Neovasc, Inc. (NASDAQ:NVCN) Q2 2016 Results Earnings Conference Call August 9, 2016 4:30 PM ET
Alexei Marko – President & Chief Executive Officer
Christopher Clark – Chief Financial Officer
Jeffrey Cohen – Ladenburg Thalmann
John Gillings – JMP Securities
Operator: Good afternoon, ladies and gentlemen. Welcome to the Neovasc Second Quarter Fiscal 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. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]
I would like to remind everyone that today's discussions includes forward-looking statements within the meaning of applicable U.S. and Canadian Securities Laws that reflect Neovasc current views with respect to future events including the company’s plan and expectations relating to its business, financial results, litigation and other matters.
Words such as expect, anticipate, may, will, estimate, continue, intend, behave, 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 statement section of the Neovasc Q2 MD&A which is 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.
Thank you, Johanna and welcome everyone. With me this usually this afternoon is Chris Clark, our CFO and I'll begin our call with Chris providing a quick summary of the financials and operations. I'll then review our Tiara and Reducer programs, and then we’ll open it up for questions. Chris?
Thank you, Alexei and good afternoon everyone. I remind everyone that our financial results are in U.S. dollars and prepared in compliance with IFRS.
Firstly, I want to cover our litigation for CardiAQ and the impact of this had on our financial statements. As you will note from our second quarter filings, we have recognized a contingent liability of $70 million related to the litigation. And for those listening today I'll give a high-level summary of that litigation.
On May 19th following a trial in Boston the jury found in favor of CardiAQ and awarded $70 million in damages for three of six trade secret claims for relief and no damages on contractual claims for relief. Both parties are pursuing a number of post trial motions including a motion from CardiAQ seeking an injunction to require Neovasc to cease Tiara operations for 18 months.
All related briefs for those motions are to be filed with the court by August 12th. Subsequent to this deadline, we expect the court will hold a hearing on these motions and issue a final ruling sometime in the coming months although the exact timing is not known and is not within our control.
After that one of both parties may potentially pursue appeals before the U.S. Court of Appeals for the Federal Circuit. And respect to the intellectual property rights ownership claims made by CardiAQ, we anticipate that the court will rule on the patent ownership claim along with the other post trial motions in the coming months as per the timetable noted previously.
There were also a number of other rulings from the court that occurred during the quarter. On April 25, the court granted Neovasc motion for summary judgment on CardiAQ's claim for fraud. On May 27, the court guided Neovasc motion for judgment as a matter of law on the Massachusetts General laws Chapter 93(a) claim. Depending on the outcome of the rulings noted above, the company will if appropriate explore its options regarding the applicable process and provide updates accordingly.
The company intends to continue to vigorously defend itself in the litigation with CardiAQ. And so the outcome of these matters including whether the company will be required to pay some or all of the jury award is not currently determinable, and should be noted however, that the outcome of the rulings noted above could cause substantial doubt about the company's ability to continue as a going concern.
Separate to this litigation with CardiAQ, on June 6, a private lawsuit was filed by a shareholder against the company and certain officers for alleged violations of U.S. Securities laws.
The company and its officers had filed a motion to dismiss that remains pending and no class has yet been certified. The company and its officers intend to vigorously defend themselves in this litigation, and so again, the outcome of this matter is determinable.
As I am sure you will understand we are not in a position to comment further on the pending litigation including any comment about the issues raised in the pending post trial motions. And we have indicated our views of the risks and potential financial impacts on the company in the light of the litigation in our second quarter filings.
I will now turn to the others items of the financial statements. Consistent with the company's prior expectations and strategy to focus our business towards the development and commercialization of our proprietary products, revenue declined by approximately $1.25 million or 42% from the same quarter last year to $1.7 million in the second quarter 2016.
Of note, in our contract manufacturing business, we experienced a 75% decrease in revenue during the quarter, primarily due to a temporary delay in shipping to a single customer. The delay has been resolved and the company believes it will clear the backlog and return sales to more appropriate levels in the third quarter and beyond.
We have seen the TAVI market mature with fewer smaller programs seeking biological tissue and manufacturing services. And we expect that this will reduce the overall number of customers believe what’s with a solid base of larger more stable companies in the future.
Overall gross margins were 19% which is below normal range. Reduced margin is due to the above mentioned decrease in sales to a single large customer, resulting in a reduction in throughput, as well as other contributing factors including the maturation of the TAVI market, a new reduction in customers and pricing pressures on our services and higher cost as we implement rigorous commercial stage quality systems required to meet the expectations of our more advance customers.
