Neovasc Inc. (NASDAQ:NVCN ) Q1 2022 Earnings Conference Call May 12, 2022 4:30 PM ET

Mike Cavanaugh - Investor Relations

Fred Colen - President and Chief Executive Officer

Chris Clark - Chief Financial Officer

Vernon Bernardino - H.C. Wainwright

Greetings and welcome to Neovasc First Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Mike Cavanaugh of Investor Relations. Thank you. You may begin.

Good afternoon and thank you for joining us today. Earlier today, Neovasc Incorporated released financial results for the quarter ended March 31, 2022. 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 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. 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, anticipate, estimate, outlook, will, may, 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 these 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, May 12, 2022. Neovasc disclaims any intention or obligation, except as required by law, to update or revise any information or forward-looking statements, whether because of new information, future events or otherwise.

I will now turn the call over to Fred.

Thank you, Mike and good afternoon everyone. As always, thank you for joining us today. I will start today’s call with an overview of the quarter and a business update before turning the call over to Chris to discuss our first quarter financials.

The first quarter of 2022 was a record breaking first quarter, with revenues up 35% year-over-year coming in at approximately $611,000, which Chris will touch base on a little bit later. As many of you know, the fourth quarter tends to be – the fourth quarter tends to be our largest quarter in terms of sales. And to see such a strong result in the first quarter is encouraging and is a testament to the continued focus of the entire Neovasc team. Our team continued to build on all three legs of our value creation strategies, making great strides across the board.

Now, a few highlights from Neovasc’s first quarter. The reimbursement efforts in Europe and elsewhere, including the United States, have been tremendous and we have seen strong momentum beginning in November of last year. As we announced in January, we have begun enrolling our first patients in the pivotal COSIRA-II clinical trial, which is intended to prepare the Reducer for a full PMA submission to the FDA. One of the pillars of our value creation strategy is expanding the use of Reducer outside of the United States.

In our fourth quarter and year end earnings call, we discussed various milestones for reimbursement abroad. In November of 2021, we announced that the National Institute for Health and Care Excellence of the United Kingdom provided positive guidance for the Neovasc Reducer system. This supports the first therapeutic intervention for stable angina patients who have not responded to treatment. As a result of the positive guidance, we are seeing an increase in utilization in the United Kingdom. We expect further growth in the coming quarters, driven by increased utilization and expanding margins.

Shortly thereafter, the Neovasc Reducer system was granted Prise en Charge Transitoire or PECT reimbursement in France by the National Health Authority of France or HAF. The Reducer is the first therapy to be approved under this newly established PECT process. In February, we announced the German Institute for the Hospital Remuneration System awarded the Reducer, a NUB 1 Status 1 designation again for 2022. The Reducer was previously been granted Status 1, which is the highest priority designation available. For 2022, 256 German hospitals applied for the Reducer NUB and they can now negotiate full reimbursement coverage for the Reducer therapy in Germany.

Securing reimbursement in three of the largest markets in Europe has been very fruitful. Our team has done great work. But we also think this is a testament to benefits the Reducer can provide to healthcare systems across the globe, especially improved outcomes for patients and resulting cost savings to payers. We continue to see a steady increase in the use of Reducer in those areas of Europe and we are grateful to see the growing acceptance and use of the Reducer for the treatment of refractory angina.

Shifting to the second pillar of our value creation strategy, the U.S. market. In January 2022, we announced the first patient enrollment in our COSIRA-II clinical trial. As a reminder, the COSIRA-II clinical trial target enrollment is approximately 380 patients across as many as 50 investigational clinical sites. And the trial is pivotal for our efforts to gain approval for the Reducer in the U.S. For the first time, patients that experienced the debilitating effects of refractory angina refractory angina will have access to an FDA designated breakthrough medical device in our placebo controlled trial, marking this as a major step towards commercialization in the United States.

Today, we are on track with 21 patients enrolled in the clinical trial. We are expecting the first readout from the COSIRA-II trial in the third quarter of 2024, which would potentially put us on track for an FDA decision around mid-2025. Please keep in mind that enrollment is not linear over time, but should increase over time as more clinical sites are being activated.

As for the third leg of our value creation strategy, we are continuing to pursue the CE Mark designation for our Tiara TA mitral valve replacement device. As noted on our fourth quarter and year end update, we continue to work on the critical bench tests and new tests required by the new European medical device regulations or MDR requirements. We anticipate a decision under the new MDR rules in late 2023. The European Union’s MDR process requires a higher standard for approval than the previous medical device directive MDD process of the past. As a result, we are seeing delays as we work to clarify and potentially meet those requirements. There can be no certainty that we will be able to meet these requirements in a timely manner or at all, but our team continues to work towards that goal.

