Neovasc Inc (NVCN) 2019 Q4 法說會逐字稿

Greetings. Welcome to the Neovasc Inc. Fourth Quarter 2019 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Mike Cavanaugh from Westwicke Partners. You may begin.

Good afternoon, and thank you for joining us today. Earlier today, Neovasc Inc. released financial results for the quarter and full year ended December 31, 2019. The release is currently available on the Investors section of the company's website at www.neovasc.com/investors.

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 this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Canadian securities laws. 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. Words such as expect, outlook, will, should, continue, strategy, potential, intend, try, believe, plan, and similar words or expressions are meant to identify forward-looking statements. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by those forward-looking statements. Accordingly, you should not place undue reliance on these 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 section of Neovasc's annual report on Form 20-F and the discussion in Neovasc's MD&A, which are available on EDGAR and SEDAR.

The information provided in this conference call speaks only to the live broadcast today, March 30, 2020. 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.

Thanks, Mike, and good afternoon, everyone. 2019 was the year of significant progress for the company as we build the clinical data for Tiara and expand our Reducer commercial presence. We advanced our 4-pronged value creation strategy, which focuses on advancing our 2 products and increased our sales team to assist commercialization efforts in Europe.

The company made a key hire in November, appointing Bill Little as Chief Operating Officer, to help drive our commercialization initiative as well as business development activities. Bill has extensive experience in the medical device industry, and we are confident that our management team is well positioned for strategic vision in 2020 and beyond.

Turning to the Reducer. 2019 saw several milestones for this device. In September, Reducer was added to the European Society of Cardiology guidelines for the treatment of refractory angina, plus the new guideline emphasize the use of diagnostics to differentiate between coronary artery disease and microvascular disease. We believe this indicates that Reducer is leading the way in interventional cardiology to find new and optimal treatment for chronic angina. The new guidelines, coupled with our increased commercial presence, has led to further growth in Reducer implants and in broader interest. Additionally, we have taken concrete steps on the path to Reducer approval in the U.S. market, where the FDA has previously granted Reducer breakthrough medical device status. In the fall of 2019, we committed to submitting a full PMA application to the FDA before the year was out, and we did just that on December 30, 2019. The application was formally accepted by FDA in early January, and we also took this step partially because we believe that Reducer has a potential market far larger than that will be limited to Humanitarian Use Device. The FDA has been reviewing our application, and we are in ongoing information at changes with FDA. We were recently informed that our application will not be delayed by current FDA restrictions resulting from the coronavirus.

We believe that the totality of data from the COSIRA study will reduce 1 European post-market study with over 400 or 400 -- I'm sorry, with over 200 of 400 patients enrolled, and multiple independent published studies will provide reasonable assurance of safety and efficacy to support the PMA. We hope that taking this more vigorous path demonstrates our confidence that we have in the safety and efficacy of the Reducer. We also continue to execute our reimbursement strategies in several European countries, and in early 2020, the Reducer once again received NUB 1 status in Germany. We continue to make meaningful progress in these international markets as we advance our clinical reimbursement objectives.

During the first 2 months of 2020, we saw strong revenue growth, and we were on track for the best quarter ever prior to the postponement of many cases due to the coronavirus in March, which for us started in Lombardia in Italy, our second largest market in Europe. We do expect the COVID crisis to impact our Reducer revenue for the year, but we have an active repository of postponed cases, which we intend to reactivate as soon as hospitals restart elective cases, and we believe that this should help us in our recovery.

Moving on to Tiara. To date, there has been 82 patients treated in our 2 clinical trials, both through compassionate use cases. As previously announced, Neovasc received approval in October to close enrollment in the TIARA-I early feasibility trial in the United States. Enrollment is ongoing in the TIARA-II CE Mark clinical study. Most importantly, we have determined that we have sufficient clinical evidence to file for CE Mark for our transapical Tiara, and the time line for approval primarily depends on the European regulatory requirements, which are in transition and which are now being reviewed again by the European authorities due to the coronavirus situation. Either way, we believe to be on schedule for approval by 2021 or earlier.