Moving to Reducer, Alexei will provide an operational update on our European launch following my remarks. But as noted in our release, we are please to report revenues for the Reducer of over 246,000 compared to 135,000 in the same period in 2015. We've seen Reducer sales growth in each quarter since launch and expect this trend to continue.
Turning to expenses, total expenses for the quarter were 13.3 million compared to 7.9 million for the same period in 2015, a 68% increase. The increase in expenses is mainly attributed to $4 million increase in litigation expenses associated with ongoing lawsuit with CardiAQ and 1.4 million increased in the product development and clinical trial expenses to advance both the Tiara and the Reducer programs.
Operating losses for the quarter were 83.7 million or $1.25 loss per share as compared with $0.10 a share in the same period in 2015. The 76.9 million increase in the operating loss compared to the same period in 2015 can be substantially explained by $70 million provision for contingent liabilities related to litigation with CardiAQ and an increase in litigation expenses leading up to and join the jury trial.
The contingent liability represents a loss of $1.05 per share and the litigation expenses for the quarter represent a loss of $0.09 per share compared to a loss of $0.03 per share for litigation expenses in the same period in 2015.
Total litigation costs since the initial claims were filed in June 2014 are 17.7 million of which 5.8 million was incurred in this quarter and we expect the company may further acquire approximately $5 million to cover litigation expenses up to and including couple of quarter, if applicable.
During the second quarter of 2016 our net cash outflows were $11 million and we ended the quarter with 36.3 million in cash and cash equivalents of those operating expenditures approximately 4.5 million was spent on litigation and 5.2 million was spent on development activities for the Tiara and Reducer.
Aside from the litigation expenses, we are satisfied that we are correctly allocating our cash 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 Reducer’s revenue as well as other income.
As you will note from our second quarter filings as of June 30, 2016 the company is in the working capital deficit position as a result of recognizing a contingent liability of $70 million, while we continue to believe that the jury verdict less on a number of errors that we're taking appropriate steps to challenge these, it follows that, unless the company is successful in post-trial motions and or an appeal of the verdict or otherwise is successful in reducing or deferring the award, the company will require significant additional financing in order to pay the damages and to continue to operate its business, and we cannot assure you that such financing will be available on favorable terms or at all.
I’ll now hand the proceedings back to Alexei.
Thanks, Chris. Our team continues to work diligently to provide revolutionary new treatments to physicians to help them in the management of cardiovascular disease. It has always been our mission and remains so today. I’m going to focus my comments on progress against that mission.
Let me begin, first, by telling you about our most recent Tiara case, the 19th in our Tiara program. The patient was very ill and was under ongoing care in the hospital not unlike many patients being considered from implantation of TAVI devices.
With advanced heart disease and severe MR and the number of comorbidities, we understand that this patient was deemed unsuitable for treatment by any other device, and, if their MR was left untreated, the prognosis for this patient was considered by the medical team to be very dire. This patient was successfully implanted with the Tiara in a straightforward transapical procedure that resulted in the complete resolution of their MR.
Over a month later this patient is doing very well, having returned home and he is continuing to improve every day. This is exactly the sort of outcome we're seeking when treating patients with our Tiara device.
We continue to see growing clinical interest in Tiara and continue to be very encouraged by results today in terms of both our early outcomes and the potential the device to treat a variety of patients, often where there is no other viable option.
19 patients have now been implanted with the Tiara, and there's a strong pipeline of prospective patients at the centers we are working with. We're deep into the planning and preparation phase for our CE Mark study and look forward reporting more on this in the coming quarters.
This past quarter also saw Tiara highlighted a several physician meetings. Tiara was featured in a number of presentations given at the transcatheter valve therapies, TVT Conference held in Chicago June 16 through June 18. Dr. Martin Leon presented an update there on his on the clinical -- Tiara clinical experience to-date. This presentation included case examples and a summary of results from the 17 patients treated with Tiara up to that time.
Of these initial implantations 14 of 17 or 82% were successful with excellent acute results; three of the 17 patients were converted to open-heart surgery. The 30-day all cause mortality rate in patients implanted with Tiara was three of 17 or 18%, and as of today this rate is down to 16%. The two longest follow-ups to-date of approximately 2.5 years and two years both patients with excellent ongoing valve function.
