiology or EP; and driving operational excellence. We executed well against these three imperatives in 2011, and we remain focused on continuing the momentum in 2012 as we chart our path towards profitability.

Let me discuss these imperatives in a bit more detail starting with Magellan and our vascular platform. As we’ve discussed before, flexible robotics in vascular applications is a key growth driver for the business, and we believe it will be a catalyst to transform the way endovascular procedures are performed.

The Magellan Robotic platform’s most significant competitive advantage is that it allows for independent individual robotic control of distal tips of both the outer sheath and the inner leader catheter, as well as robotic manipulation of standard guidewires. It is also designed to allow more precise and predictable catheter navigation of peripheral vessels while reducing procedure time, lessening radiation exposure and lowering procedural fatigue countered by physicians.

This year we reached important milestones in the growth and development of our vascular business. We received CE mark approval for the Magellan Robotic Systems and NorthStar Robotic Catheter, and related accessories in the second half of 2011, and have already begun a focused and controlled commercial launch in Europe.

While our initial commercialization strategy is predicated on partnering with esteemed physicians who are both influential and only adopters of new medical device technologies. In doing so, we hope to generate positive clinical experiences and data to drive both interest and adoption among other physicians and hospitals.

For instance, our first vascular champion in Europe is Dr. Nick Cheshire at St. Mary’s Hospital in London. Dr. Cheshire is a pioneer in the use of flexible robotics for vascular interventions, and earlier this year his team performed the first ever administrated endograft procedure using our Magellan System. This particular procedure which can be difficult to perform manually was successfully completed in less time using our Magellan System compared to manual in this patient, and another clinical cases have already generated significant attention within the physician community.

We will continue to build on cases like these with more physicians generating clinical evidence through the use of the Magellan Robotic System in the treatment of peripheral vascular disease. The preliminary results of our controlled launch strategy have been positive. First clinical cases with our Magellan System have been completed. We are currently in multiple positive conversations with hospital administrators in Europe over the potential purchase of the Magellan System. As we prepare for potential commercial launch in the U.S. this year, we intend on using a similar approach once we have FDA clearance.

Let me now update you on the status of the Magellan System in the United States. As all of you are aware, on September 11, 2011 we received a letter from the U.S. FDA in response to the Company’s April 2011 submission of a 510(k) pre-market notification application for Magellan System and NorthStar Catheter. The FDA’s initial response indicated the 510(k) approach is an appropriate regulatory pathway, and did not request additional clinical testing.

However, the FDA’s response request and answers to certain questions regarding the application, and that we provide additional non-clinical data. We are announcing today that earlier this month, we submitted our response to all of their outstanding questions. We are still targeting receipt of FDA clearance, and to begin our commercial launch of this platform in the U.S. during the second quarter of this year.

In preparation for this commercial launch, we have effectively upgraded our sales force to include professionals with more extensive vascular and clinical sales background, and we have developed a world class training program for physicians and staff designed to allow them to develop confidence to use the system with precision as quickly as possible.

Additionally, we have paired with leading hospitals and physician tier in the U.S. to conduct pre-clinical research with the systems. Earlier this year, we announced the two hospitals, The Methodist Hospital, in Houston, Texas and Hartford Hospital in Hartford, Connecticut; each purchased a Vascular Research Robotic System to expand their flexible robotic technology capability.

Both hospitals previously owned multiple anti-medical flexible robotic systems. Methodist purchased its system in Q4, and Hartford purchased its system in Q1. Both hospitals are creating an institutional focus on flexible robotic and are establishing their leadership in peripheral and cardiovascular robotics programs. We believe their recent purchases of vascular research systems for the purpose of conducting preclinical vascular research reflects their confidence in the value and benefits of Hansen Medical’s advanced flexible robotic technology; and we are very pleased to play a meaningful role in their pursuit of leadership in these areas.

Also in Canada, we have recently received approval for the Sensei Robotic System and Artisan Control Catheter, and have filed for approval for the Magellan System. In Australia, we have recently filed for and received regulatory approval for the Magellan System where we had previously received approval for the Sensei System. The ancillary products for Magellan are still pending in Australia, and we anticipate their approval soon.

Now moving to our second strategic imperative, growing our EP business. In the fourth quarter, we sold a record 714 catheters, up 2% sequentially; and 7% year-over-year, and physicians performed an estimated 633 procedures, up 6% sequentially; and down 2% over the fourth quarter of 2010. For the year, we sold a record number of catheters 2,787 which is up 14% over full year 2010. And physicians performed a record number of procedures, estimated at 2,498 up 1% over full year 2010.

