Neovasc, Inc. (NASDAQ:NVCN) Q1 2016 Earnings Conference Call April 29, 2016 8:00 AM ET
Alexei Marko - President & CEO
Chris Clark - CFO
Jason Mills - Canaccord Genuity
Jeffrey Cohen - Ladenburg Thalmann
John Gillings - JMP Securities
Danielle Antalffy - Leerink Partners
Good morning, ladies and gentlemen. Welcome to the Neovasc First Quarter 2016 Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]
I would like to remind everyone that today's discussions may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risk and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.
For more information on Neovasc's risks and uncertainties related to these forward-looking statements, please refer to the Company's Canadian and U.S. filings which are available on SEDAR and EDGAR.
Now I'd like to turn the call over to Alexei Marko, President and Chief Executive Officer of Neovasc. Please go ahead.
Thanks, Chris, and welcome everyone. With me this afternoon is Chris Clark, our CFO; and we'll begin our call with Chris providing a quick summary of the financials and operations. I will then review our Tiara and Reducer programs and then we'll open it up for questions. Chris?
Thank you, Alexei and good morning everybody. I'll start by reminding everyone that as of last quarter, we have elected to present our financial results in U.S. Dollars and we'll continue to do so from this point forward. We believe that this change will be beneficial to the readers of financial statements and will allow better comparison with our peers in the Life Science sector.
As we have previously discussed, being consistent with the company's strategy to focus our business toward development and commercialization of our proprietary products, revenue declined by approximately $300,000 or 13% from the same quarter last year to $2 million in the first quarter of 2016. While we anticipate revenue from contract manufacturing will grow as existing costumers increase their demand, we also expect the revenue from resulting services will decrease as customer's development projects near their end and that the total number of customers is likely to decline.
We have seen the TAVI market mature with fewer smaller programs seeking biological tissue of manufacturing services. However, our core business in this area and our key customer base remains strong. We expect that this will reduce the overall number of customers and leave us with a very solid base of larger more stable companies. Overall, gross margins for the quarter were 28%, also in-line with our expectations. Compared to 30% from the same period last year, the slightly reduced margin is mainly due to the maturing TAVI market, bringing a reduction in customers and lower throughput and due to a higher cost of goods sold, due to the implementation of rigorous commercial stage quality systems required to meet the expectations of our more advanced customers.
Moving to Reducer, Alexei will provide an operational update on our European launch following my remarks. But as noted on our release, we are pleased to report revenues of over $213,000 compared to $40,000 in the same quarter last year, which is the first quarter of Reducer sales. We are pleased to have seen growth in each quarter since launch and we expect this trend to continue.
Turning to expenses. Total expenses for the quarter were $10.1 million compared to $5.9 million for the first quarter of 2015; an increase of 71%. The increase in expenses is mainly attributed to increased litigation expenses associated with our ongoing lawsuit with CardiAQ, increased product volume in the clinical trial expenses to advance both the Tiara and Reducer, an increased selling expenses associated with the European launch of Reducer.
Operating in comprehensive losses for the quarter were $10.9 million and $7.6 million respectively or $0.16 basic and diluted loss per share as compared with $0.08 loss per share in the same period in 2015. Litigation expenses for the quarter represent a loss of $0.06 per share compared to less than $0.01 per share in the same quarter last year. Total litigation cost since the initial claims were filed in June 2014, approximately $11.9 million and the company may require an additional $5 million to cover additional litigation expenses up to and including the trial scheduled to begin in May. As previously stated, we have confidence, strength and integrity of our intellectual property and we'll continue to vigorously depend our position in this matter.
During the first quarter of 2016, our net cap cash out flows were $11.1 million and after favorable exchange differences of $3 million, we ended the quarter with $46.9 million in cash and cash equivalents. All those operating expenditures approximately $3.2 million was spent on litigation and approximately $4 million was spent on development activities for Tiara and Reducer.
Aside from litigation expenses, we continue to remain satisfied and we're currently allocating our current resources towards the development of our key product lines and that expenditures on other activities are significantly offset by the ongoing contribution from our tissue business and reduced with revenue as well as other income. As mentioned last month, we anticipate that our quarterly cash expenditures on operation activities will increase as we move further into our chemical studies for both products. But our forecast suggest we have cash on hand for the next 15 to 21 months.
I will now hand the proceedings back to Alexei.
