Neovasc Inc.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Greetings and welcome to the Neovasc, Inc.’s Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Mr. Jeremy Feffer, Investor Relations. Mr. Feffer, you may begin.

[Jeremy Feffer:]

Thank you, Jerry. I would like to remind everyone that today’s discussion includes forward-looking statements within the meaning of applicable U.S. and Canadian securities laws that reflect Neovasc’s current views with respect to future events, including the company’s plans and expectations related to its business, financial results, capital structure, litigation and other matters. Words such as expect, outlook, anticipate, exploring, may, might, will, should, estimate, continue, strategy potential, intend, going to, believe, plan, opportunity, trend, growing, look forward and similar words or expressions are meant to identify forward-looking statements. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.For more information on risks and uncertainties related to these forward-looking statements, please refer to the cautionary statement regarding forward-looking statements and risk factors sections of Neovasc’s Annual Report on Form 20-F and the discussion in Neovasc MD&A, which are available on SEDAR and EDGAR.At this time, I’d like to turn over the call to Fred Colen, President and Chief Executive Officer of Neovasc. Fred?

[Fred Colen:]

Thanks, Jeremy. Welcome, everyone. With me this afternoon is Chris Clark, our CFO. I would like to begin today’s call by highlighting the tremendous progress, the Neovasc team has made in the last one and a half years, particularly in the first half of 2019. We have consistently and effectively executed on our value creation strategy and the development of our two product platforms, Tiara and Reducer.I am very proud of the Neovasc team that has worked incredibly hard since I joined a company to execute a comprehensive turnaround. and from an operational and financial perspective, we have largely succeeded. Importantly, I should also add that the team and I have not been distracted by the turbulence of the stock price movements, but that we have continued to stay focused on executing our value creation strategy for the underlying assets of the company.In the second quarter, we strengthened our balance sheet in the least dilutive manner available to us at the time when we completed a private placement of convertible debt and common shares for gross proceeds of the $11.5 million. This capital is critical for our development and commercialization efforts with Reducer as well as for our two-pronged development initiatives with Tiara.In an effort to regain compliance with NASDAQ listing rules, we executed a reverse stock split following the approval by over 72% of our shareholders. Just prior to the close of the second quarter, we did indeed regain compliance with NASDAQ’s minimum market value rule. More recently, we regained compliance with NASDAQ’s minimum bid price rule resolving our last remaining outstanding NASDAQ deficiency. While our market cap has recently dropped below $35 million again, the clock has effectively restarted with respect to any deficiency related to NASDAQ’s minimum market value or minimum bid price rules subject of close to NASDAQ discretionary authority to apply additional or more stringent requirements for a company’s continued listing.In addition from a product platform development standpoint, we have achieved significant progress, with both Tiara and Reducer in recent months. For the transapical Tiara, unlike our two much larger competitors in this space, we have not made any functional changes to our valve and delivery system from the time of our very first Tiara implantation well over five years ago to the present time. This demonstrates our leading edge performance in this complex and large field of unmet clinical need and we believe this provides us with a significant competitive advantage; I’ll discuss this in greater detail shortly.I should also reiterate the German Appeals Court decision at the end of the first quarter, which overturned the lower court’s decision and granted Neovasc the full and exclusive patent rights for one of our basic Tiara patents in Europe. As we have disclosed previously, this was a tremendous win for us and left us with the strategic option to close out the U.S. litigation as well, which we did at the beginning of this quarter. Further patent related activities are ongoing and we will continue to provide material updates as appropriate.For Reducer, we continued to experience a meaningful sales momentum with strong growth in Europe and the Middle East. In the U.S., we reported on a positive development in our discussions with the FDA related to guidance received from the FDA to potentially bring the Reducer to the U.S. market faster than originally anticipated for patients with the worst refractory angina symptoms more on this too shortly.Unfortunately, as our shareholders well know, while all business fundamentals have improved significantly in recent quarters, our valuation has not increased accordingly. Therefore, in addition to continuing to execute our growth strategy as we have and remaining focused on explaining and updating that growth strategy to investors, I’d task Chris to look into the recent fluctuations in our share price.With that, I will now provide a brief update on our Tiara and Reducer program. Regarding Tiara, to-date, we have treated 76 patients overall in the TIARA-I and TIARA-II clinical studies, and on the compassionate use. The TIARA-I clinical study remains ongoing and we expect to complete enrollment before the end of this year. We have treated 24 patients to date in this clinical study.The TIARA-II clinical study, which is an international multi-center single-arm prospective non-randomized, safety and performance clinical study has received all approvals from the authorities in a different European countries and continues to