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Edited Transcript of NVC.TO earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q3 2019 Neovasc Inc Earnings Call

RICHMOND Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Neovasc Inc earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Clark

Neovasc Inc. - CFO & Corporate Secretary

* Fredericus A. Colen

Neovasc Inc. - President, CEO & Director

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Conference Call Participants

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* Danielle Joy Antalffy

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst

* Mike Cavanaugh

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Presentation

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Operator [1]

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Good day, and welcome to the Neovasc Inc. Third Quarter 2019 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mike Cavanaugh with Westwicke Partners. Please go ahead, sir.

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Mike Cavanaugh, [2]

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Thank you, and good afternoon, and thank you all for joining us today. Earlier today, Neovasc Inc. released financial results for the third quarter ended September 30, 2019. The release is currently available on the company's website at www.neovasc.com. Fred Colen, President and Chief Executive Officer; and Chris Clark, Chief Financial Officer, will host this afternoon's call.

Before we get started, I would like to remind everyone that management will be making statements during the call that contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including regarding potential pathways to the U.S. market for the Reducer, the company's intention to submit a PMA to the FDA in respect of the Reducer; the expected timing of such submission and the company's beliefs regarding the efficiency of existing clinical evidence to support the PMA; expectations regarding growing awareness about the Reducer in Europe; timing expectations with respect to reaching a system design freeze in respect of the transfemoral/transseptal or TF/TS Tiara; initiating an early small clinical feasibility study in humans and first human implant; the company's goals and expectations with respect to its share price, market value and investor base; and the company's efforts to regain compliance with the NASDAQ listing rules, including future expectations and risk factors. These risk factors and others relating to the company are discussed in greater detail in the Risk Factors section of the company's annual report on Form 20-F and in the Management's Discussion and Analysis for the 3 and 9 months ended September 30, 2019, copies of which may be obtained at www.sedar.com or www.sec.gov.

Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters, and our future financial expectations and results are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and descriptions of the risks and uncertainties associated with our business, please see our filings with the Canadian securities regulators and the U.S. Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, November 7, 2019. Neovasc disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events or otherwise.

I will now turn the call over to Fred Colen, President and CEO of Neovasc.

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Fredericus A. Colen, Neovasc Inc. - President, CEO & Director [3]

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Thanks, Mike, and good afternoon, everyone. Before I start our discussion about the company, I would like to take -- to welcome our new Chief Operating Officer, Bill Little, formally the Global Head of Customer and New Market Insights at Abbott, St. Jude Medical, to Neovasc. We are very excited to have Bill join the team and it is a testament to the products, personnel and the progress we have made so far that we are able to attract Bill. Bill is extremely excited from his side as well. He is a true believer in the great potential of the Reducer as well as of the Tiara Valve. He will be a great addition to our already strong leadership team, and we look forward to him deploying his considerable expertise in both interventional cardiology and structural heart to bringing our value creation strategies to fruition.

The third quarter of 2019 was another one of significant progress for the company as we build a clinical data around Tiara and expand our commercial presence for Reducer. On Reducer, we continued to add to our sales team and reached an important milestone with close to 200 patients being implanted in Germany with Reducer just after the end of the quarter. Additionally, we have taken concrete steps on the path to approval in the U.S. market. To that end, we decided to submit a full PMA application to the FDA before the year is out. We believe that the totality of clinical data available now from the COSIRA study, new and additional data from the REDUCER-I European post-market study, with interim analysis of over 200 from 400 patients enrolled, with up to 2-year follow-up as well as multiple independent published studies should provide reasonable assurance of safety and effectiveness to support a PMA. We believe that taking this more rigorous path demonstrate the confidence we have in the size of the market opportunity and in the safety and efficacy of Reducer.

However, any pathway to U.S. market approval by the FDA carries considerable risk, and there can be no assurance that the PMA will be approved by the FDA in a timely manner or at all. We continue to focus on the commercialization of this product in the European market and to obtain approval in the U.S. market. As of November 5, 2019, the REDUCER-I post-market observational study has enrolled 224 of 400 patients across Europe at 23 active centers. Additional new clinical data from this study, the original randomized sham-controlled COSIRA study as well as published data from several physician initiated studies continues to demonstrate the very positive safety profile as well as the effectiveness for the treatment of a patient's refractory angina; therefore, improving the patient's quality of life following Reducer implantation. We believe that these clinical trial results, along with an expanded sales force in Europe, will continue to raise awareness of Reducer with health care providers. It is important to note here that there are currently no devices on the market that compete with Reducer, a key advantage in our commercialization efforts.

