May 10, 2017
Executives
Alexei Marko - President & CEO Chris Clark - CFO
Analysts
John Gillings - JMP Securities Danielle Antalffy - Leerink Swann Jeffrey Cohen - Ladenburg Thalmann & Company Inc.
Operator
Good afternoon, ladies and gentlemen. Welcome to Neovasc First Quarter Fiscal 2017 Results Conference Call.
At this time, all participants are in 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'd 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 section of Neovasc's first quarter MD&A which is available on SEDAR and EDGAR.
Now, I'd like to turn the call over to Alexei Marko, President and Chief Executive Officer of Neovasc.
Alexei Marko
Thank you, Leoni and welcome everyone. With me this afternoon is Chris Clark, our CFO, and as we typically do, we'll begin our call with Chris providing a quick summary of the financials and operations.
I'll then review our Tiara and Reducer programs, and then we’ll open it up for questions. Chris?
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. Firstly, for those listening today, I wanted to provide a high-level summary of our ongoing litigation with CardiAQ.
In our financial statements, we’ve fully provided for the monetary judgments against this. So approximately $112 million, which includes damages, enhanced damages, and pre and post judgment interest.
As you may recall, the trial court in Boston has granted Neovasc's day of judgment, pending the completion of our Company's appeal against these damages. Concurrent with this day, the trial court required Neovasc to place $70 million in escrow.
The appeal is ongoing and is working through a schedule process. Hearing related to the appeal is currently scheduled for August of this year, but the ruling expected 60 to 90 days after that.
On the German litigation related to the same matter with CardiAQ we expect a response from the German court in the coming weeks. There are no monthly rewards associated with the German case and no damages have been recognized in the financial statements.
We will continue to update the market as material and scope. The company continues to vigorously defend itself in this litigation with CardiAQ.
So the outcome of these matters, including whether the Company will be required to pay some or hold. The $112 million in damages and interest is not currently determinable.
It should be noted, however, for the outcome of the rulings noted above indicate the existence of material uncertainty and call substantial doubt by the Company's ability to continue as a going concern after the decision from the appeals court. I will now turn to the other elements to financial statements.
In the first quarter of 2017, revenue was $1.48 million, decreasing by approximately 26% from the same period last year. The decrease was expected as the Company transitions its business away from its traditional revenue streams toward development and commercialization of its own products, the Reducer and the Tiara.
In particular, contract manufacturing revenues drop substantially in comparison same period last year as we sold out business supply and tissue to Boston Scientific in late 2016. The sale of the tissue business facility to Boston Scientific was consistent with the Company strategy to focus business towards development, commercialization of its own products and raise much-needed capital to place in escrow and secure the stated damages awards against the Company.
Moving to Reducer. We are pleased to report revenues for the Company's innovative device to treat refractory angina of $260,000 for the quarter, an of increase of 22% over the same period last year.
We've seen steady year-over-year reducer sales growth since launching in 2015, and expect this trend to continue. The gross margin for the first quarter of 2017 was 45% compared to 28% for the same period last year, due to a change in the product mix with high-margin products representing an increased share of our revenue.
Total expenses for the first quarter of 2017 by $8.5 million compared to $10.1 million for the same period last year, representing a decrease of 16%. The decrease in total expense is principally related to a reduction litigation expenses for the quarter was [indiscernible] from over $4 million in the first quarter of 2016 to $870,000 for the first quarter of 2017.
Product development and clinical trial expenses to advance both the Tiara and the Reducer programs increased by 24% to reach $5.1 million. The increase reflects a larger investment in both programs as we continue to drive towards important clinical milestones.
The loss and comprehensive loss for the three months ended March 31, 2017 was $7.8 million and $7.9 million, respectively or $0.10 basic and diluted loss per share compared to $10.9 million and $7.7 million, respectively or $0.16 basic and diluted loss per share for the same period last year. The decrease in the operating loss compared to the same period in 2016 can be substantially explained by a $3.2 million decrease in litigation expenses.
It should be noted that the Company has incurred significant costs in defending itself in the lawsuits filed by CardiAQ. Total litigation costs since the initial claims were filed in June 2014, approximately $21.9 million, and the Company may require additional $1 million to cover litigation expenses up to and including the appeal hearing currently scheduled for August 2017.
