Hansen's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 7.12 | About: Hansen Medical, (HNSN)

Hansen Medical, Inc. (NASDAQ:HNSN)

Q3 2012 Results Earnings Call

November 7, 2012 5:00 PM ET

Executives

Pete Mariani - Chief Financial Officer

Bruce Barclay - President and CEO

Analysts

Brooks West - Piper Jaffray

Jeffrey Cohen - Ladenburg Thalmann

Chris Pasquale - JP Morgan

John Demchak - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Hansen Medical 2012 Third 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)

This conference is being recorded today, Wednesday, November 7, 2012. And I would now like to turn the conference over to Peter Mariani, CFO. Please go ahead, sir.

Peter Mariani

Thank you, Macula. Good afternoon, everyone. Welcome to Hansen Medical’s 2012 third quarter results conference call. My name is Pete Mariani. I’m the Chief Financial Officer of Hansen Medical. With me today is Bruce Barclay, Hansen Medical’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, believes, 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 conference 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 forward-looking statements made in this conference call.

Examples of such statements include statements about the potential benefits of the Magellan Robotic System for hospitals, patients and physicians, expectations of shipments of our Magellan Robotic System and of our operating expenses, and the sufficiency of the company’s cash resources for supporting the initial launch of the Magellan Robotic System.

Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, among others, engineering, regulatory, manufacturing, sales and customer service challenges in developing new products and entering new markets, the commercial viability of our products in the vascular markets, potential safety and regulatory issues that could slow or suspend our sales, the effect of credit, financial and economic condition on capital spending by our customers, the uncertain timelines for the sales cycle of newly introduced products and the rate of use of our catheters, and our ability to manage expenses and cash flow 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, 2012 filed with the SEC on August 9, 2012, and the risks discussed in our other reports filed with the SEC.

Given these uncertainties, you should not place undue reliance on forward-looking statements in this conference 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.

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

Bruce Barclay

Thanks, Pete. Good afternoon, everyone. Thank you all for joining us today for our third quarter 2012 conference call. Today’s call will consist of an update for our commercial launch activities around the Magellan Robotic System, a discussion of our achievements in the third quarter and recent business highlights and a look at our plans for remainder of 2012 and beyond.

I’ll then turn the call over to Pete, who will provide a review of our financial results for the quarter, and at the end Pete and I will take your questions at the conclusion of our prepared remarks.

As you’ve seen from this afternoon’s press release, we’ve experienced growing momentum in our U.S. launch of the Magellan Robotic Systems and FDA clearance in June.

While we’ve completed only one full quarter since receiving 510(k) clearance in US, I’m very pleased with the significant and growing clinical and executive interest we’re seeing with the Magellan System and this is where I’ll begin today’s call.

As we’ve said previously, our strategy for the initial launch of the Magellan in the U.S. is to partner with influential physicians who are thought leaders in this space and who are known early adaptors of new technology.

In doing so, we expect to generate positive clinical experiences and data to drive both interest and adoption among other physicians and hospitals. We also expect these thought leaders to publish their experiences and discuss their results in major conferences to generate interest from other physicians.

Five robotic systems were shipped in the third quarter, three of these were Magellan Systems that have been installed in the U.S. and are generating procedures at prestigious hospitals with key opinion leaders.

These hospitals are the DeBakey Heart and Vascular Center at The Methodist Hospital in Houston, Texas, the UC Davis Medical Center in Sacramento, California and the Baptist Hospital of Miami in Miami, Florida. The other two system shipped are one Magellan in Europe and one Sensei in the U.S.

Additionally to help sell more systems sooner, Hansen Medical recently initiated a new limited commercial evaluation program to allow certain key accounts to install and utilize our systems for a limited trial period, while the purchase contract is being evaluated by the hospital.

While hospitals participating in the limited commercial evaluation program are not obligated to purchase the system, they all actively evaluating this purchase and they must purchase the catheters used during the evaluation process.

