Neovasc's (NVCN) CEO Alexei Marko on Q4 2016 Results - Earnings Call Transcript

| About: Neovasc Inc. (NVCN)

Neovasc Inc. (NASDAQ:NVCN)

Q4 2016 Results Earnings Conference Call

March 23, 2017, 04:30 PM ET

Executives

Alexei Marko - President & Chief Executive Officer

Chris Clark - Chief Financial Officer

Analysts

Danielle Antalffy - Leerink Swann

Robert Willoughby - Credit Suisse

Operator

Good afternoon, ladies and gentlemen. Welcome to the Neovasc Year-End and Fourth 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 reflects Neovasc's current views with respect to future events including the company’s plans and expectations relating to its business, financial results, litigation and other matters. Words such as expect, anticipate, may, will, estimate, continue, intend, believe, trend, 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 and risk factors section of Neovasc fiscal 2016 annual information form which is available on SEDAR and included in the annual report on form 40-F available on EDGAR.

Now, I'd like to turn the call over to Alexei Marko, President and Chief Executive Officer of Neovasc.

Alexei Marko

Thank you, Leoni [ph] 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?

Chris Clark

Thank you, Alexei and good afternoon everybody. I'll remind everyone that our financial results are in U.S. dollars and prepared in compliance with IFRS. I'd also encourage listeners to review our MD&A which contains more detailed disclosures that we will discuss here today.

Firstly, now that the post trial hearings and the litigation with CardiAQ at the Boston District Court are substantially complete, I'd like to summarize the impact of these proceedings. In total the trial court has awarded $111.8 million in damages against the company, $17 million in initial damages and $21 million in enhanced damages and $20.8 million in pre and post judgment interest. It should be noted that all of these damages have been fully accrued as of December 31, 2016.

In addition, the trial court accepted CardiAQ's claims on current inventorship, but denied CardiAQ's motion for an injunction, thus allowing the company to move forward with development and commercialization of the Tiara.

Finally the trial court granted a stay of judgment pending the outcome of our appeal at the appeals court. As conditions of the stay the company has placed $70 million into a joint escrow account and entered into a general security agreement with CardiAQ. The company will also require court approval for transactions outside the ordinary course of business until the appeal is decided in the company's favor or the company posts the remaining money judgment amount into the escrow account.

Company intends to continue to vigorously defend itself in the litigation with CardiAQ and we have initiated our appeal with the United States Court of Appeals for the Federal Circuit. We are appealing the validity of the damages award, the ruling on current inventorship, and related issues resulting from the trial court verdict and subsequent orders.

We have filed our opening [indiscernible] and expect a hearing sometime in the third quarter of this year tentatively scheduled for August with a final ruling to follow a few months after that. as for the German general proceedings with CardiAQ a hearing was held in late 2016 and we are awaiting response from the German court. There are no monetary damages associated with the German proceedings and no damages award has been recognized.

Secondly, before I move into comments by the financial statements themselves, I'd like to briefly highlight our successful agreement with Boston Scientific. In December 2016 Boston Scientific acquired Neovasc tissue processing technology and facilities and the 15% equity interest in the company for $75 million. In this transaction approximately $67.9 million was allocated to the acquisition of the tissue processing technology and facilities and approximately $7.1 million was allocated to the purchase of 11,817,000 common shares of the company at $0.60 per share.

This transaction and investment in Neovasc enabled the company to post $70 million bond into escrow in relation to the litigation with CardiAQ and allowed the company to continue development of the Reducer and the Tiara.

Now I'll turn to the financial statements. In the fourth quarter revenues reached $2.8 million increasing by approximately $537,000 or 24% from the same quarter last year. For the full year, revenue decreased 4% year-over-year to $9.5 million compared to revenues of $9.9 for the same period in 2015. The slight annual decrease was expected as the company's transitions of its business away from its traditional revenue streams toward development and commercialization of its own products, the Reducer and the Tiara.

Contract manufacturing revenues increased slightly in comparison to the same period in 2015, but the agreement with Boston Scientific will cause a significant decline in content manufacturing revenue in 2017. The gross margin for the quarter ended December 31, 2016 was 26% compared to 13% for the same period in 2015.

The gross margin for the year ended December 31, 2016 was 25% compared to 30% for the same period in 2015. The company had seen gross margins decline in 2016 due to a change in the product mix to less profitable products. However, the company anticipates that margins will increase in 2017 as the Reducer which has high margins than our tissue business products and services starts to represent a larger portion of the overall revenue.

Moving to Reducer, Alexei will provide an operational update on our European launch following my remarks. But as noted in our release, we are pleased to report Reducer revenues increased by 47% to $283,000 for the quarter compared to $192,000 for the same period in 2015. Reducer sales for the year ended December 31, 2016 were just over $1 million compared to $526,000 for the same period in 2015 representing an increase of 91%.

We have seen steady Reducer sales growth since launch. We anticipate that year-over-year revenues will continue to increase, but we may see some more volatility between quarters related to the timing of our orders from distributors.

