TRANSENTERIX

Moderator: Mark Klausner
August 5, 2016
8:30 am

I would like to remind you that this call is being Webcast live and recorded. A replay of the event will be available following the call on our Web site. To access the Webcast please visit the Events link in the IR section of our Web site, TransEnterix.com.

Before we begin I would like to caution listeners that certain information discussed by Management during this conference call are forward looking statements covered under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company’s business. The company undertakes no obligation to update the information provided on this call.

For discussion of risks and uncertainties associated with TransEnterix’s business I encourage you to review the company’s filings with the Securities and Exchange Commission including the Form 10-K for the year ended December 31, 2015 and the Form 10-Q for the quarter ended June 30, 2016, expected to be filed shortly.

During this call, we may also present certain non-GAAP financial information relating to adjusted operating expenses and adjusted net loss. Management believes that non-GAAP financial measures, taken in conjunction with U.S. GAAP financial measures, provide useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of the company’s core operating results.

Management uses non-GAAP measures to compare our performance, relative to forecast and strategic plans, to benchmark our performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables that accompany our earnings release — which can be found in the Investor Relations section of our Web site. With that, it’s my pleasure to turn the call over TransEnterix’s President and Chief Executive Officer, Todd Pope.

I am excited to start the call today by discussing the key milestone we achieved this week. Our first global sale of an ALF-X system to Humanitas Hospital, a leading teaching and research hospital located in Milan, Italy.

Humanitas chose ALF-X due to its unique combination of clinical capabilities and economic attractiveness. Our discussions with Humanitas focused on the potential of the ALF-X surgical robot to enable advanced laparoscopic surgery with robotic assistance at a cost similar to traditional laparoscopic procedures.

The multi-quadrant capability of the device, innovative eye tracking, camera control, and sense of haptic feedback were also cited as key advantages to our system. As we stated before, the capital price for the ALF-X system is similar to our competitor’s most advanced offering and this sale is in line with these pricing expectations.

I personally spent most of the past month in the field in Europe meeting with key pipeline accounts, observing surgery, and talking to surgeons and hospital administrators. I came away from my time in the European market even more confident in the value proposition of the ALF-X and in our ability to be successful in the market.

While the sale cycle for capital equipment remains four to six quarters I continue to be pleased with how our pipeline is building and believe that it will provide a solid foundation for the business in 2017 and beyond. The feedback we continue to receive is that robotics can potentially add value and a wide variety of surgeries, however, in Europe it is primarily been utilized in urology due to the high cost of the instruments and accessories of the competitive robotic system.

Hospitals want to move robotics into other specialties but prior to the availability of the ALF-X — the trade-offs have been too steep. When hospitals learned that the ALF-X platform offers advanced robotics that works within the hospitals own Eco system they are keenly interested. Specifically, the ALF-X leverage surgeons’ extensive laparoscopic expertise, utilizes the hospital’s existing operating room beds and trocars, and is specifically designed to perform multi-quadrant surgeries. All of this at a per procedure cost similar to laparoscopy. I have had numerous hospital executives and surgeons tell me they are thrilled to finally have a choice in robotics that delivers meaningful clinical benefits with responsible economics.

We continue to work on building out our direct sales force and clinical support staff. We have direct capital sales professionals in France, the United Kingdom, Belgium, the Netherlands, Germany, Switzerland, Middle East, and Asia. We will continue to add direct sales reps to this team as needed.

Now that we have our initial capital sales leadership team in place, we have begun shifting our hiring to clinical and training staff to support anticipated placements. Of note, our training and clinical team is led by a 30-year veteran of the medical device space and also includes a doctor of veterinary medicine, PhD, and a full-time general surgeon.

In addition to the developing of our direct sales force and training team we have been very active in adding distributors. We made particular progress during the quarter signing up distributors in Asia and in the Middle East.

Our strategy continues to be going direct in Western Europe and in the United States selectively using distributors in Southern and Eastern European markets and utilizing distributors in Asia, Latin America, and the Middle East. We are very encouraged by the quality of the distributors we have already signed on as well as those that we are currently engaged in discussions with.