Early results of the 2 studies have been encouraging as the 30-day survival rate for the patients treated with Tiara is 89%, with one patient now having survived over 6 years post implant. The Tiara has successfully treated both functional and degenerative Mitral regurgitation patients as well as patients with preexisting prosthetic aortic valves and mitral surgical annuloplasty rings.

I will now discuss the next step in the evolution of Tiara, the Transfemoral Trans-septal or Tiara TF program. The Tiara TF development program is based on the Tiara transapical valve and allows for a very controlled and predictable implantation procedure as we have experienced in our transapical Tiara. Tiara TF offers the possibility of a less invasive delivery of the device and will allow interventional cardiologists to perform the implantation. As many of you know, the team reached the design freeze for this device early in 2020. The company is benefiting from a real understanding of the anatomical and technical challenges due to our clinical experience with mitral valve replacement and our extensive clinical database. Our next step will be to initiate an early small clinical feasibility study in humans before the end of 2020. Tiara TF is being designed to allow for full retrievability of the device up to the point of final relief. Importantly, we also believe it will greatly expand the pool of treatable patients. Our new low-profile, flexible delivery system, coupled with the reduced footprint of the valve itself, should provide better mitral valve access and deployment than competitive systems, allowing for faster trial enrollment and ultimately, allowing for broad adoption.

We have also assembled a new medical advisory board of prominent key opinion leaders in the structural heart space, and we believe the caliber of these advisers is a testament to the potential of the Tiara TF.

I would now like to make some comments on the NASDAQ delisting determination that was made in February. We have requested a hearing with the Nasdaq Hearing Panel, and the hearing is scheduled for early April. We will announce the final decision in a press release when it is received. We will request a continued listing on the exchange, and we will present a robust plan to regain compliance to support the request. We believe 2 developments will be received favorably. First, the final $3.9 million of 2017 financing notes will be retired in May. These have been a significant syndrome to the company's financial position. Secondly, we have developed a strong operational track record during the past 2 years, and we believe many value-creating opportunities from our 4 value creation strategies, will continue to come to fruition in the near future, driving major company value increases. The expected return on the cash we invest to create these value creation programs is significant. Overall, we are very pleased with the quarter and 2019, and we believe that we have put the building blocks in place to achieve significant advancement in Neovasc's value creation strategy in 2020.

I will now turn the call over to Chris to discuss our financial results.

Thank you, Fred. Before I discuss the financial results, I would like to discuss a few other matters that are important to put our financial performance in share price movement and perspective. Firstly, the investigation in stock manipulation that we launched in February of this year has been completed. The findings of Joshua Mitts, a professor in Colombia University, have identified strong evidence of price manipulation during the time period in which we are trying to maintain compliance with the NASDAQ $35 million minimum market cap requirement before the February 17 deadline. We will now pass these findings on to both FINRA and the Department of Justice, and allow these institutions to pursue enforcement based on the evidence. We believe that on an ongoing basis, there is likely to be more in-depth scrutiny into the trading of the company's stock than ever before in an effort to restore fair market trading activity.

Secondly, as Fred mentioned, our revenue growth in the first part of 2020 has been strong prior to the slowdown associated with the coronavirus. We are on track for our strongest quarter ever. We are continuing to monitor the changes in the European markets, many of which have suspended elective procedures for the time being, and we will report back to you to better understand the outlook and our ability to rebound to our growth trajectory.

Turning to the income statement. For the full year 2019, revenues increased 20% to $2.1 million compared to revenues of $1.7 million for the same period in 2018. Our fourth quarter revenues for 2019 increased 8% to $566,000 compared to $523,000 for the same period in 2018 as the company continues its commercialization strategies. Physician interest is accelerating, and we are poised to capitalize on the favorable underlying market dynamics when the market returns to normalcy.

The contribution from Reducer revenue has been a positive, reducing development expenses. And the high margins of the Reducer, even without focused cost optimization, are very encouraging as the volumes increase. The cost of goods sold for the full year 2019 was $458,000 compared to $366,000 for the same period in 2018, and the gross margin was 78% compared to 79% for each period, respectively. While the cost of goods for the fourth quarter 2019 was $109,000 compared to $93,000 for the same period in 2018, and the gross margin was 81% compared to 82% for each period, respectively.

