May 6, 2021
Operator
Good day, everyone and welcome to the Neovasc, Incorporated First Quarter 2021 Earnings Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Mr. Mike Cavanaugh, Managing Director at Westwicke.
Please go ahead, sir.
Mike Cavanaugh
Good afternoon and thank you for joining us today. Earlier today, Neovasc released financial results for the quarter ended March 31, 2021.
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'd 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 provision 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 are 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 sections of Neovasc's annual information form 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 6, 2021.
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.
Fred Colen
Thank you, Mike, and good afternoon, everyone. It's been a busy quarter for Neovasc.
Overall, we are pleased with the progress we made in the quarter to advance our two key cardiology products, including the commercialization of the Reducer device. Revenues for the first quarter of 2021 were $452,000 compared to $533,000 in the first quarter of 2020.
Although, down year-over-year due to the COVID-19 pandemic driven decline in elective procedures, it was higher than we budgeted as the volume of Reducer implants continues to rebound faster than anticipated. The great majority of these implants occurred in Europe, where Reducer is approved and is gaining traction with cardiologists seeking a treatment for patients with refractory angina.
And we have run out of traditional treatment options. We think it is encouraging that our implants were down just 10% compared to the first quarter of 2020, considering the difficult year-over-year comparisons.
Recall that COVID impacted our implants during the final two weeks of the first quarter of 2020 but impacted the entire first quarter of 2021. In Germany and the larger DACH region, including Austria and Switzerland, our revenues and implants were actually flat in comparison to Q1 2020 despite the pandemic’s impact on elective procedures.
We see disparate effects of lockdowns and elective procedure cancellations across Europe with some markets returning to near normal levels of procedures and others with more market impacts. We anticipate the effects of COVID-19 on procedure volumes to continue into the second quarter of 2021 and likely the third quarter of 2021 in select markets.
Despite the lingering impact of COVID, Q2 2021 is off to a strong start compared to Q2 2020, which was severely impacted by COVID-19. We believe the recovery in Reducer implants demonstrates the value to patients experiencing chronic pain.
And for whom standard treatments have failed. We furthermore just now celebrated the enrollment of our 300 Reducer patient in the Reducer 1 post-market clinical study.
We are also pleased with our efforts to expand reimbursement for the Reducer worldwide. As previously announced, the company has significant progress against our reimbursement objectives in the UK, France, Germany, and the United States.
The company has worked with the American Medical Association to establish a new Category 3 CPT or Current Procedural Terminology code to report the transcatheter implantation of a coronary sinus reduction device, which will be effective July 1, 2021. Additionally, Neovasc has worked with the centers for Medicare and Medicaid services or CMS over the course of the last several months to create a new ICD-10 procedural code for Reducer that is effective October 1, 2020 and new ICD-10 diagnosis codes for refractory angina that are currently under review by CMS for potential implementation in 2022.
Last week, CMS issued its calendar year 2022 inpatient prospective payment system proposed rule for inpatient procedures and recommended support for a new technology add-on payment for Reducer of US$9,750 pending FDA approval of the device. Given the fact that we will not receive FDA approval with all the IDE clinical study, we intend to withdraw our application.
However, it is encouraging to note that in its proposed rule, CMS stated, “We agree with the applicant that the Neovasc Reducer system meets the cost criterion and therefore are proposing to approve the Neovasc Reducer system for new technology add-on payments for calendar year 2022 subjects to the technology receiving FDA marketing authorization for use in patients with refractory angina pectoris despite guideline directed medical therapy, who are unsuitable for revascularization by coronary artery bypass grafting or by percutaneous coronary intervention by July 1, 2021.” Additionally, CMS has established a new ICD-10-PCS procedure code for restriction of coronary sinus with reduction device percutaneous approach, new technology group seven to report the Reducer system providers will be able to report this new code for procedures performed in the hospital inpatient site of service effective October 1, 2021.
CMS also assigned this procedure to MS-DRG 228 and MS-DRG 229 and we are pleased with those assignments. These efforts on the U.S.
reimbursement front were all initiated and properly executed to enable successful commercialization of the Reducer in the United States, in parallel processes with the FDA approval processes. As we have previously disclosed, we will not receive FDA approval this year and intend to initiate an IDE clinical study in North America to support our U.S.
