Neovasc Inc.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good day, everyone and welcome to the Neovasc, Incorporated First Quarter 2021 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Mike Cavanaugh, Managing Director at Westwicke. Please go ahead, sir.

[Mike Cavanaugh:]

Good afternoon and thank you for joining us today. Earlier today, Neovasc released financial results for the quarter ended March 31, 2021. The release is currently available on the Investors section of the company's website at www.neovasc.com/investors. Fred Colen, President and Chief Executive Officer; and Chris Clark, Chief Financial Officer, will host this afternoon's call. Before we get started, I'd like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of applicable securities laws, which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and Canadian Securities Laws. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.

[Fred Colen:]

Thank you, Mike, and good afternoon, everyone. It's been a busy quarter for Neovasc. Overall, we are pleased with the progress we made in the quarter to advance our two key cardiology products, including the commercialization of the Reducer device. Revenues for the first quarter of 2021 were $452,000 compared to $533,000 in the first quarter of 2020. Although, down year-over-year due to the COVID-19 pandemic driven decline in elective procedures, it was higher than we budgeted as the volume of Reducer implants continues to rebound faster than anticipated. The great majority of these implants occurred in Europe, where Reducer is approved and is gaining traction with cardiologists seeking a treatment for patients with refractory angina. And we have run out of traditional treatment options. We think it is encouraging that our implants were down just 10% compared to the first quarter of 2020, considering the difficult year-over-year comparisons. Recall that COVID impacted our implants during the final two weeks of the first quarter of 2020 but impacted the entire first quarter of 2021. In Germany and the larger DACH region, including Austria and Switzerland, our revenues and implants were actually flat in comparison to Q1 2020 despite the pandemic’s impact on elective procedures. We see disparate effects of lockdowns and elective procedure cancellations across Europe with some markets returning to near normal levels of procedures and others with more market impacts.

[Chris Clark:]

Thank you, Fred. As everyone is actually aware, a restriction on elective procedures, which included Reducer implants, was implemented by hospitals, health authorities and governments of a substantial portion of all our major markets due to COVID-19. This caused Reducer implantations to significantly slow beginning in March 2020. There has been a recovery in elective procedures, we're not yet back to pre-COVID levels. As a result revenues decreased by 15% to $452,000 for the three months ended March 31, 2021, compared to revenues of $533,000 for the same period in 2020. However as Fred mentioned, Reducer implant volumes and revenues are both had an expected – indicating a faster recovery in Reducer procedures than we have anticipated. Cost of goods sold for the three months on the March 31, 2021 were $72,000 compared to a $125,000 for the same period in 2020. The overall gross margin for the three months ended March 31, 2021 was 84% compared to 77% gross margin for the same period in 2020, as a company sold more products in countries where we sell direct by our end salesforce behind margins. Total expenses for the three months ended March 31, 2021 were $10.6 million compared to $7.6 million for 2020, representing an increase of $3 million or 39%. The increase in total expenses for the three months ended March 31, 2021, compared to 2020 can substantially be explained by onetime $1.6 million increase in legal expenses and underwriting speeds related to the February, 2021 financing and a $1.3 million increase in noncash share-based expenses . The operating losses and comprehensive losses for the three months ended March 31, 2021 or $10.2 million and $2.9 million respectively or $0.04 basic and diluted loss per share, as compared with $7.2 million operating losses and $2.7 million comprehensive loss, or $0.38 basic and diluted loss per share for the same period in 2020. Thanks for the increase in operating losses, I've already explained in my earlier comments.

[Fred Colen:]

Thank you, Chris; and thank you all for listening to our opening remarks. Neovasc is finally on a new foundational footing with a clean cap table and balance sheet and a reasonable amount of funding for the development of our two key products. This allows us to focus completely on advancing the strategies, which we believe will uncover the vast potential of Reducer and Tiara, and ultimately help millions of patients around the world. Thank you all for your continued support. I would now like to open the call up for questions.

[Operator:]

Thank you. And our first question will come from Danielle Antalffy with SVB Leerink.

[Danielle Antalffy:]

Hi guys, thanks so much for taking the question. Fred, just a question on how you think about when realistically Tiara could start to contribute some revenue here, given – especially given now that the fact that the Reducer product probably isn't going to come to the U.S. for a little bit of time. So just any color you could give on when Tiara could actually become a revenue contributor, and I appreciate that the TA product is not likely to be the product that comes here to the U.S.