One of the key areas of focus of our commercial team has been driving hospital participation and hands-on demonstrations. In the second quarter of 2016 — 59 surgeons from 21 target hospitals participated in at least one complete hands-on evaluation of the ALF-X robot led by our clinical staff.

We continue to believe in the importance of our demonstration and training capabilities and during the quarter we expanded this capability with the building of a new training site centrally located in Milan, Italy. This site will serve as the central location for training new surgeons and surgical staff and also as an internal training and development site for our organization. To this end, we will be relocating our engineers, clinical development and commercial team to this facility in the third quarter.

Now shifting gears to our ALF-X regulatory process. We continue to work diligently on our 510(k) submission for ALF-X. As part of preparing for this filing we have already begun our official dialogue with the FDA regarding this submission. This dialogue has been highly collaborative and very productive to this point.

We submitted our first pre-submission to the FDA in early June. I would remind you that we are in the initial steps of the regulatory process and while our goal remains to make our 510(k) submission before year-end, our ultimate timing will be guided by feedback from the FDA as we seek to make the strongest submission possible.

Before turning to SurgiBot, I want to reiterate my confidence with the opportunity that lies ahead for the ALF-X. Based on our first commercial sale our progress in developing a commercial and clinical infrastructure, the direct feedback we’re receiving from surgeons and hospital executives, and our interactions with the FDA, I’m confident in our ability to be successful in commercialized in the ALF-X and C.E. Mark countries and in achieving regulatory clearance in the United States.

Moving to the SurgiBot front. On our last call, we discussed the FDA’s NIC letter regarding our SurgiBot 510(k) submission. Since receipt of the letter, we have made it a priority to gain insights into the aspects of our submission that the FDA found to be unsatisfactory to help guide our future regulatory strategy and pathway for SurgiBot.

Since we last spoke, we have had a number of highly collaborative interactions with the FDA. We have participated in three separate meetings including one in-person meeting — which I attended along with our Senior Surgical Officer, Dr. Ted Pappas and our Vice President of RA/QA Clinical and Compliance, Dr. Stephanie Fitts.

Coming out of these meetings we now have had the benefit of personal interaction with the Agency to hear their feedback and observations. Based on these discussions we continue to believe that the SurgiBot can be cleared for sale in the U.S., and that the clearance will require a new 510(k) submission. We are still working closely with the FDA to determine the scope of any additional work required to file that submission which then will allow us to estimate a filing date.

Upon SurgiBot clearance in the U.S. we would still have to consider the best way to deploy our capital resources. As we have discussed in our last call we currently intend to focus our resources on commercializing the ALF-X outside the U.S. in preparing for its 510(k) submission. With that, I’d like to turn our attention to the financial review.

For the three months end of June 30, 2016, the Company reported Total Operating Expenses of 80.7 million. These results included one-time restructuring charges of 5.6 million of which 5.2 million were non-cash, as well as a non-cash charge for goodwill impairment of 61.8 million related to the strategic prioritization of the ALF-X following the FDA NSC on our SurgiBot 510(k) submission.

Adjusted operating expenses excluding these charges were 13.3 million as compared to 9.1 million during the three-month end at June 30, 2015. Total operating expenses increased, primarily as a result of increased investment into the commercialization of the ALF-X.
Adjusted operating expenses in the second quarter of 2016 included research and development expense of 6.4 million, sales and marketing expense of 1.3 million, general and administrative expenses of 2.9 million, amortization of intangible assets of 1.8 million and change in contingent consideration of .9 million.

Turning to the Balance Sheet on June 30, 2016, the Company’s cash and cash equivalents totaled $64.6 million and as of July 31, 2016, we had approximately $61 million of cash. Based on our current cash position we have adequate cash on hand to fund our operations and working capital needs through the third quarter of 2017.

Overall, I am very encouraged about the future for TransEnterix. We are thrilled to have achieved a major milestone with our first commercial sale. Our sales pipeline is developing in line with our expectations. We have established key distributor relationships and we’re seeing significant interest from additional distributors in key markets. We will now open up the line for questions.