FDA regulatory approval process in the form of an amended and updated COSIRA II IDE clinical study, which in its original form was already approved by the FDA, before the FDA granted the Reducer, the breakthrough device designation in 2018. We are nonetheless gratified to receive this support from the CMS and look forward to continued collaboration with them in the future.
These are significant milestones on the reimbursement front, and they bode well for the Reducer of therapy, if, and when we obtain FDA approval for the Reducer device. Following up on my comments about pursuing this new U.S.
IDE clinical study for Reducer. We recently has had initial discussions with FDA, regarding the initiation of COSIRA II a double-blind, sham-controlled, randomized controlled trial of the Reducer device versus a sham procedure to be conducted in North America.
We are pleased that Blackstone from Mount Sinai Medical Center, Tim Henry, from the Christ Hospital, Marc Jolicoeur from Montreal Heart Institute and Allen Jeremias from St. Francis Hospital in Roslyn, New York has agreed to serve on our Executive Steering Committee.
We are thrilled to have such an esteemed group of cardiologists support our program. There is plenty of work to do to initiate the study, but we have set an aggressive internal goal of the end of this year for our first patient enrolment.
Although, I've touched on it during our last call, I think it is important to discuss the $72 million raise, we completed in February of this year, because of this offering, we now have a financial runway that is anticipated to take us through the next 18 months or so, and should allow us to pursue some of the work we have discussed, including the COSIRA II study. As I said on our previous earnings call, we believe that this will provide to be a significant transaction in the life of the company, shoring up our finances and providing us the opportunity to allow better decision-making around resource allocation and partnership opportunities.
Turning to our Tiara mitral valve replacement device. We did not receive a CE Mark decision for the Tiara TA transapical mitral valve replacement system under the medical device directive.
This was not a rejection of our application, but rather a timing issue. As we were not able to provide additional required information before the May 26 deadline and the transition to the MDR regulations.
We are now in collaborative discussions with the governing body to determine potential next steps. The next key initiative to watch will be activity leading up to a first human implant and related regulatory interactions for the next-generation Tiara TF device.
We are still targeting the first-in-human implant of Tiara TF towards the end of 2021, although, we are also still facing COVID-related delays and inefficiencies. This however could also move into next year, it will all depend on the progress we make in developing this complex new system.
The company is encouraged by the positive feedback we have received on the system, including the enhanced new Tiara valves. Most notably, many physicians are supportive of the implant's low profile, control delivery and unique D-shaped design that set it apart from competitive offerings in development.
We continue to believe in the potential of Tiara TF to expand the size of the market and be more broadly applicable than competitive systems under development and our own TA Tiara system. We accomplished a great deal in the first quarter that we are well aware that there was much more to do.
We hope to report on multiple milestones in 2021, as we continue to develop our devices. I will now turn the call over to Chris, for a review of our financial results.
Chris?
Chris Clark
Thank you, Fred. As everyone is actually aware, a restriction on elective procedures, which included Reducer implants, was implemented by hospitals, health authorities and governments of a substantial portion of all our major markets due to COVID-19.
This caused Reducer implantations to significantly slow beginning in March 2020. There has been a recovery in elective procedures, we're not yet back to pre-COVID levels.
As a result revenues decreased by 15% to $452,000 for the three months ended March 31, 2021, compared to revenues of $533,000 for the same period in 2020. However as Fred mentioned, Reducer implant volumes and revenues are both had an expected – indicating a faster recovery in Reducer procedures than we have anticipated.
Cost of goods sold for the three months on the March 31, 2021 were $72,000 compared to a $125,000 for the same period in 2020. The overall gross margin for the three months ended March 31, 2021 was 84% compared to 77% gross margin for the same period in 2020, as a company sold more products in countries where we sell direct by our end salesforce behind margins.