In the mitral regurgitation, paravalvular leaks or device fractures have been noted in any patient follow-up echo-cardiographic assessments. In a separate session at TVT, Dr. John Webb presented a videotaped case of a 40 millimeter Tiara being implanted in a procedure recently conducted at St. Paul's hospital in Vancouver to treat a patient with severe MR.
Tiara was also featured in a presentation given by Dr. Anson Cheung at the 16th annual scientific meeting of the international society for minimally invasive cardiothoracic surgery held in Montréal in June.
Moving on to Reducer, the update on Reducer is also positive as Chris reported. We’re now six quarters into the European launch and this last quarter was our best quarter to-date. The team in Europe continues to expand the role of adding new clinics and growing the number of units sold. Distributors were reporting encouraging feedback with physicians typically seeing measurable sometimes dramatic improvement in their patients treated with Reducer and steadily growing adoption.
Our own Neovasc physicians and clinical specialists likewise reporting that their seminars and first cases at the newer clinics are generally going smoothly. Reducer adoption, reorder rates, physician feedback, territory growth and the like all feed off of one result. Patients were feeling better after the procedure and this is not to be overlooked.
Reducer is significantly helping angina patients who are in chronic discomfort and have a poor quality of life. All of this was corroborated with the retrospective study that was reported on during the quarter in the Netherlands Heart Journal.
The study highlights one real world cohort – 23 consecutive patients treated with Reducer where after the median follow-up of nine months, 17 of 23 patients showed at least one class improvement in the Canadian Cardiovascular Society or CCS angina score. Studies like this will no doubt provide invaluable support for the ongoing rollout of Reducer in Europe and elsewhere.
I’ll close my prepared remarks here. I began my comments by referencing our company's purpose to help revolutionize the treatment of heart disease. The team at Neovasc is made up of the tremendous group of people whose passion is to develop great new medical devices and bring them into use in order to help physicians help patients. The two devices that we have brought to the clinic to-date, Tiara and Reducer are making important progress towards achieving the purpose of helping patients.
I’ll close my comments and open the floor to Q&A. Despite us being product developers most of your questions are probably better answered by lawyers. As we mentioned beginning of the call, and as I'm sure you will understand, we’re not in a position to comment further on any pending litigation.
Any journey that attempts significant change will encounter challenges along the way and may not follow a direct path, but I want to know when we get to work, we think about the products, the physicians, and most importantly the patient whose lives we improve.
With that said, I’d like to turn the call back over to our 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] And your first question is from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.
Hi, Alexei and Chris, can you hear me okay?
Yes, again, Jeff. How are you?
Just fine. So quick question as far as the first part of the commentary from Chris as far as litigation and I don’t know if you can answer, but why is this motion for 18 months that CardiAQ is seeking? How does one drive that duration or that request?
Jeff, I would love to answer the question and give you more detail. I am just not in a position to comment. The motion I believe is public and I believe they closed their reasoning there in but I can't comment beyond what we’ve said.
And two if I may, could you give us a little bit more color on Reducer’s as far as clinics and geographies and generation speaking what you are finding and could you also provide any commentary as far as Tiara on any presentation or studies or any datasets that we maybe seeing in the public domain?
Sure. First-up we will – obviously answer Reducer. Our best success to data is actually been in Italy that’s one of the first country that we went into and we’ve really been focusing their. We’re seeing very nice adoption starting to see nice adoption in Germany, as well as starting to see some adoption in the U.K. And those are really the areas that we're focusing.
And I’ve been very happy with the results, we’ve seen a lot of patients that have improve significantly. We’ve seen a number of patients with severe refractory angina actually asymptomatic and really returned to essentially a lack of chest pain and lack of any symptoms and do very well.
So we've been finding very good success in the initial centers and seeing that start to snowball, so we’re very happy with that and we’re going to continue to drive that forward.
In terms of Tiara datasets what we're going to continue to do is enroll under our Tiara one study we’re also doing a number of compassionate use type cases at centers Europe and in Canada and will continue present that data most likely next round will be I’m not sure if we are going to do anything into London heart but certainly will be presenting data at TCT in the fall and then again our focus will be getting our CE Mark study up and running over the sort of while and obviously presenting that data when its complete.
Okay. One more if I may?
Chris, you commented about the under contract manufacturing its beginning the discussion something about the biological tissue. Could you elaborate on that, please?
So under contract manufacturing we did have a delay in shipping, which caused a significant reduction in revenues for the second quarter, that delay has been resolved as I mentioned. And we are back up to a more current – more regular run rate with that customer.
