Neovasc Inc. (NASDAQ: NVCN) Third Quarter 2022 Results Conference Call November 10, 2022 4:30 p. m. Eastern Time
Participating companies
Mike Cavanaugh – Investor Relations
Fred Colen – President and Chief Executive Officer
Chris Clark – Chief Financial Officer
Conference Call Participants
David Martin – Bloom Burton
Operator
Hello and welcome to Neovasc Incorporated’s third quarter earnings call. At this point, I’ll pass the call to Mark Cavanaugh.
Mike Cavanaugh
Good afternoon. I need to thank everyone for joining us today. Earlier today, Neovasc Incorporated issued a press release announcing our monetary effects for the quarter ended September 30, 2022 and describing highlights of the company’s recent business. You can get a copy of the ad on the company’s website online. page in www. neovas. com/investors. Conmigo today are Fred Colen, president and CEO; and Chris Clark, Chief Financial Officer.
I would like to remind everyone that management will make statements on this call that come with forward-looking statements within the meaning of the applicable securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Canadian Securities Laws. All statements contained in this call that are not statements of old facts deserve to be considered forward-looking statements.
All forward-looking statements, including but not limited to our review of past operating trends, expectations related to policy decisions and approvals, pricing and board issues; Our strategies for creating prices, product benefits, and long-term monetary expectations and effects are based on existing estimates and assumptions. Believe, plan and similar words or words are intended to identify forward-looking statements. These statements involve significant uncertainties and dangers that could cause actual effects to differ materially from those expected or implied by such forward-looking statements. Therefore, you deserve not to place undue reliance on such statements.
For more information on the dangers and uncertainties related to those forward-looking statements, please see the Cautionary Notice regarding the forward-looking statements and Risk Factors sections of Neovasc’s Annual Report on Form 20-F and discussion in the MD.
Neovasc disclaims any purpose or obligation, as required by law, to update or revise any forward-looking data or statements, whether as a result of new data, long-term events or otherwise.
Today we’ll start with some opening remarks and recent highlights from Fred, followed by Chris, who will review the monetary results.
I will now give the floor to Fred Colen, President and CEO of Neovasc. Fred?
Fred Colen
Thank you, Mike, and good afternoon everyone. As we introduce our third quarter of 2022, I am proud of the effects our team has been able to achieve as we continue to expand patient access to the reductant for the treatment of refractory angina in Europe and the United States.
The team has worked hard to advance the pivotal COSIRA-II clinical trial in North America, adding several sub-studies to gearbox use here and has continued to expand the reimbursement policy for this potentially revolutionary device in the European Union, where it has already been in use for some time.
We also took steps during the quarter to strengthen our monetary position, and indefinitely postponed efforts to expand our TIARA Transapical facility. The third quarter of 2022 was another record quarter with revenue up 31% year-over-year to $923,000. This is a wonderful achievement for Neovasc, despite the demanding situations that negatively affect European markets, in particular a strong headwind for currencies with the weakening of the pound sterling and the euro.
In addition, our admissions were negatively impacted by ongoing hospital and COVID issues, resulting in a reduction in the number of implants as elective procedures were postponed in some regions. Germany has been hit hard by a surge in COVID that has led to stricter rules, cuts, and paperwork cancellations.
That said, we expect procedural grades to resume in the coming months. I am incredibly proud of my team for the progress made in the quarter, despite the demanding macroeconomic situations facing medical device corporations in general. As discussed in previous Neovasc calls, the first pillar of our pricing strategy is to expand the use of the Reducer in Europe.
The team continues to make progress in payment efforts, and those efforts are beginning to pay off, as evidenced by the acceleration of our earnings expansion in the quarter. Earlier this year, we won the refund policy for the Reducer in the UK and saw an acceleration in Reducer adoption in the region.
We attach great importance to this market position and, as stated above, we now have a direct cash sales force in the UK, which is designed to increase usage and generate higher margins through Neovasc’s direct sales force compared to the previous distributor model. .
Another effect of expanded repayment is our more diversified profit base, whereas in the past we were heavily focused on the Dutch market, i. e. Germany. In the third quarter, approximately 80% of profits were generated outside the Dutch countries, i. e. Germany. , Austria and Switzerland.
This illustrates the wonderful progress we have made toward our expansion goals. France is now our largest market by volume. For the record, we see strong social assistance and acceptance from the reducer of the European Union and the United Kingdom.