We believe this limited commercial evaluation program will help drive demand for robotic systems and accelerate the ramp of clinical cases, allowing us to further grow our pipeline and close system sales more efficiently.

Let me now take a moment to discuss the broad range of cases we’ve conducted in the U.S. As we’ve said often, the Magellan System is truly a platform technology with a wide variety of clinical applications and the cases performed in the U.S. illustrate that perfectly.

Even though these systems have been installed for a little over one month, primarily since the close of the third quarter, they have already been utilized in multiple patient procedures at each U.S. site.

First, cases were performed by three different physician clinical specialties, vascular surgery, interventional cardiology and interventional radiology. We are particularly pleased that multiple physicians at each U.S. site have been trained and have used the system.

Second, the breath of clinical targets is also impressive, ranging from lower extremity cases to upper extremity cases by carotid and inside branches.

Third, cases were done in both the arterial and venous vasculature.

And finally, various very different therapeutic devices were used to treat patients, including balloons and stents showing the true benefits of the open architecture design of our technology.

Serving us further validation of our technology is our recently announced expanded license agreement with Intuitive Surgical, the global pioneer and leader in medical robotics. We are extremely pleased to deepen our relationship with Intuitive Surgical.

We believe this agreement demonstrates the utility of our technology and our continued ability to monetize our IP assets, while retaining the right to use our IP for all clinical applications.

Importantly, our agreement with Intuitive Surgical provides Hansen with a total of $30 million, $20 million from a license fee and a $10 million -- and $10 million from Intuitive Surgical purchase of Hansen Medical common stock in a private placement. We have now received the entire $30 million.

This capital will further strengthen our balance sheets with a significant portion of the new capital being non-dilutive to our current shareholders. In fact, in the last few years we brought in more than $80 million of new non-dilutive capital to the company. Of course, these resources will further support our global launch of Magellan System.

In addition, we are pleased with Intuitive Surgical has become our third largest shareholder through the $10 million private placement and that these shares have an 18-month lockup period.

We’ve also been generating significant momentum around the Magellan System through our strong presence at a variety of educational conferences and symposia, focused on interventional vascular procedures.

In October we exhibited the Magellan System at the VIVA Conference in Las Vegas, which is an Annual Meeting of leading clinicians focused on the peripheral vasculature. Dr. John Laird, who is the Medical Director of the Vascular Center at UC Davis in Sacramento, featured the Magellan System in his presentation at VIVA. Also Professor Cheshire presented his clinical experience to date on the Magellan System at this conference.

In October we exhibited the Magellan and conducted further product demonstrations at the TCT Conference in Miami. Additionally, Dr. Barry Katzen, the Founder and Medical Director of Baptist Cardiac & Vascular Institute at the Baptist Hospital in Miami featured the Magellan System in two successful live cases at TCT, which is the world’s largest educational meeting focused on interventional vascular procedures.

The live cases from Dr. Katzen provided an additional opportunity for those in the vascular and cardiovascular community to observe how the Magellan System can enhance endovascular procedures. We have received very positive feedback from physicians on these two live cases.

In terms of upcoming conferences, we will be further exhibiting the Magellan System next week at the Annual Meeting on Vascular and Endovascular Issues, the VEITHsymposium, which takes places from November 14th through the 18th in New York as well as the ISET Meeting in January in Miami.

At VEITH, we are co-sponsoring the symposium with Philips on the benefits of robotics, and we also expect multiple talks from the podium on our vascular robotic system. I’m confident that our strong presence in TCT and VIVA, combined with our upcoming showings at VEITH and ISET will continue to generate awareness and interest in our technology.

With that, I’d like to take you through a few of the topline results for the third quarter. Revenues were $5.1 million in the third quarter, which is up 44% sequentially but down 5% from the year ago period. We shipped five systems in the third quarter, three Magellans’ and one Sensei in the U.S. and one Magellan in Europe.

During the quarter, we recognized revenue on five systems in total, including one Magellan System and one Sensei’s system shipped during the third quarter, as well as three Sensei systems from deferred revenue which were shipped in previous quarters.