Total expenses for the three months ended March 31, 2021 were $10.6 million compared to $7.6 million for 2020, representing an increase of $3 million or 39%. The increase in total expenses for the three months ended March 31, 2021, compared to 2020 can substantially be explained by onetime $1.6 million increase in legal expenses and underwriting speeds related to the February, 2021 financing and a $1.3 million increase in noncash share-based expenses [indiscernible].
The operating losses and comprehensive losses for the three months ended March 31, 2021 or $10.2 million and $2.9 million respectively or $0.04 basic and diluted loss per share, as compared with $7.2 million operating losses and $2.7 million comprehensive loss, or $0.38 basic and diluted loss per share for the same period in 2020. Thanks for the increase in operating losses, I've already explained in my earlier comments.
I will also note that we were expecting Neovasc a notice from the Appeals Court of Munich from our co-ownership patent dispute with CardiAQ. This has been delayed by the court by two weeks to May 20, 2021.
As Fred mentioned, we are in a much stronger financial position, and expect that we will reach critical value creation events before needing more capital. This is a complex process that we expected by positive updates for the balance of 2021 and beyond.
Back to you, Fred.
Fred Colen
Thank you, Chris; and thank you all for listening to our opening remarks. Neovasc is finally on a new foundational footing with a clean cap table and balance sheet and a reasonable amount of funding for the development of our two key products.
This allows us to focus completely on advancing the strategies, which we believe will uncover the vast potential of Reducer and Tiara, and ultimately help millions of patients around the world. Thank you all for your continued support.
I would now like to open the call up for questions.
Operator
Thank you. [Operator Instructions] And our first question will come from Danielle Antalffy with SVB Leerink.
Danielle Antalffy
Hi guys, thanks so much for taking the question. Fred, just a question on how you think about when realistically Tiara could start to contribute some revenue here, given – especially given now that the fact that the Reducer product probably isn't going to come to the U.S.
for a little bit of time. So just any color you could give on when Tiara could actually become a revenue contributor, and I appreciate that the TA product is not likely to be the product that comes here to the U.S.
Fred Colen
Yes, thanks Danielle. So first of all, let me put this in perspective.
We never really counted on the Tiara TA in Europe as a big revenue provider. As you know, it is not a product in the U.S.
market, it is one that we are targeting for the European side. And secondly, as you also know it is really for a relative small patient population.
That is true for a lot of these programs on the mitral valve side at the moment. And certainly also for our TA device, as you know, and as we have disclosed in the past, from all patients that we screen, we see 20% or less patients being eligible for this particular device through to all kinds of inclusion, exclusion criteria.
So it is – if anything, only a small revenue generating opportunity as it is. That said, we – I can't really give you a concrete answer yet, because we are talking about what the transition from MDD to MDR means in terms of the submission and what we have accomplished with the notified bodies so far.
We have been able to close off quite a substantial number of modules, but not all of them. But even on those, there will be some transitionary work to be done from MDD to MDR.
So we are in the process of understanding all of these things, and once we understand them, we will have a much better idea about the timeline as to how we might be able to move forward with that. So at the moment, we don't have an answer.
We need to understand the transition, the requirements from our notified body and with that we’ll come to an understanding of the work and the scope and the timelines for it, that will hopefully become clearer or in the next few months. But I really don't have that perspective yet at this point in time.
Danielle Antalffy
Okay. That's fair.
Thanks for that, Fred. And then maybe let's talk about Reducer, just congratulations on the progress need now with COSIRA II, so what was the disappointing outcome from the FDA panel.
I guess, what are the biggest risks here to us sort of timely progression of the clinical trial? Because it feels like that is the sort of next major catalyst, right, is getting this trial underway and advancing it.
And what are the milestones we need to be looking for in the investment community for Neovasc to hit here? Thanks so much.
Fred Colen
Yes. So I would agree that the – there are several value drivers on the Reducer side in the next step of months that I think are going to be interesting.
A few of them have to do with real outcome from reimbursement work in Europe. So what will we see in markets in Europe as relates to reimbursement decisions for the Reducer?
I think that's one potential value driver in the next few months. And as you saw already in descript, we have already made a lot of progress on reimbursement decisions in the U.S., which was based on our hope that we were able to get an earlier FDA approval, which obviously were shattered.