Moving on to Tiara. To date, 79 patients have been treated in our 2 clinical trials or through compassionate use cases. With permission from the FDA, on November 15, we will close enrollment in the TIARA-I Early Feasibility trial, in the United States, Canada and Belgium. However, study patients will continue to be followed out to 5 years per protocol. We believe we have accomplished the study's primary objective: demonstration of the safety of the Tiara while gathering preliminary information on device performance and clinical outcomes. This decision is in line with the company's goal to focus on Tiara transfemoral/transseptal approval in the U.S. market, while continuing to pursue a CE Mark for Tiara transapical in Europe. Enrollment in the TIARA-II CE Mark clinical study is ongoing. Early results from all our Tiara implants have been encouraging. The 30-day survival rate for the patients treated with the Tiara is 89%, with 1 patient now having survived over 5.5 years post implant. The Tiara has successfully treated both functional and degenerative mitral regurgitation patients as well as patients with pre-existing prosthetic aortic valves and mitral surgical annuloplasty rings.

More importantly, we have continued to take steps in the evolution of the transfemoral/transseptal or TF/TS Tiara program. The TF/TS development program is based on our extensive clinical experience with the transapical Tiara system, enabling a very controlled and predictable implantation procedure. The TF/TS solution offers the possibility of a minimally and less invasive delivery of the device allowing interventional cardiologists to perform the procedure. The team has narrowed the TF/TS Tiara system down to a system design concept that has shown strong potential and was most recently successfully deployed in animals using the TF/TS access with great seating, great sealing and rotational alignment. The company is benefiting from a real understanding of the anatomical and technical challenges due to our clinical experience and our extensive clinical database.

We intend to move rapidly now to reach system design freeze by the end of 2019 as planned, and to initiate an early small clinical feasibility study in humans with a first human implant before the end of 2020. The TF/TS Tiara is being designed to allow for full retrievability of the device, even after the trigonal taps have been released up to the final point of release from the delivery system. Another important development occurred just after the end of the quarter. On October 15, the United States Patent and Trademark Office granted Neovasc another important patent titled, "Prosthetic Valve for Avoiding Obstruction of Outflow." A patent directed to a prosthetic valve that helps reduce LVOT obstruction and improves unobstructed blood flow through the Tiara mitral valve and the native ventricle. This patent protects innovative ideas regarding valve technology, enabling a more natural blood flow through the Tiara mitral valve, inside the ventricle and into the aortic valve. It is another important step in the protection of Tiara's intellectual property for next-generation Tiara prosthesis and is the first patent granted in the U.S. covering new Tiara technologies.

Overall, we are very pleased with the quarter and the progress we have made in the development of Tiara and the commercialization of Reducer.

I'll now turn the call over to Chris.

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Christopher Clark, Neovasc Inc. - CFO & Corporate Secretary [4]

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Thank you, Fred. I'll start with a quick run through the company's performance for the third quarter of 2019. All numbers are in U.S. dollars. Revenues increased 4% to $500,000 for the third quarter of 2019 compared to revenues of $480,000 for the same period in 2018. The limited sales growth versus the same period last year is mostly due to a large purchase of inventory from our new distributor in Italy in the third quarter of 2018, that skewed the comparative period. The cost of goods sold for the quarter was $138,000 compared to $97,000 for the same period in 2018. Overall gross margins for the quarter was 72% compared to 80% gross margin for the same period in 2018.

In the third quarter of 2019, the company voluntarily replaced certain expired inventory of Reducers with newly sterilized product, which increased the cost of goods sold in that period by approximately $60,000.

Total department expenses for the third quarter of 2019 were $7.4 million compared to $10.0 million for the same period in 2018, representing a decrease of $2.7 million or 27%, primarily driven by a decrease in noncash charges for collaboration, license and settlement agreements as provisions of $2.4 million were taken in the third quarter of 2018, breaking this down further.

