Kips Bay Medical Provides FDA Update and Reports Second Quarter 2012 Results

Kips Bay Medical Provides FDA Update and Reports Second Quarter 2012 Results

<0> Kips Bay Medical, Inc.Manny Villafaña, Chairman and Chief Executive Officer, +1-763-235-3540Email: orScott Kellen, Chief Financial Officer, +1-763-235-3540Email: </0>

Kips Bay Medical, Inc. (NASDAQ: KIPS) today provides an FDA update and announces financial results for its second quarter ended June 30, 2012.

As previously announced on July 18, 2012, Kips Bay Medical filed an application for an Investigational Device Exemption (“IDE”) with the U.S. Food & Drug Administration (“FDA”) to include four U.S. sites in the “eMESH I” clinical feasibility study of its innovative eSVS Mesh device currently being pursued in Europe. As of the date of this press release, a number of leading cardiac centers in the U.S. have already expressed an interest in participating in the eMESH I study, pending FDA approval of the IDE.

The eSVS Mesh is a highly flexible, kink-resistant tubular prosthesis made of knitted nitinol wire. It fits externally over the saphenous vein and is designed to provide strength and support for maintaining graft patency.

Kips Bay Medical submitted this IDE application based upon the FDA’s response to its April 2012 Pre-IDE submission in which Kips Bay provided additional information to the FDA on the performance of its eSVS Mesh.

In Europe, Kips Bay Medical continues to work through the ethics committee review and approval process at its selected clinical study sites. Two sites have received ethics committee approval and are in the process of finalizing clinical study agreements.

Kips Bay Medical intends to enroll up to 120 patients in the eMESH I study, with a primary efficacy endpoint of graft patency, or openness, at twelve months. This feasibility trial is designed to provide information required by the FDA to support the approval of an investigational device exemption (“IDE”) for a larger pivotal study. A pivotal study is required to demonstrate clinical safety and efficacy in support of a request for an approval to sell our eSVS Mesh in the U.S.

Kips Bay Medical Founder and CEO, Manny Villafaña, said “It is important that we advance appropriately through the FDA review process and that we conduct the clinical studies necessary to demonstrate the safety and efficacy of the eSVS Mesh. We are pleased with our on-going activity in Europe and excited about the potential to gather more evidence here in the United States.”

Net sales increased 18.8% to $57,000 in the second quarter of 2012 from $48,000 in the second quarter of 2011 while gross profit increased 18.5% to $32,000 in the second quarter of 2012 from $27,000 in the second quarter of 2011. Net loss in the second quarter of 2012 was $1.4 million, or $0.08 per diluted share, compared to a net loss of $1.0 million, or $0.07 per diluted share, in the second quarter of 2011. The increase in net sales was caused by increased demand from the Company’s distributors. The increase in net loss reflects higher costs associated with pursuing clinical study sites for the Company’s eMESH I feasibility trial in Europe and post market studies as well as product development efforts initiated by the Company to support expanding the eSVS Mesh product labeling to indicate that physicians may use the eSVS Mesh in performing sequential grafts. Sequential grafts in bypass surgery are those grafts in which one saphenous vein is connected to two target arteries.

Net sales decreased 30.4% to $110,000 for the six months ended July 2, 2012, from $158,000 for the same period in the prior year. The Company achieved a gross margin of 55.5% compared to 63.3% for the first half of 2012 and 2011, respectively. The net loss in the first half of 2012 was $2.7 million, or $0.16 per diluted share, compared to a net loss of $2.1 million, or $0.13 per diluted share, in the first half of 2011. The overall decrease in net sales for the six months of 2012 reflects the impact of limited reimbursements available to hospitals and the continuing effects of budget difficulties in certain European countries. The increase in net loss for the current year results from the increased clinical study related costs, noted above, and the increased costs of compliance with public company requirements and supporting international sales activities.

Cash, cash equivalents and short-term investments decreased to $6.9 million at June 30, 2012 from $9.2 million at December 31, 2011. Total current assets decreased to $8.2 million at June 30, 2012, from $10.2 million at December 31, 2011. These decreases resulted from the use of cash to fund operations during the first half of 2012.

Current liabilities increased from $260,000 as of December 31, 2011 to $430,000 as of June 30, 2012. This increase is primarily attributable to increased costs associated with clinical studies and the preparation of our registration statement occurring during the second quarter of 2012.

Cash used in operations decreased from $6.3 million in the second quarter of 2011 to $2.3 million in the first half of 2012. This decrease can be attributed to the payment of the first $5.0 million milestone obligation in the second quarter of 2011, partially offset by increased operating losses during the first half of 2012.

Sales, general and administrative expenses will increase slightly as the Company continues to expand its sales and marketing activities. Research and development expenses are expected to increase as the Company increases its clinical study related activities. The Company’s ability to maintain margins will be dependent upon both the pricing negotiated with distributors and future production levels required to support commercial sales and clinical trials.

Kips Bay Medical, Inc., founded in 2007 and headquartered in Minneapolis, Minnesota, is a medical device company focused on manufacturing and commercializing its external saphenous vein support technology, or eSVS Mesh for use in coronary artery bypass grafting surgery. The eSVS Mesh is a nitinol mesh sleeve that, when placed over a saphenous vein graft during CABG surgery, is designed to improve the structural characteristics and long-term performance of the saphenous vein graft. Additional information about Kips Bay Medical, Inc. can be found at .

Certain statements in this news release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are provided under the protection of the safe harbor for forward-looking statements provided by that Act. For example, statements in this press release regarding (i) the interest expressed by leading cardiac centers in the U.S. in participating in the eMESH I study; (ii) the approval process at clinical study sites in Europe; (iii) the number of patients expected to be enrolled in the eMESH I study, and (iv) expectations regarding sales, general and administrative expenses, research and development expenses and margins, are forward-looking statements. These statements involve risks and uncertainties which could cause results to differ materially from those projected, including but not limited to, the potential for the FDA’s refusal to grant, or delays in granting, IDE approval; the possibility that clinical study sites in Europe will not grant approval and other factors detailed from time to time in our SEC filings, including our annual report on Form 10-K filed on March 15, 2012 and subsequent periodic reports. We encourage you to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements contained in this release. The forward-looking statements made in this release are made only as of the date of this release, and we undertake no obligation to update them to reflect subsequent events or circumstances.