Thanks, Chris. We just spoke with you approximately one month ago. I'm going to keep my comments this morning brief and we'll get to your questions as quickly as possible. The update on Reducer is positive. We're now five quarters into the launch and this past quarter was our best quarter to date. The team in Europe continues to expand the roll out, adding new clinics and growing the number of units sold. Distributors are reporting encouraging feedback with physicians typically seeing measurable improvements in their patients treated with Reducer and steadily growing adoption.
Our own Neovasc positions and clinical specialists likewise are reporting that there are seminars and first cases at newer clinics are generally going smoothly. As mentioned during our last call, our U.S. Regulatory plans for Reducer and the final stages of planning for COSIRA II, which will be our pivotal U.S. IDE trial. We've had our initial meetings with the FDA and our formal IDE application will be submitted very shortly for their review. We are targeting late 2016 to initiate enrollment in this study.
As announced this morning, we recently initiated Reducer I -- this is an observational study of the Neovasc Reducer system. It is a post-market multi-center, multi-country three arms study. Primary end point is percentage of subjects who experience improvement in their angina symptoms as defined as a reduction in CCS grade at six months as compared to baseline. The results of this study are expected to generate additional data as to the safety and efficacy of Reducer in real-world use.
Ultimately fueling the successful launch in our enthusiasm to initiate a U.S. Regulatory approval process is patient outcome. Reducer adoption, reorder rates, position feedback, territory growth and the like all feed up from one result – patients feeling better after the procedure. Reducer is significantly helping refractory angina patients. A typical Reducer patient is someone who routinely experience a severe chest pain when they try to do normal activities such as climbing up by the stairs or walking around their home or neighborhood. Because of this, they dramatically curtailed their activities to avoid chest pain, often forced into becoming sedentary, even house-bound with an associated loss of quality of life.
These patients are almost always on multiple medications, very frequently have had multiple previous plantations or open heart bypass surgery. But in spite of this, they have ongoing pain which can no longer be managed by doing anything other than reducing activities, so as not to put any demand on their heart. Following treatment with Reducer, we're seeing the majority of patients improve often dramatically with significant decrease in the frequency and severity of their chest pain and often times a resumption of more normal activities expected for a person of their age.
Moving on to Tiara. As most of you will know, Tiara has been designed to provide a simple, safe and effective treatment for patients who have severe mitral regurgitation and who are at high risk for surgery. Tiara valves implanted by a short [ph] procedure to replace the deceased valve. To-date, we have treated 15 patients with the Tiara device which include three procedures since the last call a month ago – one in each of Canada, the U.S. and Europe using both the 35 and 40-millimeter sizes. As we announced this morning, Health Canada's approved use of our 40-millimeter sized Tiara 1.
This, along with the FDA approval of the size earlier in the year is contributing to an increased level of activity in our clinical program. There's active patient recruitment happening at our participating centers for both the 35 and 40-millimeter sizes and we currently have multiple cases scheduled or being scheduled for implantation over the coming weeks. Details of these additional patients and all clinical results to date will be presented at TVT in Chicago this coming June.
We continue to be confident in the long-term durability of our valves. Just this reported a month ago, we continue to see no fractures in any patients including inpatients or out beyond two years. We're also in the process of designing our CE Mark study in completing all required testing to facilitate CE Mark study approval of the 35 and 40-millimeter sizes with the goal of initiating enrollment later this year. We will provide further information on this over the coming quarters as our plans become more concrete.
I'm going to end this discussion of Tiara where I ended on Reducer at the patient level. Our goal of developing Tiara has always been to provide a new therapy for the huge population of high risk surgical patients who are suffering from severe MR and a correspondingly poor quality of life. While we continue to learn from each and every case we do, we are confident we will be successful in bringing Tiara into routine clinical use to provide a much needed new therapy for these patients.
In closing, we have a busy few months ahead of us with significant activity in both our Reducer and Tiara programs. As mentioned earlier, we will be presenting a full update on the clinical status of all Tiara patients at TVT in June and we will have a team at Paris next month at Euro PCR where they will be presenting additional data on Reducer.
With that said, I'd like to turn the call back over to the moderator and open the floor for any questions that you have.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Your first question comes from John Gillings, JMP Securities. John, please go ahead.
Thanks, guys. Can you hear me okay?
I can, John. Thanks.