[Fred Colen:]

Yes, thanks Danielle. So first of all, let me put this in perspective. We never really counted on the Tiara TA in Europe as a big revenue provider. As you know, it is not a product in the U.S. market, it is one that we are targeting for the European side. And secondly, as you also know it is really for a relative small patient population. That is true for a lot of these programs on the mitral valve side at the moment. And certainly also for our TA device, as you know, and as we have disclosed in the past, from all patients that we screen, we see 20% or less patients being eligible for this particular device through to all kinds of inclusion, exclusion criteria. So it is – if anything, only a small revenue generating opportunity as it is. That said, we – I can't really give you a concrete answer yet, because we are talking about what the transition from MDD to MDR means in terms of the submission and what we have accomplished with the notified bodies so far. We have been able to close off quite a substantial number of modules, but not all of them. But even on those, there will be some transitionary work to be done from MDD to MDR. So we are in the process of understanding all of these things, and once we understand them, we will have a much better idea about the timeline as to how we might be able to move forward with that.

[Danielle Antalffy:]

Okay. That's fair. Thanks for that, Fred. And then maybe let's talk about Reducer, just congratulations on the progress need now with COSIRA II, so what was the disappointing outcome from the FDA panel. I guess, what are the biggest risks here to us sort of timely progression of the clinical trial? Because it feels like that is the sort of next major catalyst, right, is getting this trial underway and advancing it. And what are the milestones we need to be looking for in the investment community for Neovasc to hit here? Thanks so much.

[Fred Colen:]

Yes. So I would agree that the – there are several value drivers on the Reducer side in the next step of months that I think are going to be interesting. A few of them have to do with real outcome from reimbursement work in Europe. So what will we see in markets in Europe as relates to reimbursement decisions for the Reducer? I think that's one potential value driver in the next few months. And as you saw already in descript, we have already made a lot of progress on reimbursement decisions in the U.S., which was based on our hope that we were able to get an earlier FDA approval, which obviously were shattered. But I think reimbursement in general is going to be an important value driver, no matter what. I think increased revenue numbers out of Europe, I think will also be quite a value driver, because once we are finally getting through COVID, and as you all know, Europe is going through it even slower than in the U.S., and that's really where all revenue lies at the moment. So once we get through the COVID scenarios in those European countries and the recovery of elective procedures there, we do anticipate a pick up again of dramatic growth on the Reducer side of Europe, so that should be another one. But outside of those, I agree with you that the U.S. picture is going to contribute quite a bit to –as it relates to moving forward with the Reducer. And I think the risks to start the study are volatile small in my perspective, my personal view on this. And that's mostly because of the fact that you need to remember and I stated it in the script as well, that the FDA prior to the clearing the device – a breakthrough device in 2018 had already approved a U.S. IDE study for the Reducer. It was called the COSIRA II study. In that, for example all the animal study results were already debated and discussed back and forth. And all the study design was already discussed back and forth. And in the end, the FDA before 2018 already approved that study. I just want to clarify this, because there is very big confusion about this in the public domain, but people just don't understand this. And I hear lots of criticism about animal study results. Well, those were all discussed in the beta with FDA, and the FDA actually approved the IDE study before they gave the device a Breakthrough Device. So because of the Breakthrough Device and the guidelines that the FDA pulled out, we believe we had a fair shot at using a data we have including the Reducer 1 data, post-market study data to get to device approved without doing an additional IDE study, which is what we did. Now that we noted that deNovo were going back to doing this IDE study. Now, in the meantime, a few years later, we have learned a lot, we as a company, the physician community, the FDA has learned a lot. And so, we believe that a few minor changes and amendments to the original protocol of the study that was approved are needed. And so, we have had our first initial discussions with the FDA. We're gearing up to a live meeting with FDA, hopefully later this month to discuss those in detail. And then we need to basically file an amendment to that original IDE study for the changes. So I think when you look at this from a regulatory perspective, on the clinical execution perspective, as it relates to getting the study started, I think the risks are wobble low and I basically explained to you just now why I believe the . Then I think that the key point is going to be on the execution. How are we going to make sure we do it properly executed clinical study in the U.S., that is very disciplined, very rigorous, it's going to be again, a sham-controlled randomized trial, so one has to make sure that the randomization is properly done, that the sham-control is properly instituted. I mean, all these things have to be properly managed, that our thing is as with any clinical study, the most critical risk. In terms of outcome, we have so much data today as it relates to safety and effectiveness that this device really is working. So if we execute the study well, we should be able to see a positive results, I believe. But again, that was always in the detail. So does that give you a good sense of how we see this Danielle? Hello?

[Operator:]

I think – Danielle disconnected.

[Fred Colen:]

Okay. Good. That's good. I think I explained it to the audience, but I know Danielle is very busy, she has so many of these earnings calls to cover, so that's probably why she had to jump on another call.

[Operator:]

And she just disconnect about one seconds ago.

[Fred Colen:]

That's okay, Sarah. Thank you so much. So let's move on then.

[Operator:]

Absolutely. Our next question will come from Vernon Bernardino with H.C. Wainwright.

