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HNSN > SEC Filings for HNSN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for HANSEN MEDICAL INC

Form 10-Q for HANSEN MEDICAL INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Except for the historical information contained herein, the matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that involve risks and uncertainties. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "could," "intends," "might," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in this report in Part II, Item 1A "Risk Factors." Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

Overview

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q.

We develop, manufacture and sell a new generation of medical robotics designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. Our Sensei® Robotic Catheter System, or Sensei system, is designed to allow physicians to instinctively navigate flexible catheters with stability and control in interventional procedures. Our Magellan™ Robotic System is designed to allow physicians to navigate flexible catheters in the vasculature. We believe our systems and the corresponding disposable catheters will enable physicians to perform procedures that historically have been too difficult or time consuming to accomplish routinely with manually-controlled, hand-held catheters and catheter-based technologies, or that we believe could be accomplished only by the most skilled physicians. We believe that our systems have the potential to benefit patients, physicians, hospitals and third-party payors by providing excellent clinical results and permitting more complex procedures to be performed interventionally.

We were formerly known as Autocath, Inc. and were incorporated in Delaware on September 23, 2002. In March 2007, we established Hansen Medical UK Ltd, a wholly-owned subsidiary located in the United Kingdom and, in May 2007, we established Hansen Medical Deutschland, GmbH, a wholly-owned subsidiary located in Germany. Since inception, we have devoted the majority of our resources to the development and commercialization of our Sensei system and our Magellan Robotic System. Prior to the second quarter of 2007, we were a development stage company with a limited operating history. In the second quarter of 2007 we obtained the necessary regulatory approvals and recorded our initial product revenues. To date, we have incurred net losses in each year since our inception and, as of September 30, 2012, we had an accumulated deficit of $306.5 million. We expect our losses to continue through at least 2012 as we continue to expand the commercialization of our Sensei system, our Magellan Robotic System and our catheters and continue to develop new products. We have financed our operations primarily through the sale of public and private equity securities, the issuance of debt, partnering and the licensing of intellectual property.

We received CE Mark for our Sensei system in the fourth quarter of 2006 and made our first commercial shipments to the European Union in the first quarter of 2007. In May 2007, we received CE Mark for our Artisan catheter and also received FDA clearance for the marketing of our Sensei system and Artisan catheter for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. As a result, we recorded our first revenues in the second quarter of 2007. We received CE Mark for our Lynx® catheter in September 2010. In July 2011, we received CE Mark for our


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Magellan Robotic System and in September 2011 received a CE Mark for the NorthStar™ Robotic Catheter and related accessories designed for use with the Magellan Robotic System. We received FDA clearance for the marketing of our Magellan Robotic System including the catheter and accessories in June 2012.

We market our products in the United States primarily through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and other services to our customers. Outside the United States, primarily in the European Union, we use a combination of a direct sales force and distributors to market, sell and support our products.

In November 2009, we entered into agreements with Philips Medical Systems Nederland B.V., a Philips Healthcare company, or Philips, to co-develop integrated products. In December 2009, we entered into an extended joint development agreement with Philips. Under the terms of the extended joint development agreement, we have, with support and collaboration from Philips, developed a vascular robotics platform and associated catheters, or Magellan Robotic System. The Magellan Robotic System does not include our Sensei system or any system used for endoluminal, cardiac or other non-vascular procedures. Pursuant to the Agreement, Philips partially funded our development costs based upon our achievement of development milestones for the Magellan Robotic System and will receive royalties based on sales of the Magellan Robotic System subject to caps. In February 2011, we amended the extended joint development agreement. The amendment of the extended joint development agreement increased the amount of funding provided by Philips for the development of the Magellan Robotic System and extended and increased certain royalty fees to be paid to Philips based on sales of the Magellan Robotic System subject to caps. Funding received from Philips under this agreement including $8.0 million received from the original agreement and $6.0 million associated with the amendment in February 2011 was recognized as a reduction to research and development costs ratably as milestones were met through the end of the term of the agreement, which was in October 2011. We will pay Philips royalties based on the number of Magellan Robotic Systems and NorthStar Robotic Catheters that are sold, subject to caps, through October 2017.