The pillar of the moment of our creation strategy is to advance the acceptance and use of the gearbox in the key U. S. market. In the U. S. , COSIRA-II clinical trial is progressing after initial enrollment in early 2022. Lately we have 48 patients enrolled and 25 randomly assigned to 16 sites out of 380 patients targeted at 50 sites.
As a reminder, the COSIRA-II trial is critical to our efforts to fully submit the PMA to the FDA for approval of potential reductants in the United States. The gearbox has the coding, coverage and payment prestige of the Centers for Medicare and Medicaid Services, CMS, and is reimbursable as part of the study that contributes to our income. Test equipment revenue represented 6% of total revenue for the quarter. Revenue generation in a placebo-controlled clinical trial in the U. S. Not only did the U. S. Department of Homeland Science and the U. S. Centers for Disease and Prevention rarely perform, and not only did Neovasc do it, but we also pioneered a new way to do it without jeopardizing exam blinding.
CMS, with whom we talked a lot on this topic, recently published new rules for prospective reimbursement in randomized, placebo-controlled clinical trials and also referenced the coronary sinus relief device in an IDE in its rules.
In July 2022, we announced that the COSIRA-II trial had obtained approval to expand its scope, as the FDA had approved a protocol supplement for the trial. The supplement allows us to primarily examine patients with non-obstructive coronary artery disease or NOCA, and includes the addition of two imaging substudies planned in the past as a component of the assay designed to provide data on the protection and mechanism of action of Reducer.
The activation of the COSIRA-II test site continues, albeit at a slower rate than we initially expected due to administrative burdens and staff shortages in many giant organizations in the United States. We hope that registration will end in the first part. of 2024 and an initial reading of COSIRA-II knowledge at the time part of 2024.
In September 2022, CMS published new codes for the diagnosis and monitoring of refractory angina. The new codes will be used in the existing tenth revision of the clinical amendment to the International Statistical Classification of Diseases and Related Health Problems, called ICD-10 -CM Report. This was a vital milestone for angina patients as well as doctors. Before those new codes, there was no way to differentiate patients suffering from the longest-lasting and beloved form of solid chronic chest pain from the condition we call refractory angina. Doctors now have a mechanism to outline and measure the costs of the remedy, which is a vital step in treating the disease.
Finally, we recently announced outpatient reimbursement in the U. S. You are in the U. S. Department of Health through CMS for the treatment of Reducer as of January 1, 2023. We are very pleased with our wonderful progress on the payment front. Neovasc is uniquely located to have a good enough coding, policy, and payment to help reducer reimbursement in the U. S. CMS population. For both inpatient and outpatient procedures, either in the COSIRA-II clinical trial and prospective marketing in the United States.
In addition to the COSIRA-2 trial, we have made great strides in generating more clinical knowledge about the reductant. In September 2022, we attended the Transcatheter Cardiovascular Therapeutics Conference organized through the Cardiovascular Research Foundation in Boston.
At the event, we presented initial insights into an ONACA patient population. This is another cohort of patients from the randomized arm of the COSIRA-2 trial, which focuses on obstructed patients.
This was the first time the company highlighted data on the reducer’s influence on objective measurement of coronary flow reserve, CFR, a measure of the center’s ability to deliver more oxygenated blood to the central muscle during exercise or activity in angina. Chest pain without blocked coronary arteries. The effects of this initial study were positive, indicating that an even larger organization of potential patients could benefit from TReduce therapy.
Another giant investigational device (IDE) exemption clinical study is underway at the U. S. Mayo Clinic. The U. S. Department of Health and Prevention compares the effect of the reducer in patients with ANOCA. reserve, or CFR, in patients with ANOCA after implantation of the reductant. We hope to see the effects of this study in 2023. We hope that the study will provide important data on the mechanism of action and application of the reductant in patients with ANOCA.
The third and final pillar of our pricing strategy is in the progression and expansion of the Transapical Tiara mitral valve replacement device. We remain committed to monitoring and following up patients in Tiara’s clinical trials, but we have also halted all our activities while our efforts on the first 2 pillars of our pricing strategy, domestic and foreign expansion of the use of the Reducer device.
Now I’ll pass the call to Chris to talk about finances. Chris?