Physicians performed an estimated 659 Hansen robotic procedures in the third quarter, up 3.5% sequentially and 9.3%, compared to the third quarter of 2011. Importantly, this marks the fifth consecutive quarter of procedure growth for us.

The improved procedure rate seen in the third quarter, driven primarily by our base electrophysiology business, is indicative of the significant value physicians and hospitals can derive from our systems.

Catheter sold exceeded procedures performed for the second consecutive quarter as we sold 689 catheters in the third quarter, down 2.1% sequentially and 1.3% compared to the third quarter of 2011.

Importantly, Magellan procedures and Catheter sales did not contribute significantly to the third quarter results, given that the majority of the Magellan system shipped late in the quarter.

An additional highlight from the third quarter is that the first clinical cases were performed in the U.S., with our recently launched Artisan Extend Control Catheter, a key new product for our EP business that is designed to work with our Sensei system to deliver catheter stability, reachability and contact for sensing. This new product was cleared by the FDA in August, and is still pending in Europe but we expect approval there soon as well.

The Artisan Extend Catheter includes a simplified flush design that can improve physician workflow during complex EP procedures and cost us less to manufacture than the prior artisan catheter.

Finally, in our continuing efforts to achieve commercial success with our global product offerings in multiple clinical applications, we have made a change to our EMEA organization.

We are creating a new position entitled, Vice President of Global Sales to manage our worldwide sales teams in the U.S. and outside the U.S. to improve our communication, and to better leverage the learning in each territory across all geographies. As a result, we have eliminated the existing Vice President and General Manager of the EMEA position.

Before, I turn the call over to Pete to discuss our financials, I just want to reiterate a few important points about the strategic direction of our business and the opportunity for Hansen Medical in the vascular space.

Intravascular robotics provides a tremendous opportunity to transform vascular intervention. The Magellan Robotic System offers a compelling value proposition for physicians, patients and hospitals.

For physicians, the Magellan system offers the ability to more precisely navigate vessels using a simpler, more instinctive approach. Our proprietary technology offers simultaneous and independent distal tip control of a catheter and a sheath, as well as robotic manipulation of standard guide wires, all with incredible stability.

This independent catheter tip articulation provides physicians with more accurate and more predictable control of the catheter. This can lead to faster, easier and safer vessel navigation, which may result in less vessel trauma, reduce patient healing time, faster more predictable procedures and an improved case throughput.

Additionally, with Magellan, physicians can now perform the procedures in a comfortable setting from a centralized remote workstation, potentially lowering radiation exposure and reducing procedural fatigue.

Our Magellan system also allows hospitals and healthcare systems to improve the efficiency and utilization of their most profitable assets, the operating room and the cath lab. By reducing procedure times and streamlining endovascular interventions, our technology can help drive incremental procedures for hospitals, which increases efficiency and utilization.

It is more important then ever that hospitals and health systems ensure sound financial judgment in all purchase decisions. And we believe the Magellan Robotic System will allow hospitals to gain increased efficiency and utilization of their current facilities, and potentially delay the expensive capital outlays to build additional ORs and cath labs. We believe this is a compelling value proposition.

Importantly, this is the large market with multiple physicians’ specialties using the system. Of more than 3 million vascular procedures performed each year, approximately one-third to one-half of them are in the peripheral vasculature, which is the target market for the Magellan system.

In summary, we are excited about the recent developments with our launch of the Magellan Robotic System. We have a robust customer pipeline of potential transactions, supported by our new limited commercial evaluation program.

We have increased exposure of our systems through our presence in live cases at key conferences such as VIVA and TCT. And we have further strengthened our balance sheet through the agreement we signed with Intuitive Surgical.

With that, I’ll now turn the call over to Pete to discuss the financials. Pete?