I would also like to discuss various third-party publications supporting the Reducer device in the first quarter of 2022. On January 18, we announced the publication of a case series in the peer-reviewed journal, Cardiovascular Revascularization Medicine, which describes the successful uses of the Neovasc Reducer under a compassionate use protocol in the United States. Also in January, we were thrilled to announce the publication of an article entitled, the effectiveness of CS Reducer for the treatment of refractory angina, a meta-analysis in the Canadian Journal of Cardiology. The authors of this publication concluded this meta-analysis of clinical studies describing the outcomes of patients with refractory angina implanted with the Reducer for CS narrowing demonstrates its safety and efficacy. The vast majority of patients experience improvement in angina severity, quality of life and functional performance.

In February, we announced a third publication authored by Americo Cicchetti, Graduate School of Health Economics and Management at the Catholic University of Sacro Cuore, Rome, Italy. The analysis included a budget impact analysis and a cost utility analysis, which were both positive for the Reducer therapy. The various publications in the first quarter of fiscal year 2022 signal the continued spread of adoption and awareness we are driving in various target markets. I am incredibly proud of the team for all of the hard work and positive milestones we have hit in the first quarter as demonstrated by the various publications and strides in reimbursement.

Finally, following the activation of 6 clinical sites, the enrollment of 21 patients into the trial, medication stabilization and the required pre-procedural testing, we have now randomized our first 4 patients into the COSIRA-II trial. Notably, due to the strong efforts of our team in coordination with CMS, FDA and our clinical trial sites, the device is reimbursable in the COSIRA-II study without endangering the blinding of the study. And thus, we generated our first ever U.S. revenue risk Reducer in the first quarter, another important milestone.

We now have CMS coding, coverage and payment for the Reducer device in the United States, including during the COSIRA-II clinical trial. We also had a number of key events during the quarter from a corporate perspective. In early April 2022, we were pleased to announce the results of the votes on matters considered at its Annual General and Special Meeting of Shareholders held on April 12, 2022 in Vancouver, British Columbia, Canada. The shareholders of the company reelected the Board of Directors, appointed Grant Thornton US as our new auditors, and approved the proposed 1-for-25 share consolidation with over 95% of the votes in favor that became effective on April 29, 2022.

As many of you recall, we received a written notification from the NASDAQ Stock Market LLC in late November ‘21 granting an additional 180 calendar day period until May 23 2022, within which to evidence compliance with the minimum $1 bid price requirement. The impact of the share consolidation was to reduce the number of common shares issued and outstanding from approximately 68 million common shares to approximately 2.7 million common shares and increased the share price from $0.29 per share to $7.25 per share. As a result, it is anticipated that the company’s share price will remain above $1 per share for 10 consecutive trading days ending on May 12, 2022 meeting the requirements to regain compliance with the NASDAQ $1 minimum bid price rule.

Additionally, in late March, we announced the consolidation and extension of the convertible debt with the Strul Medical Group. The 2022 restated note was issued in an aggregate principal amount of $13 million and consolidates the amount owed by the company under certain convertible notes the company issued to Strul Medical Group in 2019 and 2020. The company paid out in cash an additional amount of $290,961 that was owed under the 2019 and 2020 notes. This restructuring further solidifies the company’s balance sheet and provides the company with a cash runway into mid-2024.

Before I turn over the call to Chris to discuss the financials, I would like to thank our investors, employees and customers for the continued support of Neovasc. It is gratifying to see momentum across our various value creation strategies, reimbursement initiatives, and adoption of the Reducer in many prominent markets.

With that, I will now turn the call over to Chris for a review of our financial results. Chris?

Thanks, Fred. I will repeat my comments on this quarter briefly. Revenues increased by 35%, $611,000 for the 3 months ended March 31, 2022 compared to revenues of $452,000 for the same period in 2021. As Fred has already mentioned, this is a record first quarter revenue for Reducer. The cost of goods sold for the 3 months ended March 31, 2022 was $136,000 compared to $72,000 for the same period in 2021. The overall gross margin for 3 months ended March 31, 2022 was 78% compared to 84% gross margin for the same period in 2021. As our mix of sales were skewed towards sales through distributors due to a COVID-19 wave in Germany, where we sell direct, restricted Reducer procedures in that country.

Total expenses for the 3 months ended March 31, 2022 was $7.1 million compared to $10.6 million for 2021, representing a decrease of $3.5 million, or 33%, substantially explained by one, a $1.6 million decrease in legal and underwriting fees related to the February 2021 financing; two, a $1.3 million decrease in non-cash share-based payments due to an adjustment in the expected life of the share appreciation plan and due to voluntary forfeit of certain incentive options by certain employees; and three, a $1 million decrease in employee expenses and other product development and clinical trial expenses as we definitely paused all activities related to the Tiara TF, a transfemoral mitral valve replacement program in June 2021.