Selling expenses for the third quarter of 2019 increased 87% to $380,000 compared to $203,000 in the third quarter of 2018, due to an increase in costs incurred for commercialization activities related to the Reducer, including hiring additional sales representatives. General and administrative expenses for the third quarter of 2019 were $2.2 million compared to $6.3 million the same period in 2018, driven by a decrease in certain noncash charges. First, a $2.4 million reduction in collaboration, license and settlement agreement expenses; second, a $1.1 million reduction in stock-based incentive awards; and third, a $2 million reduction in severance expenses. There was also a decrease of $400,000 in cash expenses as the company continues to control costs where possible. Product development and clinical trial expenses for the third quarter of 2019 were $4.8 million compared to $3.5 million for the same period in 2018, substantially explained by a $200,000 increase in noncash stock-based compensation charges, a $200,000 increase in cash-based employee expenses as additional staff have been hired in 2019, and an $800,000 increase in other product development and clinical trial expenses as the company continues to incur development and clinical trial costs related to Tiara and regulatory costs related to Tiara and Reducer.

The comprehensive loss for the third quarter of 2019 was $6.6 million compared to $14.3 million for the same period in 2018, driven by a $5.7 million decrease in other losses as a result of the accounting treatment for the 2017 financings, and a $2.3 million decrease in operating losses as provisions for collaboration, license and settlement agreements were taken in the third quarter of 2018.

At the end of the third quarter of 2019, the company had cash and cash equivalents of $11.4 million compared to cash and cash equivalents of $9.2 million at the start of the year. The company will require significant additional financing in order to continue to operate its business. And I'll remind you that given the company's current capital structure, there can be no assurance that such a financing will be available on favorable terms or at all.

For the 9 months ended September 30, 2019, cash operating expenses were $17.1 million compared to $17.7 million for the same period in 2018. This decrease in cash operating expenses was offset by payments of $2.15 million in collaboration, license and settlement expenses, resulting in an overall increase in cash applied to operating activities of $1.3 million, from $16.8 million in 2018 to $18.1 million in 2019. The company funded itself during the 9 months ended September 30, 2019, with cash proceeds from 3 financings of $19.6 million and cash proceeds from the exercise of warrants of $1.2 million, compared to cash proceeds from the exercise of warrants of $13.1 million and cash proceeds from the sale of buildings of $0.9 million for the same period in 2018.

I'll now briefly recap the outstanding share data. As of November 5, 2019, subsequent to the effect of the share consolidations, the company had 7,647,823 common shares issued and outstanding. The following securities are convertible into common shares: 1,052,767 stock options with a weighted average price of $20.92; a 144,444 broker warrants with an exercise price of $5.625; $11.5 million principal amount of 2000 (sic) [2019] notes, which could convert into 1,533,333 common shares; and $6.874 million principal amount of 2017 notes, which could convert into 1,740,253 common shares. Now taking into account the alternative conversion price or anti-dilution mechanisms. Our fully diluted share capital as of the same date is 12,118,620 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 November 5, 2019 is 12,561,109 shares.

Finally, I'd like to look at the company as a whole. The company continues to burn approximately $20 million to $25 million per year to fund its full value creation strategies: commercialization of the Reducer in Europe, development of a regulatory pathway for the Reducer in the U.S., continuation of the clinical and regulatory path for Tiara in Europe and product development of this TF/TS Tiara in the U.S. The company has cash on hand of $11.4 million, sufficient to fund the company until the end of the first quarter of 2020. The company will, in the near term, require significant additional financings to fund the company going forward and continue these value creation strategies. There can be no assurance that such capital will be available on favorable terms or at all, and the company will be forced to hold one or more of these strategies. These circumstances indicate the existence of material uncertainty and cast substantial doubt by the company's ability to continue as a going concern. However, it is on the strength of these valuation creation strategies for each of our 2 products, Reducer and Tiara, that the company has been able to start rebuilding its capital structure. Only $6.874 million of principal amount for 2017 notes remain outstanding. And we have attracted a high-quality investment from Strul Medical Group, and we have seen a rebound in our share price from the lows during the summer.

As we continue to evolve our shareholder base, we will continue to initially reach out to fundamental long-only funds focused on medical technologies. We recently hired Westwicke ICR to help us with this process, and we're attending 3 major health care conferences in the remainder of this year as we believe at the start of a fundamental transition for the company. There are 2 important share price points that we have targeted: the first is $4.58 when the company's market capitalization will exceed $35 million when we secure the NASDAQ minimum market value breach. And the second is $5 when we cease to be considered a penny stock and can reach out to a broader range of medical technology-focused long-only institutions. While we may suffer some share price fluctuations in the near term, we continue to believe that the fundamental value inherit in both the Tiara and Reducer, and our continued future successes on our value creation strategies, should translate into future share price gains in the long term.

I will now turn the call back over to Fred.