What do you — what did you learn — what are you learning as you’ve had these three extended discussions with FDA that gives you confidence that you’re going to be able to have a successful submission and approval for ALF-X? Sort of why should we have, you know, confidence that, you know, that this, you know, you can make it happen here?

Already in these interactions, we’ve been able to resolve many of those issues. And the few that are remaining will really help us determine what the content and timing of our, you know, SurgiBot submission will be.

You know with the ALF-X regulatory we don’t intend to go into too much detail on that on this call for competitive reasons but I would remind you that, you know, that the ALF-X is a CE marked product. It has a very good body of published clinical data. And we certainly have not only begun the process with ALF-X already filing our first pre-submission — which always gives you good learnings the way the FDAs thinking.

But to your point we’ve certainly garnered a lot of observations and learning from our SurgiBot interactions. So I think between both of those we’ve had good interactions with the FDA. We think we probably know more than anyone else right now with what the FDAs thinking as far as robotics. And we feel like it’s put us in a good position both to address the issues with SurgiBot and as you said our priority is really following our 510(k) with the ALF-X.

Yes they competitively demoed it but help us think about now as we look across Europe you have senior management team, you have I think — if I counted correctly — six sales folks. You have the clinical team in place. And you mentioned the selling cycle of four to six quarters. Is — how realistic is that and maybe talk about where you are — these sales folks are — in that, you know, early process.

I mean — and I guess we should assume just to ask sort of a complex question that this, you know, if a selling cycle is four to six quarters then we’re sort of thinking — we’re going to see meaningful impact of all this very late in 17 but probably more dramatically in 18. Is that the right way to think about all those things?

So just as we’ve been saying that typically that capital sales cycle in Europe is four to six quarters — that’s typical. This was a typical deal. They were interested in technology. They put it in. They evaluated it for four quarters and they deemed it what was best for them and they decided to purchase it.

So, every deal’s different. You know, we don’t expect every deal to require a trial process, for sure but I would remind you that our direct sales force is actually nine — not six. And, these people have been coming on in place in the first and second quarter.

So, as our pipeline has been building, you know, when you take a look at four quarters out, you know, that’s in the first half of next year. So, I don’t think your thesis is incorrect but I would just say timing, you know, we just kind of alerted you to some of those statistics, you know. We’ve had 59 surgeons from 21 hospitals complete visits in the Q2 to get a hands-on demonstration of the device.

So when you start thinking about that’s more than just a sales presentation and as you project that out, you know, four to six quarters, I think you can see some meaningful productivity from the pipeline, you know. Four quarters out is the first half of next year and then beyond it just grows from there. So, I think roughly you’re right. I just think, you know, the timing I just think would be a little bit different than the way you characterized it.

Will we see incremental? Should we expect incremental enhancements for the European and/or U.S. market? Either in form factor or functionality? What — just do you want to set some expectations or give us some color on that thought?

But I would say, you know, after our approval in the U.S. we have a robust pipeline of technology that we’re bringing in — both internally developed and externally partnered and I think you’re going to be hearing more and more about that, you know, on our coming calls.

But we also have a strong group here in the United States that have depth in software in many other areas that can really compliment what’s going on in Europe. And then as you can imagine some of our R&D development will be with external third parties and some of those relationships, you know, are being managed here from the States.

So actually, it’s quite easy to work together and it’s kind of a situation that we’ve seen where one plus one is equaling three as far as benefits for us. So those teams work very closely together and it really allows us greater reach as we think about our R&D, you know, going into the future.

But conversely, what feedback are you getting where, you know, surgeons are sensing some potential limitations that you have to sell against whether it be selling price, the way the system is configured with the individual arms, perhaps, taking up space, you know. What’s on the other side that you guys are having to, you know, educate physicians on?

And there’s not been hardly any proliferation of the technology from deep in the pelvis to the abdomen. So, when the hospital sees a system that has four individual arms, and they can set it up similar to the way they set up their laparoscopic surgery, when they see they can have robotics and actually have haptic feedback, when they see they can control three robotic arms simultaneously one with eye sensing and the other two with their hands — they’ve never been able to do that — they realize how much easier it is to operate multi-quadrant.