Cris Clark
Constant losses and comprehensive losses for the 3 months ended September 30, 2022 were $6. 7 million and $8. 2 million, respectively, or $3 base and diluted loss consistent with a consistent percentage, to $6. 7 million in consistent losses and $6. 9 million in overall loss or $2. 79 consistent diluted and fundamental loss with consistent percentage for the same consistent period in 2021.
The accrual of operating losses of $16,000 is explained through an accrual of $181,000 in operating expenses, offset by an accrual of $165,000 in gross profit. , compared to the same era in 2021, is largely explained by a $402,000 reduction in other income, basically similar to Canada’s Emergency Wage Subsidy earned in the September 2021 Array and not in the current era.
The accrual of $394,000 in interest expense is primarily similar to that of the 2022 Notes and an accrual of $401,000 in other losses and another comprehensive source of income similar to the accounting remedy of the 2019 Notes, 2020 Notes and derivative liability guarantees.
Revenue increased 31% to $923,000 for the three months ended September 30, 2022, compared to revenue of $703,000 for the same period in 2021. The lingering influence of COVID is still widespread in Germany. In addition, our revenues in France and Germany are denominated in euros and our income in the UK in pounds sterling. During the third quarter, the euro and sterling depreciated against the US dollar.
Cost of goods sold for the 3 months ended September 30, 2022 $220,000 compared to $165,000 for the same era in 2021. Overall gross margin for the 3 months ended September 30, 2022 76% compared to a gross margin of 77% for the same era in 2021. The company will concentrate on Germany, France and the United Kingdom, where the company sells the gearbox directly to consumers for higher margins.
Total expenses for the three-month period ended September 30, 2022 were $7. 4 million, compared to $7. 3 million for the same period in 2021, an accrual of $181,000 or 2%. The accrual of overhead expenses for the quarter ended September 30, 2022, compared to the previous era, is largely explained by an accumulation of $844,000 in worker expenses, basically similar to the accrual of premiums accrued in the previous era and an accumulation of $624,000 in other operating expenses similar to the COSIRA-II Study, Offset with a minimum of $862,000 in non-cash share-based payments.
Unsurprisingly, the equity appreciation plan has been adjusted from one year to four years. A minimum of $241,000 in insurance for directors and officers and a minimum of $190,000 in litigation costs.
Selling expenses for the quarter ended September 30, 2022 were $1. 1 million compared to $786,000 for the same era in 2021, a cumulative amount of $276,000 or 35%. compared to 2021, it is largely explained through a personnel expense backlog of $148,000 due to a backlog in Germany, France and the United Kingdom to a backlog of $221,000 and other expenses incurred by gearbox-like marketing activities as the company improved its sales activities and expanded its markets, offset with a minimum of $94,000 in non-cash equity bills, as the expected life of the equity appreciation plan was adjusted from one year to four years.
General and administrative expenses for the 3 months ended September 30, 2022 totaled $2. 3 million compared to $3 million for the same period in 2021, representing a minimum of $662,000 or 22%. Decreased general and administrative expenses for the quarter ended September 30, 2022, compared to 2021, largely due to a minimum of $677,000 in non-cash equity bills, as the expected life of the inventory revaluation plan was adjusted from one year to four years.
A minimum of $241,000 in insurance premiums for direct payment will be offered as premiums begin to normalize in 2022 and a minimum of $190,000 in litigation costs similar to a minimum in defense costs for lawsuits, all offset by a $251,000 accrual in labor expenses due to accrued premiums that were identified in the previous era and a $196,000 accrual in other expenses.
Product development and clinical trial expenses for the quarter ended September 30, 2022 were $4. 1 million to $3. 5 million for the same quarter in 2021, an increase of $567,000 or 16%. Increased product development and clinical trial expenses for the quarter ended September 30, 2022 is explained by a $444,000 accrual in labor costs due to the accrual of premiums that did not accrue in the previous era and a $207,000 accrual in other product development and clinical trial costs, offset by a $91,000 reduction in percentage-based non-cash bills while adjusting the expected life of the percentage appreciation plan.
Product progression and clinical trial expenses, a transition from the progression of the Tiara TF and TA programs, which were indefinitely suspended in June 2021 and September 2022 expired, respectively, to the COSIRA-II clinical study. As of September 30, 2022, the Company had $31. 3 million in cash and cash equivalents. And as of November 8, following the effect of percentage consolidations, the Company had 2,746,625 non-unusual percentages issued and outstanding.