Pete Mariani

Thank you, Bruce. We recorded quarterly revenue of $5.1 million, primarily on the recognition of revenue on five robotic systems and the sale of 689 catheters. Revenue declined 5% over the third quarter 2011, and increased 44% sequentially due primarily to higher system revenue.

The company shipped four Magellan systems and one Sensei system during the quarter. Of the five systems that we recognized revenue on, one Magellan and one Sensei system were shipped in the third quarter, and three Sensei systems were from deferred revenue, which were shipped in previous periods.

We sold 689 catheters in the third quarter, down 2.1% sequentially and 1.3% year-over-year. Physicians performed approximately 659 Hansen robotic procedures in the third quarter, up 3.5% on a sequential basis and 9.3% year-over-year.

We are particularly pleased by this performance, as of March the 5th consecutive quarter of procedure growth for the company. On a year-to-date basis, we have recorded revenue of $13.3 million, primarily on sales of eight Sensei systems, three Magellan systems and 1,967 catheters.

Gross profit was $1.3 million or 25% of third-quarter revenues, compared to gross profit of $1.1 million or 20% of revenue for the same period in 2011, and $753,000 or 21% of revenues in the previous quarter. The year-over-year and sequential increase in margins is primarily due to improved productivity, which lowered the total cost of product sold compared to prior quarters.

Research and development expenses for the third quarter were $3.8 million compared to $3.5 million for the same period in 2011, which included $2.1 million of funded research and development credits, which were recorded as a reduction of expense. This is from our now completed work under our joint development agreement with Philips.

Excluding these research and development credits in the third quarter of last year, prior year research and development expenses were higher, primarily due to additional development costs associated with the company’s Magellan system and higher employee-related costs.

Selling, general and administrative expenses for the third quarter were $5.1 million, compared to $7.6 million for the same period of 2011 and $6.8 million in the prior quarter.

The net decrease in the current quarter is primarily due to a $1.5 million insurance reimbursement received in the third quarter of 2012 related to prior litigation costs, as well as lower non-cash stock compensation and employee related expenses

Total operating expenses were $8.8 million in the third quarter, down $2.2 million, compared to the same quarter of last year and $2.5 million sequentially. As noted above, the year-over-year comparison was adversely impacted by the $2.1 million research and development credits we received from Philips in Q3 of 2011.

The reduction of expenses year-over-year is driven by the $1.5 million insurance reimbursement received in the current quarter, as well as lower expenses for development, legal and employee-related costs.

These reductions further result from the actions taken by the company to realign spending, including those actions that we took at the end of second quarter and discussed in our second quarter earnings call.

On a sequential basis, the $2.5 million decline in operating expenses was driven primarily by the $1.5 million insurance reimbursement and reductions in employee-related costs, partially offset by $600,000 reserve for bad debt recorded in the third quarter.

Loss from operations include total non-cash stock compensation expense of $1 million in third quarter of 2012, compared to $1.8 million in the third quarter of 2011 and $1 million in the second quarter of 2012. Year-over-year reduction is primarily the result of a one-time accelerated best-in-charge recorded in the third quarter of last year and lower equity awards compared to the prior year.

As we have noted, we are continuing our efforts to drive efficiencies across the company and bring additional resources to our commercial operation while lowering total operating expenses. We remain on track for operating expenses in the second half of 2012 to be approximately 15% below that of the first half.

Net loss for the third quarter was $8.4 million or $0.14 loss per share based on average shares outstanding of 61.5 million. This compares with a net loss for the third quarter of 2011 of $10.1 million or $0.18 per share, based on average shares outstanding of 55.1 million.

Turning to the balance sheet, cash, cash equivalents and short-term investments as of September 30th were $21.6 million compared to $29.4 million as of June 30, and $52.2 million as of December 31. Our September 30 cash balance of $21.6 million does not include the additional $30 million received last week as part of our expanded agreement with Intuitive Surgical.

This new capital provides the company with significant extension of our liquidity which we continue to believe will be sufficient to support our global Magellan launch as well as additional development cost.