Overall, we saw a drop in departmental expenses for the full year and the fourth quarter 2019 compared to the prior periods. Total expenses for the full year 2019 were $31.7 million compared to $33.8 million for the same period in 2018, representing a decrease of $2.1 million or 6%. Total expenses for the fourth quarter of 2019 were $10 million compared to $10.7 million for the same period in 2018, representing a decrease of $650,000 or 6%.

Notably, within history for some expenses, there was also a transition of expenses from general and administrative expenses in 2018 as the company affected the corporate transition and resolve certain potential litigation issues to product development and clinical trials expenses as the company refocused resources towards its value creation strategies.

General and administrative expenses for the full year 2019 decreased to $10 million from $16.4 million for the same period in 2018, while product development and clinical trials expenses for the full year 2019 increased to $20 million from $16 million for the same period in 2018. The numbers reflect the corporate turnaround that Fred has spoken about so regularly and so passionately.

The loss and comprehensive loss for the year -- for the full year 2019 were $35.1 million and $33.6 million, respectively, or $5.40 basic and diluted loss per share as compared with the loss and comprehensive loss of $108 million and $109 million, respectively, or $76.26 basic and diluted loss per share for the same period in 2018. The loss and comprehensive loss for the fourth quarter 2019 were $9.6 million and $11.1 million, respectively, or $1.45 basic and diluted loss per share as compared with income and comprehensive income of $10.2 million and $10.9 million, respectively, or $5.07 basic and diluted loss earnings per share for the same period in 2018.

The $75.3 million decrease and the comprehensive loss incurred for the full year 2019 compared to the same period in 2018 can be substantially explained by a $7.7 million decrease in the charges related to the accounting treatment of the November 2017 and May 2019 financings. The substantial change in our losses are gain points for the company moving towards burn rates and cash rate that can be managed within the context of the ordinary capital market.

Neovasc finances operations and capital expenditures with cash generated from operations and through equity and debt financing. The company opened the year 2019 with cash and cash equivalents of $9.2 million. We spent approximately $26 million on operations netted the contribution from Reducer revenues. The company funded the short term, but short fall through the balance sheet and through the conversion of the remaining 2017 warrants for proceeds of $1.3 million through the completion of two $5 million gross proceed financings in February and March 2019 and through an $11.5 million gross proceed debt and equity financing in May 2019, finishing the year with $5.3 million. The company also completed a $10 million gross proceed financing in early January 2020. We anticipate the need for significant additional financings in order to continue to operate our business. Given the current nature of the company's capital structure, there can be no assurance that such financing will be available on favorable terms or at all. However, we are reaching out to new investors and coalescing around our current investors to attract new capital into the company to fund our continuing value creation strategies. And as previously stated, we are looking forward to May 17, 2020, a date where 2017 notes mature.

Finally, I will note, as of today's date, we have 11,133,319 common shares issued and outstanding, and we remain laser focused on the potential of our 2 core products for our patients and for our investors.

Back to you Fred.

Thank you, Chris, and thank you all for listening to our opening remarks. So in conclusion, we are now less than 2 months away from the maturity of the 2017 convertible debt notes, and we are not aware of any active downside pressure on the share price from these notes. Furthermore, we identified evidence of a period of stock manipulation during a critical time period of the company to stay in compliance with NASDAQ rules. We will now turn this evidence over to FINRA and the Department of Justice for them to investigate the perpetrators, and we will lay out our case for continued listing at the NASDAQ hearing in early April. We are continuing to make great progress with our 4 value creation strategies. Our Reducer revenue growth will be impacted by the coronavirus situation, mainly during the second quarter, but we just saw strong growth in January and February, and we were on our way to outperform our first quarter revenue plan when the virus started to impact our March results. We believe that we will get through these difficult times and get back to significant growth again, after Europe gets through the issues related to the coronavirus. The FDA is reviewing our Reducer PMA submission, which process has not been impacted by the virus situation, and we are beginning to see real appreciation for our Reducer therapy for the treatment of microvascular refractory angina from other industry partners.