I will conclude my remarks with an update on our cash flow, which is now expected to last until the first part of 2024. The change in attitude is basically due to administrative expenses similar to those of the COSIRA-II check and higher than expected daily operating expenses. . .
With that, I will now call Fred back.
Fred Colen
Thank you very much Chris. Operator, now I would like to open the call for questions.
Q&A session
Operator
Thank you. [Operator Instructions] And the first is for David Martin of Bloom Burton.
David Martin
Oui. Bonsoir. Ma’s first query is that he discussed that he has 48 patients enrolled, 25 randomized. What is the typical time between enrollment and randomization?And what percentage of the patients you recruit are randomized?
Fred Colen
Hi, David, that’s Fred. That’s a smart question. It’s usually a matter of several weeks. Once registered, you still have to pass many pre-selection tests. In particular, the treadmill test, and we may lose patients there. I can’t give you a consistent percentage of the number of patients we would lose, because it depends on the learning curve.
At first, with the new clinical sites, they would possibly be too positive and recruit too many patients, and then lose more than they deserve when they move to randomization. But it’s also a learning curve, and we’re looking at that right guy. same over time.
So, those who have been doing it for a while have had much more experience and see a much higher actual randomization rate compared to registration than the newer site. So, it’s confusing and not so good research, although it’s a smart question, not so simple to answer.
The other thing I can say is that we are very, very active on several fronts in the COSIRA-II trial. One is to continue to activate clinical sites, because we still have a long way to go. And it’s a long wayadministrative process, and we’ve taken longer than expected in some cases, basically, because of the time it takes clinics to make their percentage of the documents to get there, to close all the other parts that want to be shut down. So that’s something that plays a role.
The other one we are focusing on is to involve our entire organization, adding the organization of clinical boxes in the United States, to boxes with clinics to identify patients. We also increased this a bit after the summer break. So we think we’re going to continue to see an acceleration in enrollment as well.
We are also, and on this side, managing some Canadian sites, and we hope to be able to register maybe one or two patients before the end of the year in Canada as well with one or two sites open there. So there’s still a lot of activity going on in terms of activation, but also in terms of helping clinics and clinic coordinators locate the right type of patients.
David Martin
You said you have 50 planned sites open right now?
Fred Colen
Yes, 16. Yes.
David Martin
AND 50. Then. . .
Fred Colen
Don’t be surprised because obviously we will continue to open clinical sites, even a few months before registration closes. The opening of clinical sites is an ongoing activity during the period.
David Martin
And what is the distribution between the United States and the rest of the world on the 16th?And will it do so in North America in the future?
Fred Colen
So far, all activated sites are in the United States. The COSIRA-II trial is a clinical study that is being conducted primarily in the United States, with some additional sites in Canada. We are committed to the vast majority of patients coming from the U. S. We have more sites and patients from Canada to the U. S. , but we may also have more sites and patients from Canada.
David Martin
It is ok. It is ok. And then my last query is, waiting for news from Germany about the possible full refund by Reducer. Is it still planned for this month?
Fred Colen
We heard this from the German authorities. It is a confusing procedure, as is the case in all countries for reimbursement. So far, this procedure was smart, but that doesn’t mean everything is done. The first initial reaction we were waiting forbecause we won it and it was positive. But we still have many steps to take, and we don’t expect a definitive answer for Germany until much later in 2023.
Meanwhile, we have had a refund in Germany on the NUB scale for 3 or 4 consecutive years, and we are actively competing to put it back in position for 2023 as well. to the plan regarding the dates and timing of full refund. But in the meantime, we also have a cashback based on Nub, and we’re racing to get it back in position for next year as well.
David Martin
IT IS OK. That’s it for me. Thank you.
Operator
[Operator Instructions] I’ll give it to Fred Colen for closing remarks.
Fred Colen
It is ok. Thank you, Jenny. I appreciate it. Let me end the call with a final statement, and I’d just like to say that we actually made wonderful progress in the third quarter of 2022 with record revenues, despite the big and very strong headwinds. And we have created strong momentum behind the gearbox with fair reimbursement work, generating more data, in particular, for the ANOCA patient population and accelerating the fundamental COSIRA-II trial. We are progressing toward long-term success, and I look forward to the days, months and years ahead.
We appreciate your participation in today’s call and thank you all for joining us today. Thank you and see you next quarter. Good bye.
Operator
And that concludes today’s call. You can now log out.