Total expenses for the quarter ended December 31, 2016 were $7.4 million compared to $8.4 million for the same period in 2015. The decrease was due to lower general and administration expenses principally as a result of a decrease in legal expenses following completion of the trial in Boston and a wind down in associated post trial activities.

Total expenses for the year ended December 31, 2016 were $39.2 million compared to $31.8 million for the same period in 2015 representing an increase of $7.4 million or 24%. The majority of the increase in expenses related to an increase in litigation expenses from $7.1 million in 2015 to $13.3 million in 2016. Litigation expenses for 2017 in the CardiAQ matter are expected to decline to between $1 million and $3 million.

Product development and clinical trial expenses to advance both the Tiara and the Reducer saw an increase of $2.3 million year-over-year as the company continues to advance its lead programs. Development expenses in 2017 are also expected to increase year-over-year as the company furthers its clinical programs for both the Reducer and the Tiara.

The net profit for the quarter ended December 31, 2016 was $37.2 million or $0.54 basic earnings and $0.47 fully diluted earnings per share compared with a loss of $7.4 million or $0.11 basic and diluted loss per share for the same period in 2015. In the fourth quarter the company recognized $65.1 million gain on sale of assets in relation to the transaction with Boston Scientific and provided $20.8 million in pre- and post judgment interest related to the litigation with CardiAQ.

The operating loss of the year ended December 31, 2016 was $86.5 million or $1.28 basic and diluted loss per share as compared with the loss of $26.7 million or$0.41 basic and diluted loss per share for the same period in 2015. The $59.8 million increase in the operating loss can be explained by one, the accrual of $111.8 million in damages related to the litigation with CardiAQ; two, the recognition of a $65.1 million gain on sale of assets in relation to the transaction with Boston Scientific; and three, an increase in expenses of $7.4 million related to litigation expenses and increases in development activity.

As of December 31, 2016 the company had cash and cash equivalents of $23.0 million compared to $55.0 million at December 31, 2015. During 2016 cash used for operating activities was $36.0 million. Of those operating expenditures approximately $13.2 million was spent on litigation and $17.8 million was spent on development activities for the Reducer and the Tiara. Aside from litigation expenses we are satisfied that we are currently allocating our cash resources toward the development of our key product lines.

As you will know from our recent filings the company is in a working capital deficit position of $17.5 million as a result of recognizing the damages provisions of $111.8 million. While we intend to continue to vigorously defend ourselves in the litigation with CardiAQ, the outcome of these matters is not determinable and the company cannot give any assurance as to the outcomes.

If the company is not successful on the appeal of the verdict or is otherwise unsuccessful in reducing the amount of these awards to an amount less than the $70 million held in escrow, company will require significant additional financing in order to pay the damages.

The company could also require significant additional financings to continue to operate the business. There can be no assurance that such financings will be available or favorable terms or at all. As a result of the above noted circumstances, material uncertainty exists and there is substantial that about company's ability to continue as a growing concern. Our orders that are included a growing concern emphasis of Max paragraph and their report on our financial statements and we will continue as always to update the market as material events occur.

I will now hand the proceedings back to Alexei.

Alexei Marko

Thanks Chris. Today I’ll start with reviewing Reducer and then move on to Tiara. The Reducer update as it has been since launching the device eight quarters ago is positive. Revenues up to the quarter and our sales for the year reached $1 million. We are seeing a steady increase in adoption of the product in selected markets has physicians see patients who have been treated with Reducer coming back with significant improvement in their angina symptoms.

Many of these patients have been suffering with their angina for years and Reducer is offering them real new option to improve the quality of life and return to a more normal lifestyle without the burden of constant chest pain. I am continually receiving reports from physicians about their patients excitedly calling them to say they are golfing again or riding their bike or something similar after being treated with Reducer.

Looking ahead we continue to see more good things in store for Reducer in the year, in particular adding new centers using the device, particularly in Germany. Reorder rates are encouraging where physicians see positive outcomes in their refractory patients they will increasingly turn to Reducer as a standard treatment for suitable patients.

This is also resulting in increased awareness of the product in treatment within the clinical community and in increased patient referrals. In some cases, the patients themselves are actually going to their doctors to request treatment with Reducer. After two years of modest investment we are building a quality footprint in Europe and we expect this to grow steadily over the coming years.

Moving on to Tiara, as was referenced in the press release the narrative around this product has importantly been dominated by litigation. Despite those distractions we continued to see excellent results in the product and clinical use. We have now treated 26 patients with the Tiara in both early feasibility and compassionate use cases. Clinical experience to date has been with our 35 and 40 mm sizes.

The current 30-day survival rate which includes 24 patients who were implanted more than a month ago is 88% and we're very pleased with the technical success rates and ease of the implantation procedure as we continue to gain experience and broaden use into additional medical centers. We have successfully implanted Tiara in both functional and degenerative mitral regurgitation patients as well as patients with pre-existing prosthetic aortic valves and microsurgical rings.

Tiara has shown itself to be a versatile device that can be implanted in a wide range of patient's anatomies. We continue to see no material issues with leaks, gradients or LVOT obstruction. We continue to work to improve both the device and the implantation procedure and these activities are paying off. While patient discharge times are variable, we continue to be encouraged by the rate of recovery from Tiara implantations with some patients returning home only a few days after their procedures.