But I think reimbursement in general is going to be an important value driver, no matter what. I think increased revenue numbers out of Europe, I think will also be quite a value driver, because once we are finally getting through COVID, and as you all know, Europe is going through it even slower than in the U.S., and that's really where all revenue lies at the moment.
So once we get through the COVID scenarios in those European countries and the recovery of elective procedures there, we do anticipate a pick up again of dramatic growth on the Reducer side of Europe, so that should be another one. But outside of those, I agree with you that the U.S.
picture is going to contribute quite a bit to –as it relates to moving forward with the Reducer. And I think the risks to start the study are volatile small in my perspective, my personal view on this.
And that's mostly because of the fact that you need to remember and I stated it in the script as well, that the FDA prior to the clearing the device – a breakthrough device in 2018 had already approved a U.S. IDE study for the Reducer.
It was called the COSIRA II study. In that, for example all the animal study results were already debated and discussed back and forth.
And all the study design was already discussed back and forth. And in the end, the FDA before 2018 already approved that study.
I just want to clarify this, because there is very big confusion about this in the public domain, but people just don't understand this. And I hear lots of criticism about animal study results.
Well, those were all discussed in the beta with FDA, and the FDA actually approved the IDE study before they gave the device a Breakthrough Device. So because of the Breakthrough Device and the guidelines that the FDA pulled out, we believe we had a fair shot at using a data we have including the Reducer 1 data, post-market study data to get to device approved without doing an additional IDE study, which is what we did.
Now that we noted that deNovo were going back to doing this IDE study. Now, in the meantime, a few years later, we have learned a lot, we as a company, the physician community, the FDA has learned a lot.
And so, we believe that a few minor changes and amendments to the original protocol of the study that was approved are needed. And so, we have had our first initial discussions with the FDA.
We're gearing up to a live meeting with FDA, hopefully later this month to discuss those in detail. And then we need to basically file an amendment to that original IDE study for the changes.
So I think when you look at this from a regulatory perspective, on the clinical execution perspective, as it relates to getting the study started, I think the risks are wobble low and I basically explained to you just now why I believe the [indiscernible]. Then I think that the key point is going to be on the execution.
How are we going to make sure we do it properly executed clinical study in the U.S., that is very disciplined, very rigorous, it's going to be again, a sham-controlled randomized trial, so one has to make sure that the randomization is properly done, that the sham-control is properly instituted. I mean, all these things have to be properly managed, that our thing is as with any clinical study, the most critical risk.
In terms of outcome, we have so much data today as it relates to safety and effectiveness that this device really is working. So if we execute the study well, we should be able to see a positive results, I believe.
But again, that was always in the detail. So does that give you a good sense of how we see this Danielle?
Hello?
Operator
I think – Danielle disconnected.
Fred Colen
Okay. Good.
That's good. I think I explained it to the audience, but I know Danielle is very busy, she has so many of these earnings calls to cover, so that's probably why she had to jump on another call.
Operator
And she just disconnect about one seconds ago.
Fred Colen
That's okay, Sarah. Thank you so much.
So let's move on then.
Operator
Absolutely. Our next question will come from Vernon Bernardino with H.C.
Wainwright.
Vernon Bernardino
Hi, Fred and Chris and Bill, if you're there. Congrats on the progress in the challenging environment, definitely a mark of success considering the restrictions all over the place, especially in the key markets.
So my FDA questions were asked, but the one or two, then therefore some housekeeping type of things. I saw the unrealized gain on warrant, you probably alluded to some of them already Chris in your remarks.
But it seems rather large, I'm sure it's related to the financing. Just wondering if you could provide any granularity on what drove the amount.
And then also is intriguing was the COGS, Chris, you did mention the margins and COGS was 16% versus 23% in first quarter last year. I was wondering if you could provide granularity on the improvement there also.
Thank you.
Chris Clark
So I'll take the last part first. Really the improvement in COGS was related to our sales mix and the fact that we increased our sales in geographies, where we had a direct sales force and therefore the mix changed and skewed towards our higher margin geographies.
