Hansen Medical Runs Aground in Q2

Hansen Medical Inc. (HNSN) manufactures catheter based medical robots. Its stock price is in a major slump right now, opening today at $1.48, versus a fifty-two week high of $4.46 on September 20, 2011 and near its 52 week low of $1.42. Is this a buying opportunity, or a stock to be avoided even at this price?

For several years Hansen has marketed its Sensei robot for electrophysiology procedures, which measures electrical activity inside the heart. Meanwhile it has developed its robotic catheter technology for use in vascular (blood vessel) surgery. Last year its Magellan vascular robotic catheter system was approved in Europe. Late in Q2 this year the FDA granted approval for commercial sales in the U.S. Given that Magellan is believed to have an addressable market roughly ten times the size of Sensei, you might think the bulls would be running with the anticipation of future profits.

Financial results for Q2 2011, reported on August 8, are the reason for the slump. I don't think anyone expected HNSN to get to profitability, since there was no time to sell Magellan robots in the U.S. in the quarter. But sales were the worst in company history. Only one Robotic Catheter System was shipped, a Sensei, but two had recognized revenue, including the one that was shipped and one shipped in a prior quarter. Revenue was $3.5 million, down 26% sequentially from $4.7 million and down 34% from $5.3 million in the year-earlier quarter.

Net income was negative $11.5 million, up sequentially from negative $11.8 million, but down from negative $8.8 million year-earlier. EPS (earnings per share) were negative $0.19, up sequentially from negative $0.20, but down from negative $0.16 year-earlier.

Management claimed that talks are underway with hospitals in the U.S. and Europe, with multiple quotes out. While understanding that these are expensive robots that have to go through a lengthy review process before hospitals buy them, you have to ask what happened in the past that the old Sensei system sales dropped to just one in the quarter.

The Sensei systems that are already installed are being used, as indicated by 637 known EP procedures performed with them in the quarter. To try to compensate for the dismal sales results, Hansen brought into the analyst conference call Professor Cheshire of St. Mary's in London, the first hospital to treat patients with the Magellan Robotic System. He spoke on his team's collective experience in peripheral vascular, aortic, and other vascular cases. They discovered a number of useful robotic catheter techniques as they progressed from simple to more complex cases. They can now treat difficult cases. The had prior experience with the De Vinci surgical robot made by Intuitive Surgical. Cheshire believes robotics differentiates St. Mary's from competitors. Studies there showed the advantages of the Magellan system and other minimally invasive techniques. The robot is bringing patients in already.

So you are making a bet buying the stock even at this price. Are the negotiations for sales of Sensei and Magellan going to come through, and are they going to grow long-term? If your crystal ball says yes, you should scoop up all the Hansen Medical stock you can afford.

I don't have a crystal ball and I already own Hansen stock. I believe the technology developed by the company would have a great deal of value for other medical device players. So there is some low point of market capitalization that should trigger that kind of event. Market capitalization today is just $90 million. If I had that kind of money, and could buy all the stock without bidding up the price, I would do it. Then I would assess the sales pipeline. Ff I did not like it I would try to sell the business or the intellectual property to St. Jude (STJ), Intuitive Surgical, or a similar player.

Given that stocks are priced by auction, we may not be at the bottom, but I don't see a scenario where the stock is worth less than it is today if management is willing to break up or sell the company. If there really is a sales pipeline and we start seeing substantial increases in revenue in Q3 and Q4, then Q2 will seem like just a glitch and I'll be using Hansen in the future as an example of how short-sighted investors can be. And kicking myself for not buying more.

Hansen had a cash balance of $29.4 million at the end of Q2. If they don't ramp sales quickly they are either going to have to dilute the stock or borrow more money, neither of which is a pretty scenario.

Hansen Medical is not a stock for conservative investors. It has astonishing potential, long term, but it is also a long way from financing itself through profits. It should only be bought by investors who know how to manage risk.

Disclaimer: I am long HNSN. I will not trade in the stock for 1 week following this post. I have no position in ISRG or STJ.

Keep diversified!

See also:

Q2 2011 Hansen Medical Analyst Call Summary
Hansen Medical main page
my other Hansen Medical articles and conference summaries