The record number of catheters sales in the period reflects anticipated strength for procedural demand in the market. Also note that these results include a small number of vascular catheter sold and procedures performed in the fourth quarter at St. Mary’s Hospital, London.

As you can see from these results, we are continuing to build momentum in EP, and at the end of fourth quarter, total of number procedures performed since launch of the Sensei system is approximately 7,500 cases, as physicians are clearly experiencing the benefits of our Sensei System. And as our robot lessen procedure time, and reduce radiation, this unique technology is powered by a highly accurate, robotically controlled arm that allows for the catheter navigation, stability and positioning within the patient’s heart. Moreover, it changes the way physicians operate, and then support the benefits associated with our Sensei system, several leading heart centers now own more than one robot.

In November, at the American Heart Association Scientific Session, an abstract was presented summarizing a multi-center worldwide survey evaluating the safety and efficacy of robotic navigation with the Sensei system in AF ablation procedures compared to manual technique as historical control.

The overall complication rate across the entire survey was similar for robotic and manual navigation. After an average follow-up of four patients of 15 months, the success rate defined as freedom from atrial tachyarrhythmia of antiarrhythmic drugs of robotic procedures was slightly superior at 67% compared to that of manual procedures at 64%. Most compelling in the survey data are the benefits that robotic navigation demonstrated in both safety and efficacy as the EPs gained experience with the robotic catheter system, and improved their robotic technique.

We believe that the results of this survey demonstrates the clinical value of the Sensei Robotic System for patients with cardiac arrhythmias. These results are in addition to the other benefits physicians, patients, payers receive from robotic navigation including less physician and patient radiation exposure, shorter procedure times and less physician fee.

Now let’s move to our third strategic imperative, operational expense. We strengthened our sales team and enhanced our management team with the addition of several new executives, all with proven track records and a deep expertise in the medical device space. Earlier this year, we raised $29 million of non-diluted capital through our agreements with Phillips, and in the fourth quarter we further bolstered our capital structure through a secured $30 million debt facility and a $10 million equity private placement.

Additionally, the company has taken several steps to reduce cost in the organization and we are well prepared to expand our margin and lower our cash burn in 2012. While we’re encouraged by our accomplishments in 2011, we believe we’re positioned for even greater success in the future. We entered the year with a strong cash position, a talented and seasoned executive team, and a clear strategic path to long-term value creation.

In 2012, we will continue to establish a unique and differentiated value proposition for our Magellan Robotic System, which we believe, enables us to expand our addressable market opportunity tenfold, further penetrate and broaden our customer base and accelerate the overall market adoption of flex robotics well into the future.

Now moving on to our outlook for 2012, we have an exciting year ahead of us as we continue to focus on the launch of our vascular platform in the U.S., build momentum in our EP business, and improve operational expense. While the company anticipates growth in total robotic system shipments in 2012 compared to 2011, given the uncertainty of timing of those shipments, we are not in a position to provide specific financial guidance.

However, gross margins are expected to improve over 2011 levels based on our volume assumptions of product sales. Operating expense levels are expected to increase moderately as the company has taken steps to offset a majority of the funded research and development credits from the company’s now completed work under the joint development agreement with Phillips from 2011.

The company expects to receive FDA clearance in the U.S. for the Magellan Robotic System in the second quarter of 2011. Finally, our strong cash position of $52.2 million at the year end is expected to be sufficient to fund the company’s operation to at least through the initial commercialization of Magellan.

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

Peter J. Mariani

Thank you, Bruce. As Bruce mentioned earlier, we recorded revenue of $6.2 million in Q4. We shipped six robotic catheter systems in the quarter and recognized revenue on eight systems, and the sale of a record 714 catheters. Four of the eight revenue systems were shipped in the quarter, and four were shipped in previous quarters.

Revenue grew 77% over the fourth quarter of 2010, where we recognized revenue on two systems, and sold 666 catheters. Revenue was up 15% compared to third quarter 2011, where we recognized revenue on five Sensei systems, and sold 698 catheters.

On a full year basis, we have recorded revenue of $22.1 million, primarily on 23 robotic systems and a record 2,787 catheters. 11 of the 23 systems recorded as revenue in 2011 were shipped in 2011, and 12 systems were shipped prior to 2011. These results compare to 2010 shipments of 16 robotic systems, revenue on 12 systems; and catheter sales of 2,439.

As a reminder, effective January 1, 2011, the company prospectively adopted financial accounting standard boards new accounting guidance related to revenue recognition for multiple deliverable revenue arrangements. In general the new guidance allows the company to recognize revenue on certain elements more quickly than under the previous guidance.