In February 2011, we entered, directly and through a wholly-owned subsidiary, into patent and technology license, sublicense and purchase agreements with Philips to allow them to develop and commercialize the non-robotic applications of our Fiber Optic Shape Sensing and Localization, or FOSSL, technology. Under the terms of the agreements, Philips has the exclusive right to develop and commercialize the FOSSL technology in the non-robotic vascular, endoluminal and orthopedic fields. Philips also receives non-exclusive rights in other non-robotic medical device fields, but not to any multi-degree of freedom robotic applications. If Philips does not meet certain specified commercialization obligations, we have the rights to re-acquire the licenses granted to Philips for pre-determined payments, which payments in the aggregate would be greater than the upfront payment amounts we received from Philips in connection with the agreements related to the FOSSL technology. The agreement also contains customary representations, warranties and indemnification provisions by each party. Each party may terminate the agreements for material breach by the other party. Philips also has the right to terminate the agreement and its rights under the agreement if we are acquired by a competitor of the relevant business unit of Philips. In connection with the agreements, we received upfront payments of $23.0 million and will be eligible to receive up to an additional $78.0 million in future payments associated with the successful commercialization by Philips or its collaborators of products containing FOSSL technology. Approximately two-thirds of these potential future payments could arise from Philips' sublicensing the FOSSL technology and approximately one-third of the potential future payments are based on Philips' royalty obligations on its sales of products containing the FOSSL technology. We would receive less than half of Philips' proceeds for its sublicensing FOSSL technology, if and following Philips entering into an applicable sublicensing transaction. Philips' FOSSL-related royalty obligations are calculated on a consistent annual basis between 2014 and 2020 and arise in any year only to the extent that Philips achieves a substantial number of commercial placements of FOSSL-enabled products in the calendar year.


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Critical Accounting Policies, Estimates and Judgments

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. We base our estimates on our past experience and on other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. Our significant accounting policies are fully described in Note 2 to our Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the U.S. Securities and Exchange Commission. There have been no significant changes to those policies in the nine months ended September 30, 2012.

Financial Overview

Revenues

Our revenues primarily consist of sales of Sensei systems, catheters, other disposables and post-contract customer service. Beginning in the fourth quarter of 2011, our revenues also include sales of our Magellan Robotic System. We have experienced significant fluctuations in quarterly revenues, primarily attributable to still being in the early stages of our commercial launch and difficult general economic and capital market conditions, slower than expected macro-economic recovery and uncertainty created by health care reform legislation that has impacted capital purchases by healthcare providers. We expect these fluctuations to continue through 2012. We do not anticipate that revenues in 2012 will be sufficient to eliminate losses.

Cost of Revenues

Cost of revenues consists primarily of materials, direct labor, depreciation, overhead costs associated with manufacturing, training and installation costs, royalties, provisions for inventory valuation, warranty expenses and the cost associated with our post-contract customer service. We expect that cost of revenues, both as a percentage of revenues and on a dollar basis, will continue to vary from quarter to quarter in 2012 due, among other things, to fluctuations in shipments and revenue levels, average selling prices, the mix of products sold including our Magellan Robotic System, manufacturing levels and manufacturing yields.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, software development, product development, quality assurance and clinical and regulatory expenses, including costs to develop our Sensei system, Magellan Robotic System and their respective disposable catheters. Research and development expenses include employee compensation, including stock-based compensation expense, consulting services, outside services, materials, supplies, depreciation and travel. We expense research and development costs as they are incurred. We expect research and development expenses for the remainder of 2012 to decrease compared with 2011 levels net of the funding recognized in 2011 under our extended joint development agreement with Philips.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of compensation for executive, finance, sales, legal and administrative personnel, including sales commissions and stock-based compensation. Other significant expenses include costs associated with attending medical conferences, professional fees for legal services (including legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products) and accounting services, consulting fees and travel expenses. We expect our selling, general and administrative expenses for the


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remainder of 2012, net of stock-based compensation charges, to decrease compared with 2011 levels as we continue to actively manage our general and administrative employee costs while maintaining our sales and clinical support groups which we believe are necessary for the continued commercialization of our electrophysiology products and the introduction of our Magellan Robotic System.

Gain on Sale of Intellectual Property

Gain on sale of intellectual property consists of amounts received in the first quarter of 2011 in exchange for patent and technology license, sublicense and purchase agreements with Philips to allow them to develop and commercialize the non-robotic applications of the FOSSL technology in the non-robotic vascular, endoluminal and orthopedic fields.

