March 17, 2010      

The story of Hansen Medical is a Silicon Valley cautionary tale repeated by various technology companies over the last few decades. Initial success and millions of dollars in venture capital funding often lead management to take shortcuts to maintain early momentum. When the plan works, no one ever sees the shortcuts. When the plan fails, legal issues overwhelm the business.

Everything went right for Mountain View, Calif.-based Hansen Medical early on. Frederic Moll split from Intuitive Surgical Inc., a surgical robotics company he founded, to start Hansen Medical in 2002. In 2005, Intuitive and Hansen cross-licensed their technology, allowing each company to apply the other’s patent portfolio. Intuitive also received royalties on future Hansen Medical product sales and equity in Hansen Medical. Hansen went public with an IPO in November 2006.

In May 2007, Hansen received clearance from the U.S. Food & Drug Administration (FDA) for commercialization of its sophisticated Sensei Robotic Catheter System and Artisan Control Catheter, which assist doctors to more precisely manipulate, position, and control cardiac ablation catheters. Luna Innovations Inc., maker of fiber-optic shape-sensing technology, became a partner in June 2007. Hansen stock peaked at $38.87 in October 2007, the result of initial sales and news of the Luna partnership.

Hansen made two more successful public offerings (IPOs) in April 2008 and April 2009. The IPOs infused a combined $74.5 million into Hansen’s bank account. Approval for Hansen’s Artisan S Control Catheter came in May 2009, expanding the product line.

Lawsuits and Resignations
In spite of the IPOs, a rising stock, and regulatory approval, all was not right at Hansen Medical. In June 2007, almost immediately after beginning their partnership, Hansen sued Luna for breach of contract and misappropriation of trade secrets. Hansen accused Luna of sharing trade secrets with Intuitive Surgical, Hansen’s technology cross-licensing partner. Lawsuits and lawyers almost always distract management, and it appears both Hansen and Luna suffered. Luna eventually sought bankruptcy protection.

A U.S. Securities and Exchange filing in November 2008 showed that Hansen sweetened its severance agreements with top executives as part of its efforts to retain them. Hansen basically agreed to increase the cash and medical benefits coverage it would pay managers “in the event of a covered termination of employment.” Not a good sign.

Legal distractions and poor sales management continued to eat away at the company. An SEC filing in February 2009 reported that the employment of Hansen’s President and Chief Operating Officer Gary Restani would terminate on March 1, 2009. Restani also agreed not to seek re-election to Hansen’s board. Under Restani’s term as COO the value of Hansen Medical’s stock had dropped 60 percent. Hansen’s board of directors appointed Frederic Moll to the position of president.

Two days after Hansen’s annual meeting in June 2009, board member Thomas McConnell also resigned. Eschewing custom, the press release announcing McConnell’s resignation gave no reason for his departure.

Through all the tumult, Moll promised the investment community that all was well, including providing stock guidance of expected yearly sales of 53 to 60 units. Later that summer, an anonymous whistleblower triggered investigations into accounting irregularities.

Earnings Restatement
On October 19, 2009, Hansen announced the need to “restate earnings to appropriately account for revenue recognition.” Instead of the promised 53 or more units, sales were in the single digits for the reporting period. Sales irregularities included the time when Hansen issued public stock offerings. On the day of the announcement, the price of a share in Hansen Medical declined $0.31, more than 9 percent, to close at $3.12 per share, on unusually heavy trading volume.

Hansen blamed slow sales on the economy. However, other firms in the same markets, notably Stereotaxis (Hansen Medical’s primary competitor), Philips Electronics, Johnson & Johnson, and General Electric were increasing their sales at that time. Shareholders blamed management for poor sales and cost overruns.

Three days after the reinstatement announcement, Hansen Medical announced that Christopher Sells, senior vice president, commercial operations, had resigned. Only three months earlier, the company’s board had approved an extension of a guaranteed bonus of $16,667 per month for Sells.

Following the restatement announcement, a number of shareholders filed suit against Hansen Medical. Multiple financial analysts firms, such as Piper Jaffray and J.P. Morgan, downgraded their stock recommendations late in 2009.

Tentative Steps Forward
One of Hansen’s legal problems resolved favorably in December 2009 as the company settled its two-year legal battle with Luna. Hansen received $5 million and 9.9 percent of Luna’s outstanding stock, and Luna crawled out of bankruptcy. Hansen also received license to use Luna’s fiber-optic product co-exclusively with Intuitive Surgical. Also in December, analyst firm Brean Murray upgraded its position on Hansen from “hold” to “buy” based on settling the Luna unpleasantness, a very low stock price, and an improving health technology market. Methodist DeBakey Heart & Vascular Center in Houston purchased its third Sensei X Robotic Catheter System in January 2010, another point of improvement for Hansen.

Will Hansen management improve sales and cut expenses enough to revive? Or will Hansen management be destroyed by accounting irregularities and the shareholder class action suit?

Even with the recent favorable indicators, the company remains in flux. In January, J.P. Morgan downgraded the company from “overweight” to “neutral.” Also, the shareholder lawsuits continue. Freezes on discretionary healthcare spending add further uncertainty. Still, the healthcare industry views robotics as a transformative technology. Hansen Medical’s healthcare robotics peers are surviving the tough economic times, and many are flourishing. With an improvement in fundamentals, Hansen Medical can also thrive, but it will take more than that to push its stock price above $20 in the near to midterm.




The Bottom Line

  • Frederic Moll split from Intuitive Surgical to found Hansen Medical in 2002.
  • Hansen follows the typical Silicon Valley start-up, IPO, product-to-market story. Revenue-generating sales start in mid-2007.
  • Hansen partners with Luna for optical shape-sensing technology improvements.
  • Luna also partners with Intuitive Surgical, providing the same optical shape-sensing technology.
  • Hansen sues Luna for breach of contract and sharing Hansen trade secrets with Intuitive.
  • Hansen stock reached a high of $38.87 in October 2007.
  • President, COO, and board member Gary Restani leaves suddenly in March 2009. Board member Thomas McConnell and SVP Christopher Sells follow suit.
  • On October 19, 2009, Hansen admits the need to restate revenues and stock guidance by a considerable amount.
  • Hansen share price plummets to a low of $2.41.
  • Shareholder lawyers file a class action suit because of accounting irregularities.
  • Hansen settles with Luna Innovations and takes 10 percent of the company in December 2009.
  • Shareholder suit continues, as do the low stock prices and negative analyst reports.