So we - while we did experience a more significant dip in Q2 and we expect overall revenues to be less than last year. I think they would return to more normal levels and in the coming quarters.
Okay. There was something about seeking biological tissue and right before margins?
One second. Can you give me a chance to just have a look and time to look for that?
Thank you. Your next question is from John Gililngs of JMP Securities. Please go ahead.
Hey guys. Can you hear me okay?
Yeah John, we can hear you fine.
Okay, good. So, I know you guys don’t want to comment on the trial but, I am going to seek some clarification anyway, if you can answer just let me know.
So, my understanding is based on some of the things I have read in about 18 months period is related to a head start that CardiAQ claims that you guys got. So, what I am wondering is, given that neither of you is selling TMVI devices today and you are given this $70 million damages award that goes to the CardiAQ, what does that award cover if it doesn't cover a head start?
It kind of seems like you guys are being double penalized if you have to pay and then you get an injunction for 18 months as well.
Yeah John, again, it is very difficult for me to comment much beyond sort of what we have. The reasoning behind the request for an 18 month injunction I think the CardiAQ’s counsel has laid out in their court filings and I would defer to that in terms of what their reasoning is.
As far as what the $70 million is intended to cover its intended to cover some sort of royalty on what they believe the trade secretes would have been with how the royalty has been paid, but I again obviously that’s all under dispute and subject of a number of post-trial motions, so I can't really comment beyond that unfortunately.
No, no, that’s fine. It’s understandable. So, then looking at kind of the potential pathways forward. I've spoken with people in the past who bought Neovasc shares, obviously, significant time in the past, specifically for the reducer. So, there's some value there, and even if things go in a worst-case scenario with an 18 month delay it seems like there's a path forward.
If you guys are hit with sort of a worst-case scenario you have to pay the full 70 million, you get delayed for 18 months on Tiara, what does – what's the plan B, what does the path forward look like under that scenario? Just so investors can kind of put a floor under things, and say okay if everything goes this way this is what management is planning to do?
Yeah, unfortunately John, again, I really can't comment on our strategy going forward related to the litigation and that really should have goes to the heart of that. That said, I think we believe strongly in the Tiara program. It’s a unique technology that has a tremendous amount of value associated with it.
We’re equally strong believers in the reducer technology, and particulars as we’re rolling it out in Europe, and seeing the first cases and seeing the successes and watching physicians treat their first patients and come back very excited some months later, because somebody who’s been on their books for patient of theirs they’ve had been seeing for years, and has had ongoing continual chest pain is now he asymptomatic and riding a bicycle.
So, we’re very strong leaders in technology and, obviously, we’re going to work our way through the various different scenarios, and that will come in litigation, but we believe that there is a lot of value in our technologies and our company and we will – we’ll drive it forward.
Okay. I appreciate. And I appreciate you guys humoring me now, I have couple things that hopefully you will be able to answer.
So, one of the things you mentioned was that Tiara had been used in a case where a patient would have been untreatable within the under design, and I think most of us are aware given some of the exclusion criteria out there, but there are different patients who would qualify for one device or another.
Can you give us a little color around the specific area where Tiara can be used and one of the other devices can't be used, and how that benefits patients and how that help this patient in particular?
Yeah, I’ll do my best. I think everybody at this state of the game, multi devices are so such early stage, or have little enough clinical data that we're also determining what the inclusion-exclusion criteria are. And people aren't necessarily publishing particularly openly what those inclusion-exclusion criteria are. So I don't really know too much about what other folks are excluding for.
But what I can talk about is Tiara and what we have found with Tiara both through design and through our initial clinical experience is that it's relatively robust in terms of being able to deal with calcium in the annulus, being able to deal with the presence of prior mitral valve surgery, whether there’s a ring in place or there’s been prior surgical repair of the mitral annulus or attempts at surgical repair.
We're also relatively agnostic to the presence or lack thereof of a prosthetic aortic valve. And so, these are things that we were not optically concerned about and will readily go ahead if anatomically it's a match, we will go ahead and treat these types of patients with rather prior surgeries and prior valves in place.
To the best of my understanding a number of other programs do exclude for those features or do exclude for those conditions and presence of prior surgeries and prior valves. And I think that’s sort of one area that we've been able to excel. And further to just the general thrust of your question, I think we recognize that as many as, I think, everybody industry does, if there's of a wide range of different anatomies that are encountered in dealing with MR much less homogeneous than what you would expect to see in treating aortic valve disease.
