Hansen Medical (HNSN) New Technology

September 29, 2010

Hansen Medical (HNSN) has had a rough couple of years. The maker of flexible catheter surgery robots was thought of as the next Intuitive Surgical (ISRG) back in 2007. Its stock price hit $39.32 back on October 22, 2007. That year it got its first FDA approval and shipped its first commercial system. Today the stock closed at $1.45.

Hansen has been selling its Sensei robots, but in low volume. The price does cover their direct production costs, but it has not covered administrative overhead or ongoing research and development costs. As a result, Hansen ran through its cash from its 2006 IPO and then had to sell more stock. Dilution is one factor that has hurt the stock price. But mainly in 2008 investors became risk-adverse. It seems unlikely in the current climate that anyone is going to bid as if HNSN is the next ISRG until it starts selling more robots and shows a profit. That would be in 2011 at the earliest.

The technology is great, but currently is mainly used for electrophysiology, which is measuring the nerve impulses in malfunctioning hearts. The next step would be using the catheter to "ablate" or kill some nervous tissue to fix atrial fibrillation. The treatment was approved in Europe this July, with commercial shipments due in Q4 2010. It is not yet approved by the FDA for use in the U.S. [see FDA Conditional IDE Approval for Evaluating Sensei X Robotic Catheter System for Treatment of Atrial Fibrillation, 5/12/10]

I believe there is a lot of value to be unlocked in Hansen, but to get there will require at least three steps. Hospitals need to be sold more Sensei systems for electrophysiology, and doctors need to use those that are installed more (the catheter part of the robot is used only once). Then treating atrial fibrillation has to become common (same robot, different catheter), which should mean more systems sold.

A much bigger market for the robots, and one requiring another specialized catheter, is vascular surgery. Experiments are being done for this application, but it may take years to get it to market.

Bigger medical technology companies are very interested in Hansen's technology. It has partnerships with St. Jude Medical, GE Healthcare, and Philips Healthcare, which are all coordinating their imaging technologies with Hansen Sensei robots.

Until sales pick up Hansen will continue to show quarterly losses and run through its cash. It conceivably could need to sell more stock to support its R&D efforts. So anyone buying the stock now should be prepared to be patient (unless there is a merger offer). The usual risks apply: another company could create a better catheter robot, the FDA or European agency might cause further delays or refuse to approve new applications for the robot, or hospitals could decide the advantages of the robots are not worth the capital investment needed.

I think it is a good bet, particularly at this price. While trading is liquid on a daily basis, Q3 results (not due until early November) could have a big impact. Hansen shipped only 3 robots in Q2, down from 7 in Q1. If it gets back up to 7 or higher, that would be a good sign. If it is under 4 again, that means profits are far, far away.

So keep diversified!

William P. Meyers

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