The other losses for the 3 months ended March 31, 2022 was $3.5 million compared to other income for $8 million for the same period in 2021, a change of $11.5 million. The change in the other loss can be substantially explained by a $11.3 million change related to the accounting treatment of the 2019 notes, 2020 notes, 2022 notes and the derivative liability warrants. The operating losses and comprehensive losses for the 3 months ended March 31, 2022 was $6.6 million and $10.4 million respectively or $3.75 basic and diluted loss per share as compared with $10.1 million operating losses and $2.9 million comprehensive losses or $1.11 basic and diluted share – loss per share for the same period in 2021. The company ended the quarter with $44.2 million in cash. Company spent $5.7 million to fund operations during the quarter, absorbed $1.4 million on to the balance sheet and paid approximately $290,000 to Strul Medical Group for accrued interest on old notes in excess of the new $13 million note.

Thank you, Chris and thank you all for joining us today. We have made great strides in the first quarter of 2022 driving awareness, adoption and demand for our life changing device. Importantly, you the shareholders voted for the share consolidation, which is expected to cure our breach with the NASDAQ. We strongly believe that remaining listed on the NASDAQ was in the best interest of the shareholders. We continue to advance across all pillars of the business and we are confident that we are marching towards a long-term success. I look forward to the days to come and I am grateful for your participation in today’s call.

With that, I would now like to open the call open for questions.

Thank you. [Operator Instructions] Our questions come from the line of Vernon Bernardino with H.C. Wainwright. Please proceed with your questions.

Good afternoon, everybody and Fred and Chris congrats on the progress. The 21 patient is very intriguing. I think that was quite an accomplishment, especially in this environment, even though things are getting looser, people are still careful. And sometimes it takes a little bit of tipping your toe in first before you can have an idea of how quickly you can get back to normal, including electric procedures. What are you seeing out there? And perhaps you can share as to what has driven enrollment and if there are any things that you are seeing that may actually add and therefore accelerate?

Yes. Hi, Vernon. This is Fred. Thanks for joining us today and for your question. So yes, I mean, I would say that similarly to Europe, where we see enthusiasm in the market, we see physicians seeing the benefit of the Reducer in their own patient population and that continues to drive demand. Similarly, in the U.S., we see quite a bit of enthusiasm from, I would say, the most prominent clinics. First of all, we had a couple of clinics in the U.S. that had actually implanted the Reducer under a prior possibility of a concern by the patient and the FDA. And those two clinics actually saw really remarkable success with the patients – with a few patients that they are treated before the COSIRA trial and therefore they were very enthusiastic in getting going right away in the COSIRA trial, but that’s just for those two. But we also see this from a number of other clinics in the U.S. And I would really say we work with the most prominent clinics in the U.S. in New York, in Florida, all over the country. And these clinics are really enthusiastic about finally having an option for a patient population that so far they really couldn’t treat. And so it really has to do with enthusiasm by these physicians and these clinics. That’s one.

The other part of it is that obviously, the fact that we are getting reimbursement by CMS for the trial also helps. The clinics are getting paid by us for their work, their expenses. But then for the implant, they are able to get reimbursement by CMS. And we are able to obtain payment by CMS for the device. All these things helped to really create an enthusiasm in the market for the device. So, I would say, it is a testament to primarily to the physicians and clinics that we work with that are really excited about being able to participate in this trial. It is I have to say quite a complex trial. And I just want to explain, I mean, there are a huge amount of steps that we and our clinical team has to go through to get a clinical site up and going. There is a lot of different steps that they have to go to just get a trial – clinical trial site approved.

But then, outside of that, when you start looking at the patients, there are a lot of requirements for this, I would say highly scientific clinical study and the safeguarding of the treated populations versus the control population. So, for example, there are strict requirements for these patients being on a stable medication regiment. And that has to be in place for a while, so that these patients really are stable on their medications. And that no medication change can be impacting the results one way or the other depending on if the patient gets to be in a controlled or on their Reducer arm, that’s one. There is also requirement for example, the patient cannot have a another procedure relatively shortly before being enrolled in COSIRA or even although every patient does get like, for example, a stenting procedure pretty quickly before enrolling in our study, that’s another issue that is not possible. And then we have to do these treadmill tests before the patient can be subject to randomization, under strict requirements for the treatment that if a patient does, I mean some patients have difficult to do with a treadmill test at all. And some may be too good, they may be actually doing the treadmill test, I am just way too good. And therefore outside of the time stipulated that basically points to the fact that the patient is not sick enough, because we are supposed to treat class three and class four angina patients. So, there really are a lot of hurdles that you have to go through. So, this is a – this really takes a clinical site and a group of clinical researchers in these clinics that are really dedicated to work with us. And I am really happy to say that that is what we see. And that is the case, because these physicians, and their clinical staff are really interested in a therapy that they could not offer to a patient before. And that’s really the driving factor. That plus all the international success that has been publicized in so many journals, where physicians and patients talk about the successes that they have had, I mean, physicians have high expectations in the U.S. also with the success of this device. So, I think that kind of like is describes the environment we see Vernon.