enroll patients as well. To date, we have treated 30 patients in this clinical study, specific to enrolling clinical sites; we finalized the process and have recently brought on additional sites. So, we now have 18 active centers in six countries with two additional centers under review. We continue to explore various strategies aimed at accelerating our European transapical Tiara program.Just as a reminder, compared to the prior four years, joined past one and a half years, we have roughly doubled the average number of patients treated with Tiara and compared to the prior three years, during the past one and a half years, we have roughly tripled the average number of patients treated with Tiara in the TIARA-I and TIARA-II clinical studies.At national and international conferences, physician presentations have indicated that changes are being made by our much larger competitors through their trends atypical valves and delivery systems to improve on clinical performance and ease of use with their prior systems. Importantly, in our opinion, these changes may lead to significant delays in completion of their ongoing clinical study work, potentially providing us with a meaningful competitive advantage.While enrollment has been methodical and disciplined, related to proper patient selection in our clinical studies, we continue to achieve significant progress with the second part of our value creation strategy for Tiara, the development of the transfemoral, transseptal or TF/TS version of the Tiara mitral valve system.As I have said previously, I believe we are in a unique position to deliver the self-anchoring Tiara in an even less invasive clinical manner and to also put this device in the hands of the interventional cardiologists, which made a significant difference on the minimally invasive aortic valve side, and we believe we’ll also make a significant difference in the acceleration and acceptance of the minimally invasive mitral valve replacement therapy as well.As a reminder, our TF/TS development program has two critical deliverables. One, reducing the profile of the device and the delivery system to at least 30 French for all three Tiara device sizes and two, to further improve on the already impressive clinical performance and on the number of severe mitral regurgitation patients, who can be treated with the device by simultaneously incorporating minor, but very meaningful changes to certain dimensions of the Tiara valve. We are currently executing on five experimental design studies for the TF/TS system in order to enable properly justified design trade-offs.With all of this set, we continue to anticipated a design freeze by the end of 2019 and remain on track for a first-in-man implant in the U.S. clinical feasibility study before the end of 2020. We continue to develop and we have made significant progress was novel, steerable, catheter technology for multiple plains or flexible trackability steerable, alignment and orientation, a dual stage deployment sequence from a collapse to a fully expanded valve state. A novel fully retrievable Tiara valve system up to the final point of valve to delivery system attachment and additional implant support features as part of our very, very simple and strong pre-procedural planning and navigational approach.We continue to file multiple unique patent applications to maintain and broaden our patent portfolio. Related to valve size and optimization opportunities for the Tiara device, our analysis suggests that relatively minor overall footprint reduction opportunities as well as the introduction over the third device size may lead to a higher penetration into the treatable MR mitral valve population towards the 70% range while we are currently only seeing about 20% penetration.Moving onto the Reducer, which is our commercial stage product that we are developing as the standard-of-care for refractory angina in Europe. In the second quarter, we reported a 9% increase in revenue compared to a strong second quarter of 2018 and a 38% increase for the first six months of 2019, as compared to the same period of 2018. Following a very strong first quarter, our second quarter was somewhat weaker as we experienced some challenges with some of our distributors, our UK and Saudi Arabia distributors in particular.We generated over one million of Reducer revenue in the first one half year of 2019 versus just over one million of Reducer revenue in all of 2017. Our gross margin improved to 85% for the second quarter of 2019 compared to 78% for the same period in 2018 and to 79% in the first half of 2019 as compared to 76% in the same period of 2018. We have achieved strong growth rates, was just two salespeople in Europe. and in 2019, we are now reinvesting every bottom line profit dollar from our Reducer EMEA P&L back into the business in Europe.During the second quarter, we hired a second direct sales rep in Germany, who was primarily focused with onboarding and training processes during the second quarter. We have also hired a third direct sales rep in Germany, who will start on September 1, and we are in the process of recruiting a fourth direct German sales rep. As stated before, we continue to drive to a strong double-digit EMEA revenue growth during 2019.In July, we were delighted to announce that the FDA issued guidance to the company that we consider potential ultimate approaches for Reducer in the U.S., such as possibly exploring the Humanitarian Device Exemption or HDE pathway for CCS Class IV refractory angina patients and/or ultimate clinical trial designs for a broader refractory angina patient population.Based on the FDA’s feedback, we will explore a two-pronged approach. First, and if indeed possible, to work with FDA to pursue a potential option for Reducer to be classified as a Humanitarian Use Device or HUD for CCS Class IV patients followed by seeking an HDE approval pathway in order to bring this treatment option to those patients in the