We have determined that we have sufficient clinical evidence to file for CE Mark for our transapical Tiara mitral valve, and we are waiting clarity around the European regulatory requirements due to transition in May. The European Commission has just recommended European authorities to postpone the May MDR regulations by 1 year to allow the medtech industry in general to focus on and combat the coronavirus pandemic instead of focusing on this new regulation. We believe to be fine either way, but we need to know which rules apply. We continue to make great progress with the development of a new, best-in-class Tiara TF system, which remains on track for a first human implant before the end of this year.

Despite unbelievably tumultuous times, we have helped together our valuable employee base, who are all safe and added great German sales reps and Bill Little, another high-caliber medtech executive. The company is doing well. We believe that we are operationally already well beyond the turnaround point.

Financially, the upcoming retirement of the 2017 debt notes in May is a significant positive event. We believe to have a strong case for continued NASDAQ listing, and we have great interest by investors to invest in our company at reasonable terms and what many perceived to be our undervalued assets once we retire the 2017 debt notes in May.

I would like to thank our loyal investors for their relentless trust and confidence in us in those past, most difficult and painful time with unbelievable stock price declines. I sincerely hope that our investors now indeed see that the company should only be moving forward and upwards from here on.

I would now like to open the call up for some questions. Operator?

(Operator Instructions) Our first question is from Danielle Antalffy.

I hope everyone is healthy and safe. I have 2 questions: one financial, one product related. On the financial side, to appreciate that May 17 has been -- or the upcoming date of May is an important event, but can you talk about how the current dynamics around COVID, the lack of revenue generation is impacting your cash position? And does it change sort of the need to do some sort of capital raise or bring in some money from somewhere? And at what point, should we expecting you to be in a position to shore up the balance sheet?

Yes. Thanks, Danielle. Everything is fine. We're all safe. Thank you for asking, and we hope the same is true for your team as well at Leerink. So to your question, yes, there is an impact to the revenue of Reducer. Again, there will be a slight impact in Q1 because of the fact that we see -- that we saw postponement of cases as of March, but that was also partially offset by strong growth in January and February. So there will be some impact in Q1.

Q2 will be a larger impact, but you need to keep into account that the Reducer is still only a minor source of cash generation for us. We still are in need of general cash raises, and we are confident that we have enough cash to get us well beyond the May 17 date. So there is really no change from that standpoint. We have enough cash to last us into July, August, around that time period. And so that situation has not really changed, meaning that we have enough cash to last us beyond the May 17, the date. And we believe that the May 17 date is important because at that point in time, we will have been able to clean up the balance sheet, and we have quite a few investors interested in investing in our company once we are through that date and have been able to clean up the balance sheet and a cap table. So that is the situation on the financial side.

Does that answer your question?

That does. That's perfect. And then on the product side, the TF Tiara system. So I know next step now, I believe you said is feasibility. But when can we think of you starting discussions with FDA on a pivotal trial for the TF system? And I guess, just trying to get a sense of what the upcoming sort of clinical milestones will be over the next 2 years. Could this be in a pivotal by the end of next year? Or how should we be thinking about timing for the TF system in the U.S.?

Yes, Danielle. Well, as always, we take it one step at a time. So first of all, I can tell you that we have already been in discussions with FDA, also for our Tiara transfemoral system. We have calibrated with them on the expectations for an approval of a first human use clinical trial. We have gone through some key questions as it relates to what are the requirements, what do we have to demonstrate to them so that we will be comfortable with filing that submission. So we've calibrated, we understand where they're coming from, and we have built it into our work activities.

I'm very happy to tell you that we are less than a month away from our very first chronic animal implants. We are going to have our very first chronic implants from the Tiara TF system before the end of April. And then there are a series of animal implants that are scheduled from there on. Through the summer time, there are chronic implants to basically evaluate the blood flow, thrombosis risk of the design and then there are acute implants to demonstrate the ability to deliver the valve in the Transfemoral Trans-septal manner. All that is planned out and then should cumulate -- accumulate in a first submission for a first human use, which we anticipate could be in the United States or Canada. But in any case, we are applying the U.S. FDA rules that we want to fulfill. So that's kind of like where we are. As I said, we take it step by step. We think it's going to be a major positive event for us to have the first human implant, and that is still scheduled before the end of 2020 in the way that I just outlined. So -- and we'll get to that. First, we'll probably have somewhere in the range of 5 to 10 implants, which will go into 2021, and then we'll start planning for the next step.