Okay, great. Hey, I just wanted to talk a little bit about the increased usage in Tiara. We spoke about a month ago on the fourth quarter call and there had been a period of nearly four months since the third quarter call and you'd only done one patient in that time. Now there has only been one month between calls and you've done three. That's a pretty significant acceleration. Is that three-patient level in one month – was there some kind of a build-up that has been flowing through with approval of the 40-millimeter valve? Or is that sort of a rate that we could potentially think about going forward?
John, I think there was perhaps a little bit of a buildup, but I think we're going to see a rate that looks a lot more like that over the coming months. We're certainly seeing momentum building. As I said, we have a number of patients scheduled now for May and a bunch more in the queue. It's a little bit hard to look too far out, but we're certainly seeing a momentum building and I think that's going to be more typical of what we're going to see going forward.
Okay. And then just turning to Reducer for a second. You mentioned last quarter that you've started a relationship with a German distributor. Can you just give us an update on how things are going with that distributor and also let us know, did they purchase from you and hold inventory? Or just how that relationship work?
That relationship is under way and it's really in its earliest stages now. But yes, they do purchase inventory outright from us and then they're responsible for holding it and distributing it themselves. That relationship is just off and running, but based on the early responses and the interactions we've had with them to date over the last month, it seems like it's going well and we're expecting good things from it.
Okay, fantastic. Just one quickly on cash and that will be the last one for me. It looks like the cash balance declined by about $8 million in the quarter. Obviously, you've had some fairly significant legal expenses and will have more in the second quarter as well with the trial. But going forward after that, how should we think about that $8 million level given that legal expenses will likely be reduced, but you'll also have increases as you move further into the clinical studies? Just kind of give us some idea of how we should think about that going forward.
John, I think you probably hit the nail right on the head there and that we have had a very expensive quarter in terms of our litigation costs. We expect Q2 to be a similar quarter in terms of litigation expenses. When you look at the expenditures that remain in that $4 million to $6 million range for our R&D and other activities and clinical trial program, what I can say is I expect those to increase as we bring on more studies and initiate programs for both the Tiara and Reducer. But I think we'll see one expense switch for the other. The sort of burn rate that we've seen this quarter wouldn't be unexpected for the forward-looking quarters.
Okay, fantastic. That's all we have for today and congrats, guys on the uptake in the patients. It's great to see that.
Thanks, John. Appreciate it.
Thank you. Your next question comes from Jeffrey Cohen, Ladenburg Thalmann. Jeffrey, please go ahead.
Good morning. Can you hear me okay?
Good morning Jeffrey, yes, we can hear you great.
Just to – and I'll take it off-line – firstly if you could run through and give us a little flavor for the Reducer procedure as far as perhaps some color on time, hospital stay, staff required, et cetera and then secondly, you could talk about this study with the CCS grade and six months out, how might we think about that being talked about as far as the level changes and the doses [ph] there.
Okay. Just in terms of the procedure itself, typically these procedures are very quick and very easy with a few caveats to them. Without getting too technical, one of the more difficult pieces of the Reducer procedure is just gaining access to the coronary sinus and sometimes that can be a little bit hard if people aren't used to doing it or if it's particularly tortuous opening. But as long as that could be done, then implantation of the device really only takes a few minutes. Generally, there aren't any issues with accessing the sinuses. It's just sort of one thing that people do sometimes, struggles with.
Then the case itself is generally about a 20-minute case. It is done through a venous access approach. So closure and dealing with that afterwards is really quite straightforward and low-risk compared to perhaps an arterial procedure where you're dealing with a higher pressure system and that sort of thing. So in cases that are quick and generally easy, generally take about 20 minutes, and the patients, it really depends on the center, but they're awake and comfortable very, very shortly thereafter and often times they discharge that day or perhaps kept overnight. It is a very straightforward and tolerated very well by the patients.
In terms of the registry and looking at the results down the road, we typically do see after six months the majority of patients who are at least based on the data that we've seen to date and the results today, that the majority of our patients after six months are showing an improvement. Typically at least one CCS class improvement, sometimes more and that's really what we're going to be looking for in this registry. Again, the purpose of the registry is really good. They collect more real-world data on how these patients are doing and we'll be presenting it at various different points along the way just to continue to bolster the data that we already have in the COSIRA I study and obviously the COSIRA II study as an ID study will be something that the data for that will stay under wraps until much further down the road.
Would you expect us to be closer to one level? Two levels? One and-a-half levels in six months?