U.S. with the worst angina symptoms CCS Class IV as soon as possible.A potential HUD designation, any possible approval of an HDE for CCS Class IV refractory angina patients would allow the Reducer device to be introduced to the U.S. market for these patients. Second, Neovasc in close consultation with the FDA and key opinion leaders will evaluate an ultimate investigational device exemption clinical trial design for CCS Class III and IV refractory angina patients. In fact, the FDA recently requested a follow-up meeting to discuss our clinical and regulatory strategy for the Reducer, which we are in the process of scheduling.If the FDA grants an HUD designation for the Reducer and CCS Class IV patients and if a subsequent HDE application is approved by the FDA in a timely manner, Neovasc expects to begin commercializing the Reducer in the U.S. for CCS Class IV refractory angina patients by early 2020. This represents the best-case scenario and that can be no shows that regulatory approval and commercialization will progress on these timelines or at all. The total U.S. addressable markets to treat those patients in the U.S. with the most severe CCS Class IV angina symptoms will be a maximum of $80 million.In addition to the regulatory progress, recently achieved with Reducer, we continue to build strong clinical evidence around this product. During the second quarter, the International Journal of Cardiology published a peer-reviewed article regarding the safety and efficacy of the Reducer therapy in 50 patients suffering from refractory disabling angina followed out to two years. The 50-patient study found that the Reducer remains safe in the long-term with no device-related adverse events at the two-year follow-up. In addition, the reduction of angina symptoms and the improvement of quality of life observed after Reducer therapy were maintained at two-year follow-up.In a second publication, the European Heart Journal, Quality of Care and Clinical Outcomes published a peer-reviewed article indicating the cost effectiveness of the Reducer as an effective therapy for patients suffering from refractory angina and its positive impact on healthcare burden. The study found that the Reducer decreases healthcare burden of refractory angina patients and the associated costs across a range of European healthcare system perspective. In addition, the study demonstrated that to reduce the risks cost effective according to the cost effectiveness thresholds of the World Health Organization.Our Reducer 1, post-market observational study continues to enroll patients across Europe at 22 active centers; enrollment has now reached 209 off 400 patients. Data from the study continues to reflect the very positive safety profile and improvements in patients’ refractory angina, therefore improving patient’s quality of life following Reducer implantation.I should also add that both the Reducer and Tiara have been highlighted at multiple leading scientific conferences over the last few months. At the EuroPCR 2019 Conference in Paris, we sponsored a successful interactive Reducer symposium titled a proven evidence-based therapy when angina persists, with several key opinion leaders presenting. For Tiara, the latest clinical results of the TIARA-I and II clinical studies were presented as well. Moreover, we held an interactive and productive TIARA-II investigator meeting with our clinical investigators and the call-out representative, and demonstrated our TF/TS system to a group of key opinion leaders and medical advisors.One of our key opinion leaders also provided an update on the latest progress on the Tiara including the challenging and atomical considerations, patient characteristics, procedural outcomes and symptom improvements of patients treated with Tiara at the 11th Annual TVT conference. Both Tiara and Reducer were also highlighted at the CSI Frankfurt 2019 conference.Most recently, we were pleased to announce our participation in the round-robin study evaluating prosthetic heart valve hydrodynamic performance measurements among the 13 leading participating international laboratories. This important work will help refine prosthetic heart valve hydrodynamic performance testing and we are extremely gratified to be setting the stage for the science in this field together with such a distinguished group of industry leaders.Before I turn the call over to Chris to discuss our financial performance, I’d like to quickly summarize the recent significant progress achieved. First, we have improved our balance sheet and we gained compliance with previous NASDAQ deficiencies. Next, we believe we have gained a competitive advantage from a consistent overtime design perspective for our transapical Tiara and removed the litigation overhang with this product.In addition for the Reducer, the FDA guided us to explore a potential HUD HDE route to the U.S. market for refractory angina CCS Class IV patients, which if approved by the FDA could allow the reducer to enter the U.S. market in 2020. Despite these collective significant achievements, our valuation continues to lag. While this is disappointing for all of our stakeholders, we remain focused on continuing to execute on our value creation strategy and making sure we are telling our story to the right investors.We also continued to speak with other companies about our products and we remain open to discussions on any potential business relationship. We will consider any opportunities that develop, but please also keep in mind that our current evaluation does not place us in a strong negotiating position. We need more time to continue to execute on our value creation strategy and to continue to reduce clinical and regulatory risks and most importantly, to better align our share price with the value of the underlying product and the addressable market.With that, I will now turn the call over to Chris to describe financial performance for the second quarter of 2019. Chris?