(Operator Instructions) And our next question is from Jason Mills from Canaccord Genuity.

This is actually Cecilia on for Jason. Fred, I was hoping you could provide just a little more color on what you've seen out of Europe with Reducer, more from a country-specific standpoint, just in how different countries have dealt with this. And then just as you're looking forward, the ability of your reps today that continue to communicate and engage with their customers. And as you move past this moment right now, just the ability to recapture postponed procedures.

Right. Thanks, Cecilia. Thanks for your question. So it is, indeed, quite different for a country and even for a region, I would say. The hardest hit region, and you see this on the TV as well, is Lombardia in Northern Italy. That's the Milan area. And that area happens to be a very strong Reducer implantation area for us as well. That area is essentially completely shut down. There is nothing happening, and that started to impact our results already in March and certainly has continued. So as you know, Italy is our second biggest market in Europe after Germany. In Germany, the situation is actually quite different from Italy. There is not really a complete total shutdown. There are certain hospitals that have stopped elective procedures, including the Reducer. There are some hospitals that are still implanting the Reducer. In fact, we had an implant last week somewhere in Germany. Similarly, in the U.K. and some other countries, we had 2 implants in the U.K. last week, and we had an implant in Israel as well. So it is not that -- it's not so that it's completely shut down everywhere. But certainly, the virus situation has a, I would say, substantial impact on the implantations and the revenue generation that we have. We have a log of all the postponed cases. By now, about 30 patients, 3-0, are in that log of patients where the patients wanted to have the Reducer, the physicians were ready to go and then the procedure was postponed. That is all in the log. We know of those patients and those sites and the physicians who want to do those procedures. So we believe that, that situation will continue, and we will continue to have an increased log of patients that are awaiting a Reducer procedure. So once the hospitals will start doing procedures again, which probably will differ from country to country and from region to region, we will all have a quicker rethought of the Reducer implantation that we believe we should be back on track again that way sooner than later.

Great. I appreciate all the color. And then if I could -- sorry, go ahead.

Sorry. Yes, I was just going to say, so I do believe that the majority of the impact is going to be in the second quarter. Like I said, there was some impact in March, but I think the vast majority of the impact will be in the second quarter. And I do believe that we will be back to strong growth in the third and fourth quarter of this year.

Great. And then if I could also just ask your thoughts around the potential postponement of MDR. I know you mentioned it at the end of your prepared remarks. But just as you're thinking about bringing Tiara to the market in Europe, what impact that could have if it is postponed on approval time lines? And then just going forward, with implantation a year later, kind of how you think about that, too.

Yes, as it relates to the transapical Tiara CE Mark, so most importantly, and this is true in whatever regulatory system, we have determined to have sufficient clinical evidence for a CE Mark. The European regulatory rules were going to be updated to the MDR requirements in May, and now the European Commission has recommended to postpone that by a year. And that is basically to allow the medical technology industry at large to be able to focus on the delivery and the supply of critically needed medtech supplies in those countries and not too worrying about these updated rules. So that seems to make sense from a big picture perspective. It needs to be officially reviewed and approved by the authorities in Europe and in the countries. And the time lines that are here for that are looking like it's probably going to happen by the end of April, if it happens.

For us, we can live either way. We can live with the requirements under the MDD system, but also under the MDR systems. So we basically have to know what it is because there is a lot of nomenclature changes in the regulations and the filings that we do have to address those changes. So one way or the other, we will be able to file once we know what the rules are. If the MDR rules are going to be postponed for a year, it will make it likely easier for us. We can probably file faster for a CE Mark and potentially get the CE Mark approval faster than under MDR. But in general, we are confident to have our CE Mark by 2021 or earlier, as we've always stated.

At this time, we have reached the end of the question-and-answer session, and this also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Thank you.