Analyst Conference Call Summary

biotechnology

conference date: November 2, 2011 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2011 (Q3, third quarter 2011)

(at the time this is being written)
Forward-looking statements

Overview: Promising technology still appears to be a long way from profitability.

Basic data (GAAP) :

Revenue was $5.4 million, up 2% sequentially from $5.3 million and up 54% from $3.5 million in the year-earlier quarter.

Net income was negative $10.1 million, down sequentially from negative $8.8 million, but improved from negative $21.1 million year-earlier.

EPS (earnings per share) were negative $0.18, down sequentially from negative $0.16, but improved from negative $0.23 year-earlier.

Guidance:

none

Conference Highlights:

After the quarter ended the first Magellan vascular robotic system was installed in St Mary's Hospital, London, England. Doctor and staff training on it has been completed and first real use in near. In Q3 the Magellan system and its NorthStar Catheter were approved (given CE Mark) for sale in Europe. Approval in the U.S. is expected some time in 2012, most likely Q2. This also marks a milestone that triggers a $3 million payment from Philips. Physicians have shown strong interest in acquiring the systems, but limiting initial accounts to develop compelling data for use.

5 Sensei Robotic Systems had recognized revenue. Two systems were shipped in the quarter (1 U.S., 1 international) and both had revenue recognized. The remaining 3 systems recognized had been shipped in prior quarters but not had their revenue recognized. Shipped system average price was $596,000, lower than usual because of lower price to international distributors. We are continuing to develop a pipeline of potential Sensei system sales.

698 Artisan, Lynx or NorthStar Catheters were sold, a record and up 20% y/y and 2% sequentially. $1642 average price, flat sequentially.

Number of EP (electrophysiology) procedures performed was 598, down 5% y/y and flat sequentially. Procedures were strong in Europe, but less than expected in the U.S. Procedures in the U.S. did ramp during the quarter after a weak July and were also up in October.

Cash and equivalents ended at $26.0 million, down $11.2 million sequentially from $37.2 million. The deferred revenue balance was $7.3 million, for 8 shipped Sensei systems not yet recognized as revenue. Debt was paid down by $0.9 million. $3.6 million debt remains.

Expenses and cash use were within plan, with the goal of reaching positive cash flow.

Gross profit was $1.1 million and gross margin was 20.2%.

Charges connected to building vascular robotic inventory were $0.5 million. R&D expense was decreased by $1.0 million by funding from Philips, but increased by a $0.4 million non-cash charge for technology rights acquisition (in exchange for stock). Non-cash stock compensation expense total was $1.8 million.

Cost of goods sold was $4.3 million. Gross profit $1.1 million. Operating expenses of $11.1 million included $3.5 million for R&D and $7.6 million for selling, general and administrative expense. Loss from operations was $10.0 million while other loss was $0.1 million.

Q&A:

FDA clearance for Magellan? We are very confident in our prediction for Q2. We have had conversations directly with the agency. The questions in their letter are within our control. We do understand the timing is not totally within our control. The label claim has so far been left as we requested, which is for all peripheral vascular.

Training for Magellan? We have an improved team for Magellan training and so far it has gone exceedingly well. With Sensei we launched a new product in its category, now we have the benefit of having worked with Sensei, which is partly applicable to the Magellan system. Our controlled launch of Magellan is partly about training so that they have early clinical successes we can build on.

Running out of cash? $26 million cash remains. We will get $3 million from Philips. That should get us through Q2, the commercial launch in Europe, and the FDA approval in the U.S. We are considering strategic financing similar to the Philips financing as well as debt or equity financing. We are confident in our ability to raise capital.

Deferred revenue? Every one of those systems have been paid for. All of those systems should be coming into revenue in the coming quarters.

St Mary's Magellan system? That will be a Q4 transaction, it was shipped in Q4.

Lynx catheter sales? The product continues to do well. We are not breaking it out in our remarks. Data is being gathered and hopefully will lead to a publication in Europe.

Value message for Magellan for hospitals? We have had dozens of these conversations. Different physicians have different priorities. Some want to enable new procedures (that otherwise would require open surgery). Tip rotation abilities is a big driver. Reduced procedure times and better access to vessels, plus being outside the radiation field all are desirable. Hospitals see payback from a variety of effects, including quicker and easier to schedule procedures. Our challenge is to show both clinical and financial benefit data.

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