That’s terrific. And it’s great that you have these sites, which already had experience implanting the Reducer, but how much education do you still have to go through, for example, when you visit sites who have not and what kind of conversations if you could share any regarding what looks to be a promising environment as far as reimbursement from CMS? Thank you.

Yes. So, training, there is a lot of training. There is a lot of training going on by us to each individual site, to basically educate them on all the requirements, on what all needs to be done to get to the right kind of patient to be enrolled. And then obviously, there is also training that we provide with our own staff, as it relates to how the device has to be implanted. So, the clinical sites that had patients before and in the compassionate use environment already had a certain amount of training that certainly helped. But we are doing still a lot of training in general for all the requirements from the clinical trial and then also for the first several implants of the Reducer, because that is something we have to safeguard as well that these physicians are properly trained as to how to implant a device. It is not really a complicated implant, but there are some tricks that you need to learn, that are important so that you really have the best possible outcome for the patient. And so there is a training component there as well, that is important. As it relates to CMS, we did spend quite a bit of time with CMS and over the last, I would say 1.5 years, that has cumulated, really in a very good outcome for us. The last piece of it was basically a separate reimbursement code for a patient’s into COSIRA to clinical trial. So, basically, the way this works is how – I mean so how do we get paid for our device without endangering the blind. It’s basically done by CMS on our suggestion by the way, taking the approach of well, let’s take one patient who goes through the entire procedure, but doesn’t get the device, then let’s look at the next patient who would go through entire procedure and all the costs for that, but then including the device, then you take those two together and divided by two.

So, you get an average cost for the statistical average patient. And that is the reimbursement amount that that CMS has stated now for patients in the COSIRA-II trial. So, all that the clinic does is basically state that this is a patient that participated in the COSIRA-II clinical study. And then there is a particular reimbursement code and particular reimbursement amount that is being provided, which is basically an average of the two different scenarios. And that is how we are still being able to get paid for the device without endangering the blind. So, we really have been able to work this out nicely with CMS, I can tell you that, I mean Neovasc has really done a quite a bit of groundbreaking work in the space of reimbursement. You look at the UK for the very first time, we get a positive statement from NICE, before the statement recommending the use of the Reducer by NICE, before that NICE was basically recommending that the patients had to go through psychological counseling in terms of how to deal with the pain. And then when we worked with them, they are now basically recommending the use of the Reducer, that is a absolute first for these angina patients. In France, we were the very first company that was able to get reimbursement under the new French reimbursement tax process. At the very first there wasn’t Medtronic, it wasn’t none of the big companies, I am sure they all would have liked to be the first, Neovasc was the first to actually get this process done and actually got the reimbursement out of it. And then last but not least, I can tell you that Neovasc is the company who has worked with the CMS and as far as I know, is the first and only company who actually is executing on reimbursement for a device in a clinical trial, the way I described it. I don’t think that this actually has been executed this way before. So, there are a lot of novel ways that we actually are going and actually have succeeded in to be able to work with authorities in the UK, in France, and in the U.S. to really put the Reducer therapy in the forefront of these authorities. And last but not least, Vernon I think to put it in perspective, it’s not just that we are saying, well, you should be using the Reducer, you should be doing the Reducer, we are recommending the European guidelines, that’s one for cardiology. And the second one and I would say that’s equally and maybe even more important. There is more and more evidence and studies out there that demonstrate that the use of the Reducer device and the therapy for the patient will actually save the healthcare systems’ money. And that part is extremely important. If this is a good therapy for patient, it actually does good for the patient, for the most – in most cases, not always, but in most cases, the patient will do better, and that the healthcare systems actually save money because this is such a very expensive patient population that needs a lot of attention in any healthcare system. And those are the things that really help us in getting these firsts accomplished. I just want to explain that to you one more time.

Perfect. Those are very helpful insights and thank you for sharing. And thank you for taking my question. Appreciate it.

Thank you, Vernon. Thank you so much.

Thank you. That is all the time we have for questions today. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.