Accounts receivable decreased to $4.6 million at September 30th from $4.7 million at June 30 and $5.5 million at December 31. Inventories increased to $8.4 million at September 30 from $8.1 million at June 30th and $6.6 million at December 31st. This increased inventory balance primarily reflects increased inventory bills in support of the Magellan launch.

As of September 30th, we had $2.9 million of deferred revenue on the balance sheet, all of which is related to deferred revenue on service contracts. Total debt on September 30th was $29.3 million, essentially flat with June and December balances.

Finally, in the third quarter, total cash burn was approximately $7.8 million compared to $9.1 million in the previous quarter and $11.1 million in the third quarter of last year. Current quarter cash burn was positively impacted by the receipt of $1.5 million insurance reimbursement as well as improvements in gross margin and lower operating expenses.

Before I conclude my remarks, I want to highlight the impact on our third quarter financials of the operational improvements we’ve been working on over the past year. As I have noted in previous quarters, we continue to develop improvements in product design and material sourcing, implement lean manufacturing processes and make strategic investments to support the commercial success of our vascular and EP platforms.

In this quarter, we have delivered improved gross margins as productivity has improved due to our lean manufacturing efforts as well as reductions in certain materials cost. We have also cut expenses significantly and reduced our cash burn while actually adding important resources in support of the commercial launch of the Magellan program. And our employees are continuing to work to deliver additional efficiencies across the company.

Our success continues to be dependent upon the clinical adoption and growth of these platforms but we are now better positioned to support and drive this growth and improve our financial results. Additionally, our recent expanded license agreement with Intuitive Surgical will provide us with additional financial flexibility to support the launch of the Magellan and drive additional product development efforts.

That concludes our summary of the financials. I would now like to pass the call back to the operator for Q&A. Macula?

Question-and-Answer Session

Operator

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

Brooks West - Piper Jaffray

Hi guys. Can you hear me?

Bruce Barclay

Yeah, we can Brooks.

Brooks West - Piper Jaffray

Good afternoon. Let me start with the Intuitive license deal. I just want to make sure I understand. So this deal gives some access to the current IP portfolio and anything generated over the next three years. Is that correct to read?

Bruce Barclay

Yeah. This is an update to the 2005 agreement that we signed with Intuitive that agreement had a end date for new patent applications that were filed. And so this agreement extends the license to agreement to patent applications filed after September of 2005 and then for three years after we signed this new agreement. So effectively gives them access to these new applications but in the limited field.

Brooks West - Piper Jaffray

So Bruce, how should we think about that? Intuitive’s intentions was signing this deal, I mean, is there the potential that they could incorporate some of your IP into their existing systems. Is there a potential partnership or how would you help people think about that?

Bruce Barclay

Sure. So they -- we don’t have specific information on their development programs. All those questions would need to be answered by them directly. We don’t believe that the current IP that we’ve licensed them is used by any existing product today. We believe it’s based upon potential products in the pipeline that come out.

So I think their application of the technologies again really better answered by them. I think for us what it does, it allow us to retain the right to use our IP for all clinical applications and that was important to us. So it really was a way to monetize IP without affecting us in our core strategic focus, which is vascular.

Brooks West - Piper Jaffray

Okay. And then, let me -- couple more from me, Pete, any chance you break out Magellan catheters from the catheter numbers you gave on the quarter?

Pete Mariani

No. It just -- it wasn’t a big number in the quarter.

Brooks West - Piper Jaffray

Okay. And then I just -- I had a question around the -- so the three Magellan’s that were placed and it sounds like you sold one in Europe. What Bruce -- what’s the criteria around placing a robot. I remember those were all guys in your medical advisory board but in the press release, it says you’re placing when there’s a purchase contract being evaluated by the hospital. So how should we think about those units? What’s the likelihood that they get converted to sales and any detail around the criteria that program would bring?

Pete Mariani

Sure. And you talk specifically about the evaluation program.

Brooks West - Piper Jaffray

Correct.