The average selling price on the four Sensei systems shipped in the quarter inclusive of maintenance was $598,000 compared to $596,000 in the previous quarter and $605,000 in the same quarter of last year. The variances and average selling prices are primarily reflective of the mix of revenue units obviously between those sold directly to end customers and those units sold to our international distributors which are typically completed at comparatively lower prices.

Additionally, given that we have recently launched our vascular system which has a much higher list price than the Sensei system and in recognition of multiple ongoing customer conversations regarding the potential purchase of the system and the competitive nature of the marketplace, we will no longer breakout ASPs for robotic system shipments in the future.

Catheter sold in the quarter had an average selling price of approximately $1,614 down 1.7% from $1,642 in the previous quarter and down 1.2% from the $1,633 in the fourth quarter of last year.

In the fourth quarter, physicians conducted an estimated 633 procedures. This was up 6% compared to 598 procedures performed last quarter, and was down 2% when compared to the year ago period. Gross profit was $1.6 million or 25.4% of fourth quarter revenues compared to gross profit of $59,000 or a negative 1.7% of revenues in the fourth quarter of 2010 and $1.1 million or 20.2% of revenues in the previous quarter. The increase in margins is primarily due to the growth in revenue as well as variances in manufacturing activity.

On a full year basis, gross profit was $4.9 million or 22% of revenue compared to $1.9 million or 11% in 2010. Again, the growth in margins is primarily the result of increased revenue and improved manufacturing operations.

Total operating expenses were $10.8 million in the fourth quarter compared to $10.7 million in the same quarter of last year and $11.1 million in the previous quarter. These amounts include funded research and development credits, which are recorded as a reduction of expense from the company’s now completed work under the joint development agreement with Philips totaling $3.7 million in the current quarter, $2 million in the same quarter of last year and $2.1 million in the previous quarter.

Q4 2011 operating expenses also included one-time legal and other expenses of $700,000 related to our debt and equity financings. On a full year basis, total expenses were $43.6 million and included funded research and development credits from the Philips agreement of $10.6 million.

In 2010, operating expenses were $36.9 million and included funded research and development credits from the false agreement up $3.4 million and a gain on settlement of litigation of $10 million.

Net loss for the fourth quarter of 2011 including total non-cash stock compensation expense of $1.2 million was $9.5 million or a loss of $0.16 per share. In comparison, net loss for the fourth quarter of 2010 including total non-cash stock compensation of $1.4 million was $11 million or a loss of $0.20 per share. Net loss in the third quarter of 2011 including non-cash stock compensation expense of $1.8 million was $10.1 million or $0.18 per share.

For 2011, net loss including total non-cash stock compensation expense of $6.7 million was $16.7 million or a loss of $0.30 per share. For 2010, net loss including total non-cash stock compensation expense of $5 million was $37.9 million or a loss of $0.78 per share.

Turning to the balance sheets, cash, cash equivalents, and short-term investments as of December 31, 2011 were $52.2 million compared to $26 million balance at the end of the previous quarter. The strongest year-end cash balance we have enjoyed since our IPO in 2006. This $26.2 million increase is primarily due to recent equity and debt private placements partially offset by total cash used in the quarter.

As of December 31, we have $6.4 million of deferred revenue on the balance sheet, which includes six robotic 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 corporate. However, the ultimate timing of revenue recognition is primarily dependent upon their efforts and placing the systems with their end users.

During the fourth quarter, we also repaid the previous loan balance of $3.6 million and recorded a new venture debt facility of $30 million. Total financing fees and expenses incurred amounted to $1 million of which $300,000 was capitalized as deferred debt costs and the rest was recorded as a one-time expense in the quarter.

Finally, in the fourth quarter, total cash used was $9.4 million excluding the proceeds and direct cost of our financing activities. Further excluding the $3 million milestone payment earned and received from Philips in the quarter, cash used was approximately $12.4 million, compared to $9.7 million in the fourth quarter of last year and $10.5 million in the previous quarter.

Finally, when Bruce discussed our outlook for 2012, he mentioned that we have taken steps to improve our margins and lower operating expenses. These steps include improvements in product design and material sourcing and the implementation of lean manufacturing techniques, which we anticipate will increase productivity and lower the cost of production.

Company has also taken steps to offset a majority of the $10.6 million funded research and development credits, which were recorded as a reduction of expense in 2011 from the company’s now completed work under the joint development agreement with Philips.

The actions noted above are consistent with our previously discussed intention to chart a path to profitability for the company and our shareholders. That path remains dependent upon the commercial success of our vascular and EP platforms, as well as our ability to implement operational excellence across the organization. We continue to have tremendous opportunity on these markets and we’re working to execute on our strategy and assure our long-term success.