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Fredericus A. Colen, Neovasc Inc. - President, CEO & Director [5]

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Thanks, Chris. With that, we'll be happy to answer your questions. Operator, please open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We will take our first question from Danielle Antalffy from SVB Leering.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [2]

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I have a few questions, Fred and Chris. I guess my first question is, given the capital structure and capital needs of the company right now, can you talk a little bit about the rationale behind the timing of the hiring of a Chief Operating Officer? It's the first part of the question. The second part of the question is, maybe you could talk about Bill's marching orders early on and sort of where you're looking for him to add value?

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Fredericus A. Colen, Neovasc Inc. - President, CEO & Director [3]

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Yes. So thanks, Danielle. This is Fred. So now we are extremely pleased to bring Bill onboard. Bill is a very strong strategic thinker and he will add a lot of value, in particular, on the commercialization side. So he is going to focus very much so on continued commercialization strategies for the Reducer as well as for the strategic positioning of the Reducer in the marketplace. He can also provide a lot of insight in potential additional applications for the Reducer and to come up with a very comprehensive and detailed plan for what kind of markets, what kind of other applications might there be for the Reducer. So we are actually very pleased with Chris -- with Bill coming on board. I think he is going to play a major role in the planning activities for next year and into the future as well as in the -- his assistance in guiding us and our salespeople related to a further increased commercial activities for the Reducer on a global basis. So I think that he is actually joining us at the right time and I'm sure he is going to provide a lot of additional value to the company.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [4]

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Got it. Congrats on that hire. My next question for you is on the PMA filing for Reducer. I'm just curious if you can provide any color behind your -- I know you guys have been in conversation with the FDA. Any color you can give that gave you at least enough comfort to take this path as to sort of what -- how your conversations went with FDA there?

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Fredericus A. Colen, Neovasc Inc. - President, CEO & Director [5]

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Yes. So as you know, we have been working very closely with the FDA to explore the best path to market for the Reducer in the U.S. And I think we have explained already publicly some of the issues we're running into going down the path of an HUD. The 8,000 patient restriction is somewhat problematic because there's a large patient population that can benefit from this device, and the device is not just built for a Class 4 patient population, but for a much broader patient population. So we were running with best efforts on all sides, including us as well as the FDA, into some snags there.

The other point is that we have been very fortunate to have now enrolled over 200 patients of the 400 in our REDUCER-I European post-market study. And we have started to analyze the data for interim analysis of 200 patients, which will also be published sometime around the middle of next year. But that data is also very important real-world data that we want to add to the strong COSIRA data that we have, the sham-controlled clinical data, and put together a comprehensive clinical package for the FDA as part of this PMA submission. So I think that was the other part of this, Danielle, that we felt we have not only a very good sham-controlled randomized clinical study in the terms of COSIRA, but that we now also have real strong additional post-market data that we believe might support the safety and efficacy of a full PMA submission. So that's basically the background that you were looking for.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [6]

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Yes, that's super helpful and makes a lot of sense. Last question for me. Fred, wondering if you can give us any sort of update on when you think we should be looking for a CE Mark for the TA Tiara product? And how that timing works with -- it sounds like some other players are looking to launch in Europe before the end of next year, how you're sort of thinking about the go-to-market strategy, given that it might be along with some other players? Maybe give a little bit of color there.

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Fredericus A. Colen, Neovasc Inc. - President, CEO & Director [7]

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Yes. Right. Thanks, Danielle. So certainly, the regulatory approval for transapical Tiara in Europe is one of our value creation drivers. We are continued to be very focused on that, and we believe that we have a very decent chance to obtain that as well. We have stated several times before that we believe that this is going to be likely a 2021 event, but in a, I would say, very best case scenario, we might also be able to see an approval -- a CE Mark approval in Europe sometime in the year 2020. We are still working through those strategies and through the different opportunities that we might have on that side. And maybe on our next call, a quarter from now, I might be able to give you a further update. As you know, we are not pursuing an approval of the transapical Tiara in the U.S. Instead, we are developing the transfemoral and transseptal version of the Tiara and move into a first feasibility study in the U.S. And I'm very pleased to say that we made excellent progress in the last quarter on the development of that device. We did additional acute animal studies, and we're able to place the device appropriately and correctly into the mitral valve of pigs. So we are actually very excited about where we are with this program. And Anson Cheung is going to give a more detailed update at the PCR London Valves conference in November -- later this month in November, with a lot more of the details and the medical descriptions. So you should put it on your radar screen. I think that we're going to create a lot of excitement with this transfemoral/transeptal version.

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Operator [8]

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That is all the time we have allotted for questions. And this concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.