[Vernon Bernardino:]

Hi, Fred and Chris and Bill, if you're there. Congrats on the progress in the challenging environment, definitely a mark of success considering the restrictions all over the place, especially in the key markets. So my FDA questions were asked, but the one or two, then therefore some housekeeping type of things. I saw the unrealized gain on warrant, you probably alluded to some of them already Chris in your remarks. But it seems rather large, I'm sure it's related to the financing. Just wondering if you could provide any granularity on what drove the amount. And then also is intriguing was the COGS, Chris, you did mention the margins and COGS was 16% versus 23% in first quarter last year. I was wondering if you could provide granularity on the improvement there also. Thank you.

[Chris Clark:]

So I'll take the last part first. Really the improvement in COGS was related to our sales mix and the fact that we increased our sales in geographies, where we had a direct sales force and therefore the mix changed and skewed towards our higher margin geographies. And that explains the increase in our margin. And then on the accounting for the derivative liabilities, the asset that was created on our balance sheet related to the February financing and was related to the fact that the stock declined substantially following the financing, which created a loss. And as we see the price fluctuate, we will revalue our derivative liabilities on a quarterly basis, and we reflect back on our statements without any real significant passion.

[Vernon Bernardino:]

Right, it’s a non-cash. And just to follow up on the COGS improvement, do you anticipate your COGS will settle around 16% going forward?

[Chris Clark:]

I expected actually to normalize a little bit back to the norm while we did have a strong quarter in the DACH region and a weaker quarter in other regions, I expect that to normalize and other countries to come online. So that we normalize closer to the 75% to 80%, rather than 88% as we saw in the first quarter for gross margin.

[Fred Colen:]

Yes. And Vernon, good to hear you. This is Fred, just to add on to that. So yes. Hi Vernon. So we really expect the gross margin to be like somewhere between 75% and 80%. It really depends on the mix in the countries. Obviously, we achieve higher prices in Germany where we have direct. We are bringing all the countries online, wherever we have distributors that has a somewhat negative effect on the gross margin. But then on the other hand, we're also working hard in France. And if and when that is going to be successful, we would like to start building up a direct sales force in France and that will again, help lift up the gross margin. So it all depends on these different countries and the different fluctuations. But to point out to the gross margin from this quarter, Q1 and it being exceptionally high, really is because of enormous good performance in Germany, in particular. And if you look at the implants in Germany in Q1 of 2021, compared to Q1 of 2020, they were essentially flat. So about the same in the first quarter of 2021, compared to the first quarter of 2020 and when you notice situation Germany, as it relates to COVID, you know that in essentially all of Q1 2021, the country was in a lockdown scenario versus in 2020, we basically only started to see impact of the COVID in the last two weeks of the first quarter. So it is actually very remarkable to see an amount of implants of Reducer in Germany where a country essentially in lockdown in the first quarter of 2021 at about the same level as in 2020. And we contribute that to the strong underlying demand in a difficult market in terms of elective procedures being pushed out, there is enough push from the patients and the referring physicians to get these patients treated with the Reducer. And that wouldn't happen if this device would work. This device works, it provides real relief for the majority of patients. We have lots of data to prove that and I think the underlying commercial success is as much a proof of that as well. So I just wanted to add those comments to that, Vernon.

[Vernon Bernardino:]

One more follow-up then is one way to look at this is, depending on how restrictions are lifted besides the Germany is one way we could look at forecasting sales for the rest of the year?

[Fred Colen:]

Well, we have a plan in place that had a subdued Q1. We actually did slightly better in Q1 than our subdue plan because of the virus. We still have a slower Q2 than on the normal circumstances because we still impact – we still see impact of the virus, although Q2 in our own internal planning is already quite a bit stronger than Q1. And then we see a real acceleration in terms of revenue growth starting in select markets in Q3 and really kicking in Q4. So our Q4 plan certainly does have quite a bit of growth in it for internal planning purposes on both implanted revenue side because we do believe that's the way it's continued to be strong acceleration of revenue. Basically we have been kept when you look at the numbers in a big picture perspective, Vernon, we haven't basically capped at a roughly $2 million revenue range for the year in 2019, 2020 and 2021 would be shaping up the same way. And that's all because of COVID. If COVID goes away, we are convinced and we do believe that revenue will continue to accelerate again and we will start back to go into growth space so COVID to us, basically has kept us at about a $2 million revenue number. And when COVID finally will go away as we hold, we will actually go back to strong revenue grows again. That's kind of like how we see the picture of the developing revenue all the time.

[Vernon Bernardino:]

Terrific. Appreciate the insights because if you just ran with slightly more than $0.5 million per quarter, that's already above $2 million. Thank you, Fred. Appreciate that.

[Fred Colen:]

Yes.

[Operator:]

And we have no further questions at this time. So I’ll turn things back over to Fred for any closing remarks.

[Fred Colen:]

Thank you very much, Sarah, for a great call. With this, I just like to say thank you all for your attention and goodbye until we talk again next quarter. Take care. Bye-Bye.

[Operator:]

And that does conclude today's conference. Thanks everyone for joining us.