Stock-Based Compensation Expense

Cost of revenues, research and development and general and administrative
expense included stock-based compensation expense for stock-based awards as
follows (in thousands):



                                          Three months  ended          Nine months ended
                                             September 30,               September 30,
                                           2012           2011          2012         2011
  Cost of goods sold                    $      168       $   169     $      282     $   767
  Research and development                     235           274            380       1,304
  Selling, general and administrative          606         1,387          1,639       3,454

  Total                                 $    1,009       $ 1,830     $    2,301     $ 5,525

Total stock-based compensation for the nine months ended September 30, 2012 includes a $740,000 reduction in expense recorded in the first quarter of 2012 resulting from an out of period adjustment related to compensation recorded in 2011 and prior periods for our employee stock purchase plan. This out of period correction is not material to the nine months ended September 30, 2012 or to prior periods. Net of this adjustment, the decrease in stock-based compensation in 2012 compared to 2011 is due primarily to lower equity awards.

Results of Operations

Comparison of the quarter ended September 30, 2012 to the quarter ended September 30, 2011

Revenues



                                 Three Months  Ended
                                    September 30,                Change
                                  2012           2011         $           %
                                           (Dollars in thousands)
              Product          $    3,868       $ 3,901     $  (33 )       (1 )%
              Service               1,235         1,459       (224 )      (15 )%

              Total revenues   $    5,103       $ 5,360     $ (257 )       (5 )%

We recognized revenue on five systems in both the third quarter of 2012 and 2011 and sold slightly fewer catheters in the third quarter of 2012 as compared to the third quarter of 2011. Service revenue declined in the third quarter of 2012 as compared to 2011 due to the timing of service renewals. We have experienced significant fluctuations in quarterly revenues, primarily attributable to being in the early stages of our commercial launch and difficult general economic and capital market conditions, slower than expected macro-economic recovery and uncertainty created by health care reform legislation that has impacted capital purchases by healthcare providers. We expect these fluctuations to continue through the end of 2012. We do not anticipate that revenues in 2012 will be sufficient to eliminate losses.


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Cost of Revenues



                                       Three Months  Ended
                                          September 30,                 Change
                                        2012           2011          $           %
                                                 (Dollars in thousands)
       Product                       $    3,358       $ 3,632      $ (274 )       (8 )%
       Service                              488           646        (158 )      (24 )%

       Total cost of revenues        $    3,846       $ 4,278      $ (432 )      (10 )%
       As a percentage of revenues         75.4 %        79.8 %

Cost of revenues for the third quarter of 2012 decreased as a percentage of revenue compared to the third quarter of 2011 due primarily to improved productivity and the impact of production variances. We expect that cost of revenues, both as a percentage of revenues and on a dollar basis, will continue to vary from quarter to quarter in 2012 due, among other things, to fluctuations in shipments and revenue levels, average selling prices, the mix of products sold including our Magellan Robotic System, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development



                                         Three Months  Ended
                                            September 30,              Change
                                          2012           2011         $        %
                                                 (Dollars in thousands)

Research and development $ 3,772 $ 3,458 $ 314 9 %

Research and development expenses in the third quarter of 2011 included the recognition of $2.1 million of funded development credits from our since-completed work under the Philips agreement. Excluding these credits, research and development expenses in the third quarter of 2012 decreased compared to the third quarter of 2011 primarily due to a decrease of $1.2 million in materials related to reduced development costs associated with our Magellan Robotic System and decreases in employee-related expenses. We expect research and development expenses for the remainder of 2012 to decrease compared with 2011 levels net of the funding recognized in 2011 under our extended joint development agreement with Philips.

Selling, General and Administrative



                                           Three Months  Ended
                                              September 30,                 Change
                                            2012           2011          $            %
                                                      (Dollars in thousands)

Selling, general and administrative $ 5,058 $ 7,621 $ (2,563 ) (34 )%

The decrease in selling, general and administrative expenses in the third quarter of 2012 compared to the third quarter of 2011 was primarily due to a $1.5 million insurance reimbursement received in the third quarter or 2012 related to our litigation costs in addition to lower stock compensation and employee related expenses. We expect our selling, general and administrative expenses for the remainder of 2012, net of stock-based compensation charges, to decrease compared with 2011 levels as we continue to actively manage our general and administrative employee costs while maintaining our sales and clinical support groups which we believe are necessary for the continued commercialization of our electrophysiology products and the introduction of our Magellan Robotic System.