When they see all these things and then you add on the benefit of not escalating their costs unrealistically on a per procedure basis it has been a lot of positive feedback. Now I’m sure in time we’ll get things that people want changed but I think the form factor, the way it’s set up — the individual arms and these meaningful clinical benefits — have really resonated loudly.

As I said, I spent the last month over in Europe and just we really haven’t seen any pushback yet. I’m sure the more we talk, you know, you’re not going to be able to be the ideal solution for everyone but right now overwhelmingly being able to have another robot on the market and some of the benefits that have been highlighted have really dominated the conversation in a positive manner.

I would say that every one of the 21 hospitals that have come on board have all been strong multispecialty interest. A hospital that’s just looking to do urology and prostate is not our target market. So every one of the hospitals that have come in — to answer your question — have strong interest from multiple specialties including urology but certainly general, foregut, colon and rectal, GYN, and even some thoracic. So, that’s what really identifies a target for us — so all of those have been very representative by multi-specialties.

Now when you look at the ALF-X you rightly point out that we have papers that have been published and those papers have data behind them so one of the benefits of the ALF-X from the regulatory outlook is, one, it has a broad CE mark; two, it has papers; and three, it has clinical data. So that’s obviously going to be able to bolster ours — as it would anyone’s — 510(k) submission when you have clinical data. You would turn that in if you have it and we do.

Then, on our May 10 call, we really talked about that we had brought 10 hospitals actually in to have a hands-on training event. So, you can see how those early calls and presentations at the beginning of the year generated, you know, 10 hospitals actually visiting us and getting a hands-on demo.

Now today we talked about in the second quarter we have 59 surgeons from 21 hospitals actually come in and get, you know, get a hands-on demo. So you can see how it’s building from originally going out and doing sales presentations and bringing 10 in the prior quarter. They now bring in 21 hospitals. So, I just think that that natural progression will continue to build.

As soon as we get more sales under our belt we’ll be able to, you know, more accurately predict, you know, kind of a close ratio and giving you more data. But I think that progression that I just outlined over the last three quarters, you know, is fair representation of our momentum and it will just continue on.

We have been able to bring on some distributors and we’re certainly in the ladder stages of bringing on several more in key areas. So that doesn’t require as much upfront investment on our part — which is good — but it certainly gives us access to a sales organization and those distributors that can reach a little further a little quicker.

So — for us — most of our near-term investment now as we talked about on the call will be to bring on clinical representation and training because as we bring new sites on and get new sales institutions installed you need those people there for training and early support. So that’s where our spend will go here in the near-term to support some of the, you know, upcoming placements.

It’s a big market. It’s a growing market. And us being the first company in the world in this space to have another approved robot — it’s got their full attention. But we continue to be bolstered by, you know, it seems like customers out there are excited about choice and not only choice but, you know, the things that we bring both clinically and economically. So we expect a strong competition and strong competitive response. We’re getting that but we’re certainly prepared for that and look forward to moving forward.

As far as in the United States, we really want to focus, you know, on our regulatory efforts with the ALF-X but we are getting inbound interest so we’ll be, you know, building out some market development resources over the near-term to be able to go out and just understand the market, understand the needs, so we can be better educated as we prepare for an approval, hopefully, in 2017, for the ALF-X.

As far as studies we now have a nice library of studies for the ALF-X in different specialties and that are in Peer Review Journals. So, I think those will just continue to come on line. There’s always studies being worked on and certainly with categories exciting as robotics we have a lot of interest in that.

And as we bring on new accounts there’s a high interest right now of being able to publish because of the interest in the robotic space. So we’ll be seeing more and more of those as we go through the end of this year and certainly in the next year.

So, since we have pretty in-depth discussions going on with both platforms right now at the FDA, I would just say in multiple facets we’re being informed. And I think they’re continuing to evolve how they look at these and think about them. So, I think we benefit from going through two processes right now and conversations concurrently and it’s been very helpful to us.

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