Wednesday, February 24, 2010

Hansen Medical's Long March

Hansen Medical (HNSN) reported its Q4 2009 numbers yesterday. Although the revenue numbers showed good improvement both sequentially and year over year ($7.2 million, up 56% sequentially from $4.6 million and up 33% from $5.4 million in the year-earlier quarter), revenue does not even meet half of expenses. (See also my Hansen Medical analyst conference summary for Q4 2009).

What we have in Hansen is an opportunity to be a venture-capitalist-equivalent using a listed and liquidly traded stock. This is not uncommon in biotechnology. Starting a biotechnology company is a lengthy process, and venture capitalists like to IPO these stocks long before they reach profitability. Often, several rounds of stock sales are needed to keep the companies going, and many simply go under, as we say in 2008 and 2009 when funding dried up. The risks are high, but so are the potential returns.

At least Hansen is selling its robotic catheter machines. Six were shipped in Q4. They are predicting a seasonally down first half, but total sales of 30 to 35 in 2010, so lets say 8 per quarter.

There are a bunch of problems in developing robotic surgery businesses. That they can be overcome has been proven by Intuitive Surgical (ISRG). Hansen has to get approval from the FDA for each type of surgery for its machines. Also, each type may require the development of a different catheter. Right now the Sensei Robotic System and its Artesian Control Catheter are approved only for electrophysiology (EP).

Just because the first goal of Hansen was to get approval for EP, does not mean that is where the real money is. While certainly useful for EP, flexible catheter robotics has broader uses. With its flexible EP platform a success, Hansen needs to move into other areas. And since the EP business is money losing (and might remain so), capital is needed for research and development.

Fortunately, Hansen both has some cash raised in a stock offerering in 2009 and a partner in Philips Medical Systems. The next big target is peripheral vascular disease. This would seem to be a perfect match for Hansen's technology, and it is a much bigger market than EP. But the machinery has to be perfected, FDA approval obtained, and then surgeons have to be convinced that they should use these rather expensive machines (over $600,000 each).

You can put a target price where ever you like on a stock like Hansen Medical. It was trading for over $20 per share in 2008, now it is under $2.50 per share. Investors thought that once the robots started to be used in hospitals, there would be a continuous ramp-up, and ISRG like stories were told.

I think at $2.50 per share, as long as it is a small part of a risk-balanced portfolio, Hansen is very, very attractive for long-term investors. I mean people who can wait two years or more to see how things develop. [I own HNSN]

There might even be an upside to the EP business while other markets are developed. The catheters cost over $1500 each, and 539 were sold in Q4. It is not far-fetched that the run rate could be pushed up well above current levels; that is one of management's explicit aims.

Europe apparently has a more flexible system regarding robotic medical devices, so there is a possibility that in 2010 we will start seeing more machines sold there than in the U.S. Of the six machines shipped in Q4, 3 went to Europe.

Nibble before you bite, and keep diversified!

See also the Hansen Medical site

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