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Interest Income



                                    Three Months  Ended
                                       September 30,              Change
                                    2012             2011       $        %
                                            (Dollars in thousands)

Interest income $ 17 $ 14 $ 3 (21 )%

Interest income from cash, cash equivalents and investments increased in the third quarter of 2012 compared to the third quarter of 2011 primarily due to the interest on higher cash, cash equivalents and short term investment balances due to the proceeds from our debt. We expect interest income for 2012 to continue to decline compared to overall 2011 levels.

Interest and Other Expense, net



                                          Three Months  Ended
                                             September 30,                 Change
                                          2012            2011          $           %
                                                    (Dollars in thousands)

Interest and other expense, net $ (875 ) $ (162 ) $ (713 ) 440 %

Interest and other expense, net increased in the third quarter of 2012 compared to the third quarter of 2011 primarily due to an increase in interest expense related to our fourth quarter 2011 debt agreement. We expect interest expense to continue to increase in 2012 over 2011 levels.

Comparison of the nine months ended September 30, 2012 to the nine months ended September 30, 2011

Revenues



                                 Nine Months Ended
                                   September 30,                Change
                                 2012          2011          $            %
                                           (Dollars in thousands)
              Product          $   9,376     $ 11,831     $ (2,455 )      (21 )%
              Service              3,916        4,128         (212 )       (5 )%

              Total revenues   $  13,292     $ 15,959     $ (2,667 )      (17 )%

In the first nine months of 2012, we recognized revenue on 11 systems compared to 15 systems in the first nine months of 2011. The number of catheters sold in the first nine months of 2012 compared with the first nine months of 2011 also declined.

Cost of Revenues



                                       Nine Months Ended
                                         September 30,                 Change
                                       2012          2011           $            %
                                                 (Dollars in thousands)
       Product                       $  9,068      $ 10,687      $ (1,619 )      (15 )%
       Service                          1,482         1,998          (516 )      (26 )%

       Total cost of revenues        $ 10,550      $ 12,685      $ (2,135 )      (17 )%
       As a percentage of revenues       79.4 %        79.5 %

Cost of revenues for the first nine months of 2012 remained consistent as a percentage of revenue compared to the first nine months of 2011 primarily due to offsetting changes in product mix sold, improved productivity and the impact of production variances on reduced revenue levels.


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Operating Expenses

Research and Development

Nine Months Ended
September 30, Change
2012 2011 $ %
(Dollars in thousands)

Research and development $ 12,632 $ 10,258 $ 2,374 23 %

Research and development expenses in the first nine months of 2011 included the recognition of $6.9 million of funded development costs from our since-completed work under the Philips agreement. Excluding these credits, research and development expenses in the first nine months of 2012 decreased compared to the first nine months of 2011 primarily due to a decrease of $3.1 million in materials related to reduced development costs associated with our Magellan Robotic System and decreases in stock-based compensation and employee-related expenses.

Selling, General and Administrative

Nine Months Ended
September 30, Change
2012 2011 $ %
(Dollars in thousands)

Selling, general and administrative $ 19,186 $ 22,816 $ (3,630 ) (16 )%

The decrease in selling, general and administrative expenses in the first nine months of 2012 compared to the first nine months of 2011 was primarily due to a decrease of $3.0 million in professional service fees, primarily due to the receipt of $1.5 million insurance reimbursement in the third quarter and decreased litigation expenses, and a decrease of $1.8 million in stock-based compensation expense, partially offset by an increase in bad debt expense.

Gain on Sale of Intellectual Property



                                                    Nine Months  Ended
                                                       September 30,                  Change
                                                        2012            2011       $            %
                                                              (Dollars in thousands)

Gain on sale of intellectual property $ - $23,000 $ (23,000 ) (100 )%

In February 2011, we entered, directly and through a wholly-owned subsidiary, into patent and technology license, sublicense and purchase agreements with Philips to allow them to develop and commercialize the non-robotic applications of the FOSSL technology. Under the terms of the agreements, Philips has the exclusive right to develop and commercialize the FOSSL technology in the non-robotic vascular, endoluminal and orthopedic fields. Philips also receives non-exclusive rights in other non-robotic medical device fields, but not to any multi-degree of freedom robotic applications. If Philips does not meet certain specified commercialization obligations, we have the rights to re-acquire the licenses granted to Philips for pre-determined payments. The agreement also . . .

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