And I think there’s going to be case where Tiara is a perfect match and there’s going to be cases where it's not and I think that’s going to be the same for all sorts of different valves and different programs. So I think there's – in this space there’s a going to be a lot of room for different types of devices that are suitable for one patient or another.
Okay. Just one last one from me and probably for you Chris, just looking at going concern language was in the release. If I look just high-level at where you guys sit, say there’s a 70 million liability, market cap right now is around 55 million.
That would, high-level, suggests that somebody could acquire you guys for about 125 million, which is significantly less than the acquisition prices that we’ve seen for other TMVR companies that have been acquired in the recent past.
And that’s seems like a really severe discount even if you ended up with an 18 month delay, I'm just wondering have you guys felt about sort of this scenario with any financiers out there, it seems like there's some value there given that scenario that backdrop?
John, you know as Alexei alluded to I think we really believe in the value of the Tiara and Reducer and in the current market conditions we believe they have significant valuation.
That said, right now with incomplete information from this core, we are continuing business as usual and until we have the full facts and the full lay of the land in the coming months you know we are not at liberty to discuss any plans that we may have or may do in the future.
Okay. Make sense. I appreciate that at the end. Thanks for taking all the questions. Sorry for taking too much time.
Thank you. Your next question is from Danielle Antalffy from Leerink Partners. Please go ahead.
Q – Unidentified Analyst
Yeah, hi guys. This is Puneet in for Danielle, just a couple of questions, I mean I'm in for so I'm not a lawyer so I won't get into that and hard for you to comment. So maybe if we can just talk about - in terms of feasibility trial how many cases did you had out of the 19?
I don't know, off the top of my head. We're really not making a huge distinction between feasibility versus compassionate use cases at this stage of the game, really collecting a complete data set or – completed data set as we can from all patients we're treating and looking at them altogether.
So to be honest, I don’t know, off the top of my head. But 19 patients to-date, a number of the final stages of screening and we expect then a bit of a slowdown in July, August, particularly for European cases as you would expect given the holiday season that a number on the books and expect to continue enrolling at a nice steady rate heading into the fall.
Q – Unidentified Analyst
Okay. Got it. And then on into TVT I mean of course you guys had – a solid presentation from Dr. Lyons and overall the competition seems to be evolving here just wanted to get your thoughts on how these - you commented earlier to a different devices being used in different patients and that sort of somewhat evolving, but what's the thought around it and maybe you can help us understand if you know certain devices are suitable for different MR type patients?
Yeah, I think it’s – I can really should only comment on our device and the amount of information that's being presented by the different programs is quite small and the number of patients treated today there is - are quite small. I think majority of programs are under 20 patients with -- in sort of a high-teens numbers the last I heard and with one exception. But not a lot whole lot more than that. So I think everybody is still figuring it out it.
It does seem that different devices are going after different patient populations, some are focusing more on DMR versus functional MR. If you sort of look at the ejection fractions and the various things in the patient, you'll see that there are slightly different patients profiles and so its very hard for us to sort of comment on what other folks are doing. But, again, what we find is, there's certainly patients that are quite well-suited for Tiara. We, obviously, are not for every patient. But we think it’s a fairly versatile device and treats a wide variety and we’re going to continue move forward.
We will treat SMR patients, we will treat the DMR patients were applicable. Again, were not particularly concerned about calcium, although excessive calcium, so probably we are not particularly concerned about prior aortic valve or mitral valve surgery. So we kind of know what we're good at and we can guess at what others are good at, but its pretty early to tell.
Q – Unidentified Analyst
Okay. Got it. And just one last one for me, so do you have a timing on the 45 valve and does it have -- the 45 millimeter valve and does it have to go through the same, you know, sort of a robust testing that the 40 went through and FDA review after.
Yeah. I don't have firm timing on the 45 right now. It will have to go through the same testing as the 40. But we are actually finding that as we learn more about anatomical fit and how best to size these patients that the 35s and 40s are hitting a larger part of the population than I think we'd originally predicted. So I don’t have timing, but we are quite happy with where we are right now.
Q – Unidentified Analyst
Great guys. Thank you so much.
Thank you. This concludes the Q&A session. I will now turn the call back over to your presenters.
Thank you again for attending our conference call. And we look forward to talking to you again soon. Have good afternoon.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.
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