Again, we're looking at the data that we saw in COSIRA I as what we might expect to see and you'd see a third of patients roughly having a two-level response, two-thirds of them having a one-level response and a relatively small group not having any response. That's sort of what we saw on the COSIRA I study. What we've actually been seeing in real-world uses is at least as good as that and again a lot of that's anecdotal about we have physicians who were recording that essentially all of their patients are markedly improved. I think it's going to be in that range, it's hard to guess what data is going to say, but I guess that's really the purpose of doing the study, is to continue to collect this real-world data and analyze it in a formal way.
Got it. That's perfect. Thanks for taking the questions.
You're most welcome, Jeff. Have a good day.
Thank you. Your next question comes from Danielle Antalffy, Leerink. Danielle, please go ahead.
Great. Thanks so much. Good morning, guys. Thanks for taking the question. Alexei, two questions on Tiara: first, Euro PCR, I guess are we going to see anything on Tiara at Euro PCR and is there anything to read into the fact that it's not a PCR and rather a TVT? Or is it just a timing thing? And next question: on the patients that you have sort of backlogged – I guess if you want to call that or just waited for May implant – can you give any color on how many of those are feasibility patient and potentially an updated timeline on when you think the feasibility trial is to be fully enrolled?
I will do my best. The PCR, no. You're not going to see anything from us on Tiara and that's really a matter of timing. We just had a number of conflicts and for a number of reasons, we feel that TVT is more appropriate. So you'll be seeing a full update at TVT. I believe I know who's going to be giving that update, but I won't confirm it until I know for sure. But no, I wouldn't read anything into it other than just some conflicts and getting appropriate timing.
In terms of backlog patients, I'm trying to think – the last number of patients, it's been about 50% trial patients, 50% compassionate youth patients. We're certainly seeing a lot more trial patients coming in now, but at the same time we're being approached by a lot more centers of the compassionate youth patients. So I think we'll probably see it be relatively evenly split going forward.
In terms of completing enrollment in Tiara I, I think we're looking at later this year, but really in parallel with that, we're starting to really turn our attention to that European CE marks study and designing that. So hopefully we'll get that up and running as well.
Okay, great. That's helpful. And if I could just one follow up on Reducer. Given the early success that you're seeing, does it change your long-term outlook for Reducer? Can you help frame for us the market opportunities for that, because I do think everyone is so focused on Tiara, actually like maybe it's a little under-appreciated by the street, myself included. Thanks so much.
You're most welcome. Yes, it doesn't really change our outlook. We've always been very bullish on Reducer. It is a substantial patient population and based on the results that we've seen today, we're very encouraged and what we're also very encouraged by is how many of these patients are starting to come out of the wood work. One of the main issues with these refractory angina patient is that once the cardiologist or interventional cardiologist, or a surgeon can't do anything more for them, they tend to fall off the physician's slates and just go back and are being managed by a GP or not being managed much at all.
And I think as I said in the prepared remarks, they manage themselves by just not doing anything. So in a lot of ways, people say, well, your question, are these patients really out there? Because they're not in the interventional cardiologist's office every day. Well, they're not there because there's nothing that can be done for them. What we're finding as part of our launch is that as people learn of this device, both at the patient-level and the physician-level, these patients are appearing. Coming back and saying, “Look, I've been managing my pain by not doing anything. I'd really like to do something. Let's try this.” So we're seeing a lot of patients just come out of the GP's management and come back into the hands of those like implant Reducer.
We've been very happy to see that. It's what we have always expected and I think it really supports our position, which is always been that there is a significant number of patients who can benefit from this and that's certainly what we're seeing in our product launch.
Thank you. [Operator instructions]. Your next question comes from Jason Mills, Cannacord Genuity. Jason, please go ahead.
Good morning, Alexei, Chris. Thanks for taking the questions. Can you hear me okay?
Yes, Jason, we could hear you great. Thanks.
Sorry if there's any background noise in my conference and I'm sorry if you covered this. I'm bouncing between a couple of calls here, but sticking with Danielle's line of question on Reducer for a second. Just curious in your answers with respect to the patients and the patient flow. What, if anything, are you doing now or what do you plan in the future to develop the referral channel there? It's one that has not been developed. These patients fall out but the market opportunity which again to Danielle's question, maybe if you could maybe remind all of us about that opportunity would be helpful, but the market opportunity is quite large there. So talk about referral development strategy, plans and what you're doing now? What do you plan to do in the future?