And not to be forgotten our longest patient is now over three years and continues to lead a productive and fulfilling life without recurrent MR. When you think of how sick these patients were at the time of their implants and how vulnerable their hearts were, it is truly amazing the impact Tiara has had to them. We are expecting to continue to enrol patients in our ongoing feasibility trial TIARA I as well as in compassionate use cases. Screening levels are high; number of patients are scheduled now for implantation and the investigators are eager to treat their patients with Tiara.

In Europe we've initiated our CE Mark trial the TIARA II which will support our application for CE Mark approval to begin marketing the product in Europe. The first TIARA II patients are expected to be treated by medical teams in Italy over the coming weeks. We’re working to gain regulatory approval to add additional TIARA II trial centers in Germany, the UK and elsewhere and we will continue to update the market on our clinical activities as they progress and continue to present results at relevant medical conferences.

High success rates, short procedure times, investigator enthusiasm, regulatory progress in Europe, we continue to be excited by Tiara’s performance and look forward to driving this program forward throughout 2017.

I'll close my prepared comments here and turn the call back over to our moderator and open the floor to any questions that you may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Danielle Antalffy. Please go ahead.

Danielle Antalffy

Yep, hey good afternoon guys. Thanks so much for taking the question. Thanks for the clinical update Alexei. I was just wondering if you could give any color on what your expectations are. First of all can you remind us how many patients TIARA II will be? And then what your expectation is and as far as pace of enrolment it sounds like you've been, I think you added two patients since we saw you in mid February at our conference, tell me if I'm wrong, so it seems like it's about a patient or two a month. Do you expect that to accelerate in TIARA II or is that sort of the pace we should be thinking about?

Alexei Marko

No, well first of to answer your question, hi thanks Danielle for the questions. The TIARA II trial is a 115-patient trial. I believe we have implanted two patients over the last month. We do expect that rate to ramp up as we add additional centres particularly in Germany and the UK. We have a number of patients that are being scheduled presently and we should see those numbers ramping up steadily. It's hard to put or to forecast exactly what that's going to look like, but we do see it ramping up steadily over the coming months as we add additional centers.

Danielle Antalffy

Okay, that’s helpful and then as we look forward to potential U.S. or potential U.S. clinical study can you help us understand what a U.S. clinical study might look like from a total number of patients perspective, because 115 patients in CE Mark is actually higher than I think we’ve been initially thinking, do you think that the U.S. trial are we talking a couple 100 patients, are we talking more TAVR style like 1000 patients?

Alexei Marko

Danielle it’s very hard, yes it's very hard to say at this point in time. We certainly have seen the numbers of patients required for CE Mark move up over the last year or so compared to I think what you were seeing in some of the more recent aortic valve approvals where you were seeing sub 100 patients. It seems that around 100 patients may be as many as 200 patients is required now for a CE Mark we believe were there with the 115-patient study that we have going.

In terms of forecasting what's going to be required by the FDA it really is early days and it's hard to tell yet. Were certainly, we're having our own active dialogue with the FDA, I expect others working in this space are as well, but I don't think anybody really has any hard numbers yet or any real study designs around that. It’s certainly is more than 100 patients. My guess is it won't be 1000 patients, I think it will be in the middle somewhere, but it is early days to determine that.

Danielle Antalffy

And then as far as TIARA II endpoints is it MR 30 days or what kind of endpoints are these trials looking at?

Alexei Marko

It’s a combination. We're looking at MR and survival at 30 days and then out to a year. I think we’re findings that the year is an important deadline for us versus simple 30-day mortality which was used earlier on in some of the TAVI trials and then we're continuing to follow these patients out to five years, but really the key endpoints are 30 days and one year.

Danielle Antalffy

Got it and so sorry, last question. As far as critical updates we might see anything coming at EuroPCR when or when can we see maybe some update on the patients enrolled thus far? Thank you so much.

Alexei Marko

Yes, you are most welcome. We may be presenting something at EuroPCR. We will be presenting something certainly at TVT, so in the May-June timeframe will be the next formal update.

Operator

Thank you. [Operator Instructions] There are no further questions, pardon me, we do have a question. The question comes from Robert Willoughby. Robert, please go ahead.

Robert Willoughby

Hi, I just have a real quick question. I was wondering if there are any plans for future advances in technology with the company after Tiara?

Alexei Marko

We certainly have a number of things that we've been looking at. Right now we don't have any concrete plans to develop any of those, but as we continue to move forward with Tiara we certainly have next-generation products in terms of both the implant and the delivery system that we will be working on and are looking at other things, no real concrete plans in terms of which things we’re going to be working on next.

Robert Willoughby

Thank you, I appreciate it.

Alexei Marko

You are most welcome.

Operator

Thank you. There are no further questions at this time. Please go ahead Alexei.

Alexei Marko

Thank you very much. We appreciate everybody calling in and we look forward to updating you again soon.

Operator

Ladies and gentlemen this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.

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