That concludes our summary of the financials. I’d like to pass the call back to the operator for Q&A. Camille?

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Hi, thanks for taking my questions.

Bruce J Barclay

Good afternoon, Jeff.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Firstly, you where talking about one of the two centers either Hartford or Methodist and talking about their expanding flexible robotic platform. Could you talk about what they have there now? I wasn’t sure what you meant by their expanding flexible robotic platforms.

Bruce J Barclay

Yes, each hospital has both Sensei systems and now a preclinical vascular system. So both are very committed to flexible robotics with Hansen’s technology.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay, got it. Thank you. The Lynx ablation catheter, could you talk about composition of catheters sold in Europe or any update or progress or anything expected in the U.S.?

Bruce J Barclay

Yes, certainly, we’re continuing to see good use of that product in Europe, and it still is limited to approval only in Europe at this point. We have not broken out Lynx catheters throughout the year and we obviously did not in this call as well. It continues to be a small number of our total catheters used in our EP business, but obviously as we go forward, we expect that to grow in Europe.

In the U.S., we have done significant work and looking at what’s the regulatory pathway would be. And at this point it looks like it’s going to be a full IDE PMA process and so we actually reprioritize that for U.S. markets at this point given the expense and the time necessary to get it approved in the U.S. compared to other expenses and other priorities that we have in the United States. So at this point, we expect it to be limited to international use only.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay. And as far as the Magellan sales, so you stated that you are no longer going to breakout investor, so if you sell a handful of units that are Sensei’s and a handful of units that are Magellen’s you’ll tell us the total number of units and you’ll give us a blended average, is that what I should expect?

Peter J. Mariani

No, we’ll continue to talk about the number of unit, but it’s just not going to make sense for us to give a ASP for the robotic systems going forward.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay. Could you give us an indication as far as the two systems sold in the U.S. maybe where they sold your ASPs or where they sold that premium to Sensei’s or could you give us any further color on that?

Peter J. Mariani

We are not going to comment on those pricing again it’s we are excited to have these systems in the marketplace they were purchased, but given the competitive nature of the launch both in Europe anticipated here it just not going to appropriate for us to talk about individual unit sales numbers.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay. Further then what can be backed down on a spreadsheet, so R&D seen like it was a little higher, I’m sorry, R&D seems lower for the quarter and SG&A seen higher. Could you talk about the two of them and should we expect the SG&A to continue at around 86 going forward and as joint you’re going to pop back up or was it late just for the quarter or should we expect that going forward?

Peter J. Mariani

No, it will pop back up and remember in the quarter we recorded $3.7 million of the funded R&D credits from Philips including $3 million of the cash milestone that we received in the quarter. And that was $1.7 million higher than what we have recorded in Q3, so that’s why you see the step down from Q3 to Q4. And what we said in our comments here is that those funded research and development credits from Philips will not be present going forward. We had $10.6 million of those offsetting R&D in the current year and those will not be present next year.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay, so the $12.2 was $22.2?

Peter J. Mariani

Yes.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay, got it.

Peter J. Mariani

Roughly, and what we’re saying going forward is that we have outset though the majority of those of that $10.6 million going forward, so you should not expect a $10.6 million pop in R&D expense in 2012 versus 2011.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay. Got it. And the 29.147 in debt, is that long-term or current portion?

Peter J. Mariani

It’s all long-term, its interest only for the first 12-months extendable to 18-months interest only, if we get Magellan approval in the U.S. sometime in this year. And the 29, reason why that’s less than 30 is because of the discount on the warrants.

Jeffrey Cohen – Ladenburg Thalmann & Co.

Okay. Got it, that’s it from me. I appreciate it. Thanks a lot.

Peter J. Mariani

You are welcome.

Bruce J Barclay

Thanks for the call, Jeff.

Operator

Thank you. (Operator Instructions) And I am showing no further questions in the queue at this time. Please continue with closing remarks.

Bruce J Barclay

Thanks Camille. In conclusion, 2011 was a landmark year for Hansen Medical, as we delivered on our key strategic imperatives that will support our growth and momentum in 2012 and beyond. Well encouraged by our accomplishments in 2011, we believe we’re positioned for even greater success in the future. Thanks to everyone for joining us today on our fourth quarter and year-end 2011 conference call. We look forward providing you with the results of our first quarter in May.

Operator

Ladies and gentlemen, this concludes the Hansen Medical 2011 fourth quarter results conference call. If you’d like to access the replay of today’s conference, please dial 1-877-870-5176 with the access code of 4512361. Thank you for your participation. You may now disconnect.

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