As at March 31st 2017, the Company had cash and cash equivalents of $16.2 million compared to $23.0 million as of December 31, 2016. The Company has also -- also has $70.1 million of cash held in escrow, pending the outcome of the Company's ongoing litigation and appeal with CardiAQ.
During the quarter, cash used from operating activities was $6.3 million. $6.1 million was used in operations and $245,000 was absorbed by noncash balance sheet items.
Of the $6.1 million, cash used in development activities was approximately $4.3 million. Cash used in litigation was approximately $870,000 and the rest of the business including sales and marketing and general administrative expenses net of gross profit used cash of approximately $1 million during the quarter.
Aside from the litigation expenses, we are satisfied that we’re currently allocating our cash resources toward the development of our key product launch and that expenditures on other activities are significantly offset by the ongoing contribution from our tissue business and reducer revenue. As you will note from our recent filings, the Company is in a working capital deficit position of $24.2 million as a result of recognizing the damages provision of $112 million related to a litigation with CardiAQ.
While we intend to continue to vigorously defend ourselves the litigation with CardiAQ, the outcome of these matters including whether the Company will be required to pay some or all of the $112 million award is not currently determinable. Litigation is inherently uncertain, therefore, until CardiAQ, the CardiAQ litigation matters have been resolved their conclusion by the appropriate course, the Company cannot give any assurances as to the outcomes.
If we are unsuccessful in defending these claims, including any appeal of the verdict and the litigation with CardiAQ are unable to settle these claims in a amount of satisfactory to the Company, we may because with a significant monthly damages that could exceed our resources. The Company could require significant additional financing in order to pay the damages and to continue to operate the business.
There can be no assurance as such financing be available on favorable terms or at all. The circumstances indicate existence material uncertainty and cost substantial doubt about the Company's ability to continue as a going concern.
We will continue as always to update the market as material events occur. I'll now hand the proceedings back to Alexei.
A - Alexei Marko
Thanks, Chris. The Reducer update, as it has been since launching the device nine quarters ago is positive.
Sales were up to the quarter, margins remain strong and the key indicators such as adding new sites, reorder rates and position feedback all encouraging, suggesting that the positive trend will continue. To give you a feel for where we are at our commercial footprint for reducer.
Since launch, we've sold more than 450 devices and have seen cases performing approximately 65 clinics or hospitals spread across nine countries. It's difficult to exactly say categorically what this products commercial potential is, and large part as we’ve only investment modestly and its rolled out.
But without a doubt, the product is establishing itself as a viable treatment for refractory angina and significantly improving the lives of many hundreds of patients. As I said in the last call, building a quality footprint in Europe for Reducer, expanding its awareness and [indiscernible] that we will steadily growth revenue over the coming years.
Now we believe that this will support our initiatives in the United States for this proprietary device. Moving on to Tiara, it's now treated 28 patients.
The technical success rates are very high and at the most recent 17 cases the data is even more encouraging with 0, 30 day mortality reported. Minor tweaks to the products design and ongoing procedural improvements have all contributed to the successes and we continue to learn from and improve with every case we do.
And as we like to report on one of our first patients ever treated in Vancouver over three years ago was alive and well. When you stop to think about, this is a real testimony to the Tiara's engineering.
Typical heartbeats more than 40 million times a year, and this specific Tiara, in other words it's going to drive more than a 120 million times since being implanted 2014. We continue to be very happy with the long-term results and performance of Tiara, and we're confident that Tiara continues to be one of the leading programs in this exciting field.
We were steadily increasing our patient screening activities, we continue to enroll patients in our ongoing early feasibility trial and we're excited to have started our Tiara CE mark trial in Europe. We recently received German regulatory approval to initiate CE mark study enrollment there.
So this study, it's now active in both Germany and Italy and expect to be adding additional sites in these countries over the coming months, as well as seeking regulatory approval to outside some additional jurisdictions. Our first Tiara CE mark patient was treated at San Rafael Hospital in Malan in April and while the patient hasn’t reached their 30-day follow up point, they’re recovering without incident to date.
This case was recently presented by one of the implanting positions at a medical conference in Italy. We are steadily increasing our screening activities, and as we continue to add participating countries and medical centers, we expect our enrollment rates in this Tiara -- critical Tiara CE Mark study to continued around that.