First of all, Jason, thanks for the question. We're handling it to a number of different ways. We are undertaking some direct patient outreach programs. We're working with the physicians who are implanting the device to help them develop their referral channels, we're working with refractory angina clinics, working with Chronic Total Occlusion clinics and really sort of reaching out to anybody who may be managing these types of patients outside of the interventional cardiology community.
That's the thrust of what we've been doing and how we do that really varies by country and we've been doing it on a country-by-country basis and working with our distributors on that to which in general terms, it's just figuring out how to reach out to these other folks and then we've also been seeing some good success through things as simple as newspaper articles that are being published about centers that are implanting the device and the patients seeing those or potential patients seeing those articles, or contacting their GPs, or contacting their cardiologist to ask to be treated. It's hard to describe any one thing that we're doing, but that's the general approach and we're working through it on a country-by-country basis.
In terms of the market opportunity for this, we believe that there are several million patients available currently right now to be treated with Reducer who have refractory angina in Europe and certainly similar numbers in the U.S. And I think as we potentially down the road are able to broaden the indication to go after what I would call a recurrent angina patients who perhaps not a refractory patient, but one who it hasn't exhausted all of their options, but is seeking, repeated, and continual treatment for their refractory angina, that we may be able to get into that patient population which again is a much larger population.
Again, a very significant opportunity here and we're just seeing the tip of the iceberg now, but we're feeling very good about how it's going.
Thanks for that. Let's stick with Reducer for a second. To your point, you've got a couple of patient populations you're talking about. The refractory patient population while small are still sufficiently large. They're obviously consuming quite a bit of resources at the hospital level, the cost are relatively high. Could you talk about the economics of three and-a-half patient with Reducer and what we might see going forward or what you're collecting that might show the cost effectiveness of using Reducer and perhaps reducing the consumption of cost by these patients – the refractory patients specifically and how that might play into your market development, plans and your growth going forward with this product?
Yes. These refractory patients are very heavy-users of hospital resources. Many of these patients have had heart attacks, myocardial infarctions before, they're very worried about it, they tend to be exhausted and in pain all the time. So quite often they think that horrible things are happening and they will show up in the emergency room and this is obviously very costly. Anecdotally, we've seen a significant reduction in hospital visits in these types of things in patients that have been implanted with the Reducer and have had a positive response. But part of the registry is to collect information like this. So, we are doing those economic studies. We've done some in the background, but we'd like to collect real-world data and we're looking at hospital visits and consumption of resources. I think that will be quite compelling.
One of the early questions this morning from John was to walk through what a Reducer procedure entails. It is a very quick procedure. Typically we find it much quicker than just a regular coronary stent implantation. So in terms of consumption of hospital resources to implant the Reducer, it's very low on the scale. So we believe that if we can show that through implantation of Reducer in a 20-minute procedure in a same-day discharge, or perhaps a discharge the next day, we believe that the map will work out, that that has potentially significant cost-savings over a patient who's going to be in and out of the hospital multiple times over the next few years.
That's great color. Turning to Tiara, obviously, a good part of evaluation of the company is wrapped up in transcatheter mitral. So maybe I would just like us to focus there; and I can appreciate that getting in the patient-by-patient characteristics, it's a little bit cumbersome, but we are talking about small numbers here. So what if anything can you tell us about maybe folks who are on these recent three patients? In terms of their characteristics, the acute success, or commentary, anything that you'd be able to share? That would be helpful.
Yes. I'm going to get away from sharing too much detail, but I'll tell you we just continue to be encouraged by the results and the device seems to be performing as we want it to. It's early days, obviously, but no, we've been happy with the results. In terms of the patient characteristics, they're quite varied and I think as everybody working in this particular field is experiencing, we're seeing functional patients, we're seeing degenerative patients, we're seeing some patients who have had prior to aortic valves implanted, some without, some are quite robust, some are quite frail – these MR patients really do present in so many different ways and one of the aspects that I think everybody working on this, regardless of what program it is are really trying to deal with our patient selection and who benefits and who does well out of it.
So we're very happy with how things has been going and we're seeing all sort of different patients and so far we've been quite impressed with Tiara's ability to deal with all these different anatomies and things that we encounter.
Perfect. I'll leave it at that. Thanks, Alexei.
You bet, Jason. Thank you.
Thank you. There are no further questions at this time. Please proceed.
Well, thank you again to everybody for attending our conference and we look forward to talking with you again soon. Have a great day.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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