Bruce Barclay

Yeah. So as we mentioned at the -- it’s a limited program. We believe that it is limited in number of systems and in duration of availability. And it’s really focused on those key strategic accounts that we believe will eventually purchase the system as there is no guarantee that they’ll purchase the system but we wouldn’t do for an account. But we didn’t believe had an active interest in purchasing the system.

And so, in each case there is activity going on at the hospital where they are working through their system right now to purchase the robot. We have a great deal of confidence in our system that once you place them in their lab and they start seeing it clinically, that they’re going to continue to see the benefits of the system. And no one close on the purchase because this program is also limited in terms of duration of how long they’ll have the system to be able to use it in their labs.

Brooks West - Piper Jaffray

How long?

Bruce Barclay

It differs. It’s short for each account but it differs depending upon the account, their particular needs. So again, I think for us, it’s really a way to drive sales more quickly. It also helps us generate data. It also helps generate some of the commercial -- some of the industry activity that you’ve seen as well.

Brooks West - Piper Jaffray

And then last one, if I could, just following up on the data comment, you’ve mentioned generating some data around reduce procedure time and reduce radiation exposure in particular. Are you actively guiding or partnering with these sites to generate specific data or you kind of letting guys do their own thing. How are you approaching the post approval data?

Bruce Barclay

We’re capturing all the data that’s being generated in the clinical setting. And then we’ll accumulate that data and then eventually the physicians that are contributing to that will publish on that day when they believe they did got enough to make a meaningful publication.

Our guidance to them really is around staying within our label claim from the FDA and from our European indication. And as I mentioned the very heartening components of that is that they’re using it a wide variety of clinical applications from upper extremity, lower extremity, lots of side branch applications.

It’s really driven by where they see the clinical benefit and once we collect that data then we’ll -- you will see at least one publication come from that.

Brooks West - Piper Jaffray

Great. Thanks Bruce. Thanks Pete.

Bruce Barclay

Thanks Brooks.

Operator

Thank you. And our next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen - Ladenburg Thalmann

Thanks for taking my questions.

Bruce Barclay

Sure, Jeff.

Jeffrey Cohen - Ladenburg Thalmann

So, you shipped one Magellan to Europe this quarter…

Bruce Barclay

The third quarter.

Jeffrey Cohen - Ladenburg Thalmann

During the third quarter and you received revenue on one Magellan. So did you receive revenue last quarter from St. Mary’s during Q2 or no?

Pete Mariani

We recognized revenue amount in the first quarter.

Jeffrey Cohen - Ladenburg Thalmann

Okay. So, the revenue recognition on the one Magellan for Q3 would have been the European sale or the three that you discussed in U.S. since in Miami?

Pete Mariani

That’s correct.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Is it safe to say or safe for me to assume that some number greater than zero have also been sent out during Q4 under your revaluation program?

Bruce Barclay

We will update investors on Q4 at the February call but we remain confident that we will ship Magellan systems in Q4.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Pete, your comment on the deferred revenue so the 4.65 was reduced down to 2.85, but the balance of 2.85 is all for service or there is no more sensor units on deferred?

Pete Mariani

That’s correct.

Jeffrey Cohen - Ladenburg Thalmann

Okay. So, that’s down to zero. Top on the last set of questions, perhaps in the next quarter you may break out catheters specific to Magellan versus Sensei or?

Pete Mariani

Yeah. Without committing to that, yeah. I think, once we get more volume going, it may make sense to do so.

Jeffrey Cohen - Ladenburg Thalmann

Okay. And does the $1.5 million insurance reimbursement show up on the income statement?

Pete Mariani

Yeah. It’s a reduction of the SG&A expenses in the current quarter, in Q3.

Jeffrey Cohen - Ladenburg Thalmann

Got it. Okay. And could you talk a little about -- so that was part of reduced expenses but what’s the headcount as of Q3 on a corporate basis?

Bruce Barclay

Employees approximately 170.

Jeffrey Cohen - Ladenburg Thalmann

Total, okay.