[Chris Clark:]

Thank you, Fred. Good afternoon everybody. Before I overview our financial results, I’d like to further discuss some of the issues that Fred touched on earlier and highlight some of the steps we’ve taken to mitigate the corporate challenges we faced at the beginning of the year. During the first half of the year, we have raised $22 million in three financings to fund the value creation strategy of the company.Firstly, through two equity only public offerings at modest discount to market; and secondly, through a debt and equity private placement, where the pricing of the equity and the conversion rates in the notes for both at a premium to market. We’ve taken care to make these transactions as least dilutive as possible while raising the needed capital to fund and grow the business and we intend to keep this mindset whenever possible in the context of the future market environment. We’ve also attempted to resolve the remaining issues from the 2017 financing. We were able to execute an equity for warrants exchange and have no warrants remaining outstanding and only have $7.3 million of the $32.75 million of 2017 convertible notes remaining.Finally, we have worked hard to resolve all of our litigation issues and have some significant wins notably at the Appeals Court in Germany. I’m pleased to reiterate, we do not currently have any ongoing litigation issues, not any amounts owed are correctly accrued and reflect in the financial statements.I would now like to look forward at our approach to rebuilding confidence in the company following particularly volatile period of trading activity. As Fred noted, there appears to be a significant gap between the current company valuation and what we believed to be the value of the underlying products and the addressable markets that we are targeting. We are focused on closing this gap. Specifically, we need to continue to resolve certain structural issues within our cap table and corporate structure that are contributing to this gap. In addition, we also need to evaluate our approach to and focus on our investor relations activities.We are taking steps to improve our investor outreach and investor relations programs. We have a full slate of investor conferences scheduled for the fall and we are taking steps to broaden our reach and research. Specifically, we are looking to new investors, who have a time horizon similar to our products that is measured in months and quarters rather than days and weeks.As Fred noted, we have started to look at the recent trading activity, which seemed contrary to the positive operational needs we disclosed. We will follow the historical data and try to further understand why the stock price softened, or the underlying assets developed in a positive manner.Having said that, we recognized that there are several factors depressing evaluation. First, in the last 18 months, we’ve been through a period of significant dilation and have executed two reverse stock splits that would be necessary in a certain breaches of the NASDAQ rules. This has placed us in the category of dilute and consolidate companies. It should be noted; however, that one, the dilution has primarily come from the impact of the 2017 financings and financing that we undertook as the only available alternative at that time was bankruptcy and not from operational needs; and two, the types of financing we’ve done in 2019 indicate that we’re doing what we can to minimize dilution while still providing the operating capital the company needs to continue growing.Second, we still have $7.3 million of convertible debt remaining that reaches maturity in May 2020. We will continue to work with the holders of the remaining notes to try to find a constructive solution to mitigate the dilution that may occur in the future, and to try and address how we might repay and/or renegotiate this note on more favorable terms.Finally, we recognize that we are undercapitalized and we’ll need to raise additional capital in the future to fund our operations, but as we have shown, we will attempt to identify ways to do this that result in as little dilution as possible. We have focused our efforts to run effectively four distinct development regulatory and