It was, as stated in the press release another quietly successful quarter for us. Continued growth from Reducer sales, more patients successfully treated with the Tiara, which continues to perform well both acutely and long-term.
With the late summer timing expected for the appeal hearing on the cardiac litigation matter, we look forward to a positive outcome and putting litigation behind us and moving our innovative cardiovascular products and their potential back to the center stage. I will close my prepared comments there.
And open the floor to Q&A. I will just remind everyone that there are many questions related to the ongoing litigation that we unfortunately cannot answer at the present time.
We are simply not in a position to comment further on pending litigation beyond what we’ve already stated to date, and what is in our regulatory filings. With that said, I'd like to turn the call back over to our moderator and open the floor to any questions that you have.
Operator
Thank you. [Operator Instructions] Your first question comes from John Gillings from JMP Securities.
John, please go ahead.
John Gillings
Hey, could you guys hear me okay?
Alexei Marko
I can hear you well, John. Thanks.
John Gillings
Okay, great. So, first I just wanted to ask one of the comments that was made during the remarks or in the press release was that there had been no 30-day mortality in the last 17 patients treated with Tiara.
And I was wondering if you could just walk-through -- sort of some of the change that you guys have made for screening patients or small updates to the device that might help us understand what have changed, what might be driving that?
Alexei Marko
Sure. You cut out a little bit there, but I think I know what you're asking.
So, yes, we haven't seen mortality in under 30 days since I think it was late 2015 now. Largely that's that -- I think that can be attributed to we’ve made some very, very small tweak to the device, but that's largely based on improved screening.
I think a better understanding of the types of patients we should be treating and then obviously just getting better and better during the procedure. I think as we’ve said, every time we do one of these procedures we learn something.
So I think it really just goes to getting better and better what we’re doing. The device is still fundamentally the same and we believe that it's got a very broad base of applicability and can treat a wide range of patients.
But I think we’re just getting a little better at screening and determining who we shouldn’t treat and obviously just getting better with each case.
John Gillings
Okay, perfect. Yes, I appreciate that.
And then just turning to cash for a minute. So you guys burned over $6 million this quarter.
Obviously, that the cash that’s available right now isn't very sizable that you do have this large amount in escrow. So, just kind of a two-part question.
One is, is that $6 million range about what we should look at over the next couple quarters or will that come down a little bit with less legal expenses? And then, the second part of that is, is there any potential to petition the court to be able to draw on the escrow account, if it really means the difference between running out of money versus being able to keep the study going and also those sorts of things?
Alexei Marko
Sure, John. So, yes, we should see that number come down.
So we expect to see that lower over the next couple of quarters. Yes, there is potential to petition the court to use some of the escrowed money, but obviously that’s probably not a preferred approach.
We’re looking at a number different options to handle that and trying to find a solution that I think works best for our shareholders and results in least amount of dilution. But I think its a number of different things we’re looking at and we're confident that we won't need to swap anything and we can keep going full speed on things.
John Gillings
Okay, perfect. Great to hear.
All right. Thanks a lot guys.
Take care.
Alexei Marko
Thanks, John. I appreciate it.
Operator
Thank you. Your next question comes from Danielle Antalffy from Leerink partners.
Danielle, please go ahead.
Danielle Antalffy
Hi. Good afternoon, guys.
Thanks so much for taking the question. Alexei, I was hoping you could give some color on how we should think about complete -- enrollment completion for the CE mark, and when we could see a U.S trial start?
And then maybe sort of any color at this point with FDA? Are you talking to FDA about what that trial might look like?
Alexei Marko
Sure, Danielle. Thanks for your questions.
Yes, I think we are starting to get better feel for how the enrollment is going to go on the CE mark study. As I indicated, it was in press release in my prepared comments.
We recently received approval to initiate enrollment in the study. Center is in Germany and we believe this is something we've been waiting on and working towards and we believe this is going to be a very important addition to the study.
I believe we currently have three centers that are up and running in Italy, and we expect a reasonable rate of enrollment out of that jurisdiction, but I think the addition of Germany is going to be significant to us. We’ve, I believe about five centers ready to come on board and start moving very quickly there.
So we think that’s really going to kick up enrollment rates. So I'm hesitant to give an actual number yet or a target completion date, but the German piece was a very important fee to us.