Bruce Barclay

Yeah.

Jeffrey Cohen - Ladenburg Thalmann

Okay. And I think that that’s it for me. Thank you very much.

Bruce Barclay

Thanks for call.

Operator

Thank you. And our next question comes from the line of Chris Pasquale from JP Morgan. Please go ahead.

Chris Pasquale - JP Morgan

Thanks, guys. First, I just want to make sure I understood the answer to one of the previous question correctly. So, coming in this quarter on the vascular side, you had shipped out two research systems and a one commercial system to St. Mary’s. I had you guys recognizing one of those research systems in the fourth quarter and another in the first quarter.

You are saying that the St. Mary’s system was actually recognizing the first quarter. Does that mean that one of the vascular systems is still out or do I missed the system in there?

Bruce Barclay

All three systems have been recognized as revenue, but I am not remembering of top my head as whether one of those pre-clinicals was recognized in Q4 of last year. And then second one was in Q1 of this year and then St. Mary’s was recognized, I think, Pete in Q1 of this year.

Pete Mariani

Yeah.

Chris Pasquale - JP Morgan

Okay.

Bruce Barclay

Really, going into Q3, Chris, all three had already been recognized as revenue.

Chris Pasquale - JP Morgan

Okay. And then this quarter, you recognized revenue on a commercial system, sold into your commercial vascular system.

Bruce Barclay

Without saying which geography, I can’t really remember if you try to break that out. We’ve recognized one Magellan this quarter and we’ve recognized two Magellan systems in Q1, one where the clinical, the St. Mary’s system we talked about and one was a preclinical system.

Chris Pasquale - JP Morgan

Okay. As I -- I know you guys don’t want to talk about average selling prices but you had previously alluded to a list price from Magellan that was going to be significantly above, I should have realized historically on Sensei. When I look at this quarter versus the year-ago period, both had five systems recognized both pole three of those from deferred revenue.

Any other fact that you had one Magellan this year doesn’t seem to have given you any mix benefit. In fact, revenue was down a little bit year-over-year. Everything else was about the same catheters.

So tell me out, what’s the disconnect there? Are you now recognizing that premium that you had originally thought or am I missing something in the math?

Bruce Barclay

I think that we feel very good about the sales price of the Magellan’s. Now certain individual deals maybe higher or lower depending on other aspects of the deal. But I understand the math you are looking at, I would not read into too much end of that as far as what it means for future deals.

Pete Mariani

Well, I think the other component to that Chris is the math of small number. So it’s one Magellan and four Senseis were recognized as revenue in Q3 and some of those Sensei’s were sold to distributors in previous, which we’ve said historically have been at lower prices.

So, it’s just -- we just talk about small number right now. But we continue to feel very confident that the Magellan will commend a higher price than Sensei’s in general.

Chris Pasquale - JP Morgan

Okay. And you didn’t want to specify what the trial periods were for these new clinical valuation programs. But is it on the order of couple of quarters a year, when should we get nervous if we don’t see some of these transitioning to outright purchases?

Bruce Barclay

Again, I really don’t want to put a real number on it other than to say it is limited. We would not be doing this if we couldn’t do it in the near-term. And we do feel good about these systems that are being evaluated and at the same time working through the executive process very well within the hospital.

Chris Pasquale - JP Morgan

Okay. One last thing upon the $1.5 million payment that you said is an offset to your operating burn. What was the nature of that?

Pete Mariani

It’s an insurance reimbursement on prior litigation costs associated with some of the litigation we’ve had in previous years.

Chris Pasquale - JP Morgan

Okay. And…

Bruce Barclay

We were paying for that out of our own pocket and we took position insurance other side and they finally agreed with us that they did. So, it’s a good thing.

Chris Pasquale - JP Morgan

Okay. That’s it for me. Thank you, guys.

Bruce Barclay

Yeah. Thanks for call.

Operator

(Operator Instructions) And we have a question from the line of David Lewis from Morgan Stanley. Please go ahead.