commercialization programs on a constrained budget and believe we are growing intrinsic value in the process.With that, I would like to return to the results of the second quarter of 2019. I’d like to remind everyone that our financial results are in U.S. dollars and prepared in compliance with IFRS. To keep my comments brief, we’ll refer you to a full disclosure both in SEDAR and EDGAR for a more fulsome review of our second quarter 2019 results.We reported a 9% increase from Reducer sales to $444,000 for the quarter ended June 30, 2019, compared to $405,000 for the same period last year. Despite some issues with our distributors as Fred noted, we continue to experience underlying sales momentum. In addition, we continue to add sales reps in Germany. Our margins for the quarter ended June 30, 2019 were 85% or $373,000 compared to the gross margin of 78% or $317,000 for the same period last year.Our departmental expenses for the quarter ended June 30, 2019, increased by $695,000 or 11% and $6.3 million in 2018 to $7 million in 2019. it should be noted that a significant factor to this increase against the same period last year was an $833,000 increase in non-cash charges as follows. A $692,000 increase in stock-based compensation charges, a $56,000 increase in depreciation and an $85,000 charge for accretion on collaboration, license, and settlement agreements provisions. I should also add overall cash expenses decreased by $148,000. the company continues to preserve capital when possible while advancing the commercialization and development of those products, and we believe it has become more efficient in the process.Our operating loss for the quarter ended June 30, 2019 was $6.6 million, compared to $6.0 million for 2018, an increase of $629,000, substantially explained by an increase in non-cash charges of $833,000, offset by an increase in contribution from our Reducer revenue, $56,000 and a decrease in cash expenses of $148,000 as noted above.The loss for the three months ended June 30, 2019 was $7.9 million compared to $49.1 million for the same period last year. The $41.2 million decrease in the loss incurred for the three months ended June 30, 2019, compared to the same period in 2018, can be substantially explained by $42.0 million decrease in other losses due to the accounting treatment of the 2017 financing. These accounting charges for the 2017 financing are best explained in the financial statements do not impact the cash flow expectations in the coming quarters.Our basic and diluted loss per share for the second quarter of 2019 was $1.17 basic and diluted share compared to a loss of $36.59 for the same period in 2018. from a cash flow perspective, we spent approximately $5.2 million on operations. To offset this expenditure, we received net proceeds of $11.2 million from the completion of the private placement in May. As of June 30, 2019, the reported cash and cash equivalents of $18.3 million. Management will continue to look for opportunities to extend our runway further into the future.Turning to the capital structure of the company. As of August 6, 2019, the company had 7,481,157 common shares issues in outstanding. The following securities are convertible into common shares, 1,059,247 stock options with a weighted average exercise price of $21.72, 144,444 broker warrants with an exercise price of $5.625, $11.5 million principal amount of 2019 notes, which could currently convert $7.50 per common share into 1,533,333 common shares and $7,289,000 principal amount of 2017 senior secured convertible notes, which could convert at $3.95 per common share into 1,845,316 common shares not taking into account the alternate conversion price or anti-dilution mechanisms.Our fully diluted share capital as of the same date is 12,063,497 shares. Our fully diluted share capital adjusted on the assumption that all the outstanding 2017 notes are converted using the alternative conversion price at the closing price on August 6, 2019, is 12,940,497 shares. We will continue to update you as we execute on our strategy to drive future growth opportunities for Tiara and reducer.with that, we will be happy to answer your questions. Operator, please open the line for questions.