And that explains the increase in our margin. And then on the accounting for the derivative liabilities, the asset that was created on our balance sheet related to the February financing and was related to the fact that the stock declined substantially following the financing, which created a loss.
And as we see the price fluctuate, we will revalue our derivative liabilities on a quarterly basis, and we reflect back on our statements without any real significant passion.
Vernon Bernardino
Right, it’s a non-cash. And just to follow up on the COGS improvement, do you anticipate your COGS will settle around 16% going forward?
Chris Clark
I expected actually to normalize a little bit back to the norm while we did have a strong quarter in the DACH region and a weaker quarter in other regions, I expect that to normalize and other countries to come online. So that we normalize closer to the 75% to 80%, rather than 88% as we saw in the first quarter for gross margin.
Fred Colen
Yes. And Vernon, good to hear you.
This is Fred, just to add on to that. So yes.
Hi Vernon. So we really expect the gross margin to be like somewhere between 75% and 80%.
It really depends on the mix in the countries. Obviously, we achieve higher prices in Germany where we have direct.
We are bringing all the countries online, wherever we have distributors that has a somewhat negative effect on the gross margin. But then on the other hand, we're also working hard in France.
And if and when that is going to be successful, we would like to start building up a direct sales force in France and that will again, help lift up the gross margin. So it all depends on these different countries and the different fluctuations.
But to point out to the gross margin from this quarter, Q1 and it being exceptionally high, really is because of enormous good performance in Germany, in particular. And if you look at the implants in Germany in Q1 of 2021, compared to Q1 of 2020, they were essentially flat.
So about the same in the first quarter of 2021, compared to the first quarter of 2020 and when you notice situation Germany, as it relates to COVID, you know that in essentially all of Q1 2021, the country was in a lockdown scenario versus in 2020, we basically only started to see impact of the COVID in the last two weeks of the first quarter. So it is actually very remarkable to see an amount of implants of Reducer in Germany where a country essentially in lockdown in the first quarter of 2021 at about the same level as in 2020.
And we contribute that to the strong underlying demand in a difficult market in terms of elective procedures being pushed out, there is enough push from the patients and the referring physicians to get these patients treated with the Reducer. And that wouldn't happen if this device would work.
This device works, it provides real relief for the majority of patients. We have lots of data to prove that and I think the underlying commercial success is as much a proof of that as well.
So I just wanted to add those comments to that, Vernon.
Vernon Bernardino
One more follow-up then is one way to look at this is, depending on how restrictions are lifted besides the Germany is one way we could look at forecasting sales for the rest of the year?
Fred Colen
Well, we have a plan in place that had a subdued Q1. We actually did slightly better in Q1 than our subdue plan because of the virus.
We still have a slower Q2 than on the normal circumstances because we still impact – we still see impact of the virus, although Q2 in our own internal planning is already quite a bit stronger than Q1. And then we see a real acceleration in terms of revenue growth starting in select markets in Q3 and really kicking in Q4.
So our Q4 plan certainly does have quite a bit of growth in it for internal planning purposes on both implanted revenue side because we do believe that's the way it's continued to be strong acceleration of revenue. Basically we have been kept when you look at the numbers in a big picture perspective, Vernon, we haven't basically capped at a roughly $2 million revenue range for the year in 2019, 2020 and 2021 would be shaping up the same way.
And that's all because of COVID. If COVID goes away, we are convinced and we do believe that revenue will continue to accelerate again and we will start back to go into growth space so COVID to us, basically has kept us at about a $2 million revenue number.
And when COVID finally will go away as we hold, we will actually go back to strong revenue grows again. That's kind of like how we see the picture of the developing revenue all the time.
Vernon Bernardino
Terrific. Appreciate the insights because if you just ran with slightly more than $0.5 million per quarter, that's already above $2 million.
Thank you, Fred. Appreciate that.
Fred Colen
Yes.
Operator
And we have no further questions at this time. So I’ll turn things back over to Fred for any closing remarks.
Fred Colen
Thank you very much, Sarah, for a great call. With this, I just like to say thank you all for your attention and goodbye until we talk again next quarter.
Take care. Bye-Bye.
Operator
And that does conclude today's conference. Thanks everyone for joining us.