John Demchak - Morgan Stanley

Hello, this is actually John Demchak in for David. So, now we are about I guess a year -- not a year, half a year into the U.S. Magellan launch. I was wondering if you get discuss and compare the initial stages with that of Europe, our physicians and hospitals responding, but I guess the clinical and cost proposition is the same way, is there any difference that you are seeing have lead time sells. Just any color with the initial stages would be helpful.

Bruce Barclay

Sure. We’re about four months into the approval since the June clearance and the economic environment in the U.S. while far from perfect is much healthier from our perspective and what we’re seeing in Europe. The clinical interest is at strong or stronger in the U.S. than what we’ve seen in Europe. Although, it’s been very strong in Europe, but it’s been very heartening to see the clinical interest in the U.S.

And I would say, some of that simply flows from the fact that Europe was first and some geography had to be first and so the earlier publications release of the product in the clinical setting have started to resonate in some of these conferences and among from some of the physicians as they talk.

And just a reminder as well that the market in the U.S. is substantially larger. And so that gives us more interest and more test drives and that type of thing in the U.S. as well. So, remains very early in U.S. we are very encouraged with what were seeing, especially on the clinical setting and as said we remained very, very harden with but the opportunity is going forward.

John Demchak - Morgan Stanley

Okay. Very helpful. And kind of there is follow-up to that. With this limited evaluation program, I was just kind of wondering if this kind of a reaction to maybe the market that’s pushing out, purchase cycles for hospitals a bit and also just how much costs are involved on your end to place the system and then maybe have to subsequently take it away?

Pete Mariani

To your first question, no, it’s not necessarily result of extended purchase. It’s a result of our desire to pull that purchase time maintenance quickly as possible. And we’ve got significant clinical interest in these systems from physicians who are committed to gain an access to the system. And they just have -- they have to negotiate a period or negotiate a process within their hospital to get it done.

And those accounts when we feel very confident that they are going to get that done. We are willing to come in and provide them with a valuation system during that period. So they can get going with procedures, get development going across not only for themselves as Bruce mentioned earlier the multiple physicians across multiple specialties within the account.

And that actually helps the process of demonstrating to the executives within these account, this is a system that may get substantially use.

And as far as a cost, it goes with it. There really isn’t anything beyond the normal installation and training and support that we would have done anyway as a part of this program. So it’s really not next for burden for us at all. It’s more of an opportunity to advance the system as quickly as possible.

John Demchak - Morgan Stanley

Okay. Very helpful and just one more on I guess like cost controls that we saw in the quarter. Gross margin was obviously improved in both R&D and SG&A decline sequentially. Given an absolute sense while revenues were I guess could deal better. How sustainable are these results going forward? As you did mention, I guess a few one-time items that look less repeatable. Is there a lot more room for improvement even if revenue tend to stay at their current levels for the next couple of quarters.

Pete Mariani

Yeah. I think so what we’ve said both at the beginning of the year when we started the year and we talked about now we’ve taken steps to reduce that and what we did here into the second quarter.

We felt like over those two periods we’ve got the company to the point but we were much better focused on our spend to be as efficient as we can both with our R&D spend and with the launch of the commercial piece of our business. Ad we’ve talked about now we’re at a place where as the business leads it, we feel that we can invest more on the commercial side which we are doing and we can continue to bring more spend back into the R&D side of the business in support of iterations and new platform. So, we feel like the business is sitting in a good place right now and we could respond well as the business continuous to expand.

John Demchak - Morgan Stanley

Thank you very much.

Pete Mariani

Thanks for the call.

Operator

Thank you. At this time, I’m showing no further questions in the queue. I would like to turn the conference back over to management for closing comments.

Bruce Barclay

Thank you, Operator. And thanks everybody for joining us today for our third quarter 2012 conference call. We look forward to providing you with the results of our fourth quarter and full year 2012 results in February.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation and at this time, you may now disconnect.

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