So between Germany and Italy, we should have about eight centers up and running within relatively short order now and should be moving quite quickly. So obviously, targeting completion sometime next year, just not quite sure when.
In terms of adding additional centers to the CE Mark study we’re looking at a couple of other centers in two new -- one to two other countries that we are looking got in but we will provide more clarity on those when that’s finalized. In terms of the U.S trial, still little bit far out to be looking at that or talking about that in any detail.
Obviously, we are having ongoing discussions, or in ongoing communication with the FDA that really haven't reached any conclusions, so that we can discuss it.
Danielle Antalffy
Okay. And any -- I’m just trying to get a sense of how big a trial could be?
Could [indiscernible] trials now or something like a 1,000 patients give or take, do you think it's going to be similar or do you think it could be smaller, or it could be a larger.
Alexei Marko
I can tell you what, I think it will probably be smaller, but I don't I really don't know yet, so I'm very hesitant to give an answer that. We know what a European trial looks like for CE Mark and that’s the 100 to 115 patient trial that we're doing.
It's really too early yet to judge on -- in the U.S. I wish I could, but I just don't think we know yet.
Danielle Antalffy
Okay. That’s fine.
All right, guys. Thank you so much.
Alexei Marko
Thanks, Danielle. I appreciate it.
Operator
Thank you. [Operator Instructions] Your next question comes from Jeffrey Cohen from Ladenburg Thalmann.
Jeffery please go ahead.
Jeffrey Cohen
Hi, Alexei, and Chris. Thanks for taking the questions.
Alexei Marko
Hi, Jeff. Our pleasure.
Jeffrey Cohen
So, firstly, on Reducer. Can you give us a feel for the sales organization that’s on the field both sales and in clinical support and how your thoughts around there?
Alexei Marko
Right now it is a very small group. We've got a number of distributors obviously that we’re working with and we’ve two to three people in the field.
We just added a new person in Germany, who is going to really be leading the charge their and will likely be putting a few additional people under that person in Germany. So we are looking to grow that group.
So it's a -- to date it's really been a very small group working closely with our distributors.
Jeffrey Cohen
Okay. And then circling into your, could you give us a sense of how many physicians have been in trained thus far?
And what’s the process or procedure for the training of the physicians after that you train [indiscernible].
Alexei Marko
I think we’ve done -- so, we’ve done plus or minus. I think we’ve done cases at about 08 different with -- about 8 different centers, plus or minus a couple.
I don’t know off the top of my head. In terms of the physician training, obviously we spent some time with them walking to the screening criteria.
We do a theoretical training on it and then we have a model that we work with them, a bench top model that we work and do a final training. So it's a day or two process.
And then we obviously have our own proctors and our own people there supporting the cases. So it's not particularly difficult to train physicians.
It's not practically time consuming, but then of course at this stage of the game we’re really supporting it heavily with our own people. One of the things we’re in a process of doing is, is adding additional people to our own team that can support these cases.
We have a number of scheduling complex over the last month or so that prevented us from doing a number of cases that we wanted to do, so we're looking at adding some additional people to our team that can work around that. So, yes, it's not onerous for the implanters, but I think we need to grow our team to do the supports.
Jeffrey Cohen
And you’re training 1 to 2 in each location or what kind of learning curve are you seeing? [Multiple speakers] surpass.
Alexei Marko
Yes, we’ve -- obviously, people have been doing very, very well within a very, very -- or satisfied with what they’re seeing. Typically we work with the surgeon, a cardiologist, an international cardiologist and we like to involve the echo person as well, because that’s obviously a critical piece of the procedure.
So it's really a case about working with those three key people. And then obviously a lot of times that will be supporting team members around that.
So, but it is really key to have that primary surgeon, that interventionalist and that echo person really trained up. So that's the core team that we need to work with and as long as we have those guys up to speed, I think that’s what we need to do in order to get successful implants.
Jeffrey Cohen
Okay, perfect. That’s it for me.
Thanks for taking the questions.
Alexei Marko
Perfect. Thanks, Jeff.
Operator
Thank you. There's no more questions at this time.
Please proceed.
Alexei Marko
Thanks everyone for attending our Q1 '17 earnings call. And we look forward to speaking with you all 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.