[Operator:]

Thank you. [Operator Instructions] We have a question from Jason Mills, Canaccord Genuity. please go ahead, sir.

[David Rescott:]

Hey, this is David Rescott on for Jason. Can you guys hear my right?

[Fred Colen:]

Yes, I can hear you well, thank you.

[David Rescott:]

Okay, great. Thanks. So, first I want to start with Tiara and wondering if you could more specifically provide some info around the enrollment trends even changed so far and maybe more initially or I guess more specifically looking at them, the trends you’re seeing by adding on new centers and whether or not growth is coming from the newer centers that are coming online versus those that you kind of brought on there a year. So, we’re going and second, provide kind of any commentary around where you’re seeing the most growth or where you’re really seeing the most growth coming from and what’s kind of supporting most growth in enrollment trends.

[Fred Colen:]

Okay. Yes. so that’s a great question. So, as it relates to Tiara enrollment into TIARA-II study, we see a pretty steady amount coming from clinics that have signed up with us for some time. Although I also have to say that we experienced some movement of physicians in some of those clinics, which basically had a somewhat negative impact on enrollment in both longer enrolling site. And we see certainly a contribution as well from the newer sites. So, we believe that, bringing on additional sites will certainly have a positive impact. And as I – as I’m talking about this, I can also say that we certainly in the last few weeks have seen a continued enthusiasm from our longer term clinical sites and that were basically through some of the issues as it relates to with some movement off physicians.So, it’s pretty much an even picture. We have a good amount of patients being presented to us, from clinics that have worked with us for some time. And we also see quite a nice contribution from the newer facilities. So, I think it bodes well for continued good and strong improvement in Tiara enrollments in the TIARA-II study.

[David Rescott:]

Okay, thanks. And then next time on reducer, one of you could provide some more specific commentary around the pathway, the timeline and kind of the specific next steps you guys are taking to bring Reducer to the U.S.? And then secondly within growth in Europe for Reducer, I know you mentioned that there was a disruption with distributors in the quarter. and one of you could provide some more commentary on that as well as kind of how we should think about that. going forward, just looking at not necessarily, the toughest comp, third, fourth quarter, but certainly tougher than we have the first quarter.

[Fred Colen:]

Yes. So, we had a very strong second quarter in 2018, which made the second quarter of 2019 a lot more difficult. And we still had essentially only two salespeople, in Europe, driving the sales of the reducer. So, that certainly has had an impact. And as I talked about in my script, we’re all in the process of hiring additional direct sales reps in Germany. In fact, we have hired two of which one is – was higher during the second quarter. And one will start in September 1.So, we will continue to anticipate growth coming out primarily out of the Germany. And as it relates to the distributors, I mean, we have a mix of sales that we do directly in Germany and then we have the sales through the distributors and always – that’s always a factor of ups and downs with the different distributors overtime. But we did face some disappointment with the distributors in the UK and Saudi Arabia that has impacted the numbers a bit more in the second quarter.Moving forward because of our investments on the sales side in Europe, we are still very confident that we’re going to see strong double-digit growth in Reducer revenue for the rest of the year. As it relates to your question for the United States, and so we are quite encouraged with the discussions we’ve had with the FDA. the FDA guided us to explore the option or potential option I should say, have in HUD approval for the reducer for Class IV patients. We are indeed exploring that together with the FDA and the appropriate departments there to see how this could be potentially accomplished. So that’s one avenue. The other one is that we are in parallel looking at a redesign of a clinical study for a broader indication in the U.S. that will be for Class III and IV Reducer patient in consultation with the FDA and some key U.S. cardiologists.So, that’s basically, the two-pronged approach that we are pursuing based on the Sprint discussions we’ve had with the FDA so far. We’re happy to say that we’ve also gotten a recent invitation again, from FDA to talk about the U.S. Clin/Reg strategy once more in another Sprint discussion, which we are in the process of scheduling with the FDA meeting. It’ll likely happen sometime in September.So that’s basically where we are. It is a very – I would say positive momentum that we have developed into discussions with the FDA. the FDA clearly understands that there was a large group of patients out there in the United States that can benefit from this product. And they are working with us to find the best – to define the best possible introduction strategy for the device into the U.S. market. It is a process that takes time. this is not accomplished in just a few months time even though we do have breakthrough technology device designation for this device. It’s a complex regulatory undertaking and we continue to pursue that path together with the FDA.

[David Rescott:]

Okay. Thanks, Fred.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to Fred Colen for closing comments.

[Fred Colen:]

Okay. Thank you, Jerry. Much appreciate your guidance here on the call. So, I would just like to say then that this concludes the earnings call and I would like to thank everybody for your participation. Thank you. Goodbye.

[Operator:]

You may disconnect your lines at this time. Thank you for calling. Goodbye.