Nov 14, 2016
Executives
Alexei Marko - President & Chief Executive Officer Chris Clark - Chief Financial Officer
Analysts
Jeffrey Cohen - Ladenburg Thalmann Financial John Gillings - JMP Securities
Operator
Good afternoon, ladies and gentlemen. Welcome to the Neovasc Third Fiscal 2016 Results Conference Call.
At this time, all participants are in a 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 would like to remind everyone that today's discussions includes forward-looking statements within the meaning of applicable US and Canadian Securities Laws that reflects Neovasc current views with respect to future events including the company’s plan 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 statement and risk factors.
Section of Neovasc Q3 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 [ph] and welcome everyone. With me as usual this afternoon is Chris Clark, our CFO and will 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 remind everyone that our financial results are in US dollars and prepared in compliance with IFRS.
Firstly, I want to cover our litigation with CardiAQ and the impact of this had on our financial statements. As you will note from our third quarter filings, we have recognized an additional damages provision of $21 along with $70 million damages provision recognized in Q2 related to the litigation.
For those listening today I'll give a quick summary of litigation. On May 19th, 2016 following a trial in Boston the jury found in favor of CardiAQ and awarded $70 million in damages for three of six trade secret claims for relief and no damages on contractual claims for relief.
Following this decision the court provided rulings on a number of post-trial motions the rules of which were announced November 1. In that order Judge Burroughs ruled in favour of CardiAQ on the issue of inventorship of Neovasc 964 patent.
If upheld with deal, this judgment would give CardiAQ and Neovasc equal right to the 964 patent which could have, a competitive impact on us, but does not create additional liabilities or royalties between the companies. At the same time the Judge denied CardiAQ’s motion for injunction that would have shutdown Neovasc development of Tiara thus allowing the company to continue to develop and commercialize its lead product.
The Judge also denied Neovasc motion’s for a new trial. Judge Burroughs upheld the Jury’s verdict and $70 million damages award against Neovasc and awarded $21 million in enhanced damages to that award.
In addition, interest cost and fees may be due on any award granted by the court. CardiAQ filed a motion for pre-trial interest of approximately $20.3 million accrued to 12% interest since 2010.
We’ve not accrued for this liability as the arguments have not been heard by the trial court. Upon entry of judgment by the trial court Neovasc will immediately seek to stay the payment of $91 million damages awards until after the appeal is complete.
The company will appeal the validity of the awards as well as the ruling on inventorship. As per our class action securities litigation in the Massachusetts Federal Court we intend to continue to vigorously defend ourselves with respect to the ongoing class action litigation as of the present time, no class action has been certified by the court to proceed.
We will continue to provide updating as appropriate as events unfold. I will now turn to other elements of the financial statements.
Revenue increased by approximately $560,000 or 23% from the same quarter last year to $3 million for the third quarter of 2016. Of note, in our contract manufacturing business we experienced 109% increase in revenue during the quarter primarily due to the clearing of a backlog and growth in demand from one of our largest customers.
Overall gross margins for the quarter were 27% which is below the prior year as we’ve discussed in prior quarter reduced margin is due to a number of contributing factors including the maturation of the TAVI market bringing a reduction in customers and pricing pressure on our services and higher costs as we implement rigorous commercial stage quality systems require to meet the expectations of our more advance customers. Moving to Reducer, Alexei will provide an operational update on our European launch following my remarks.
But as noted in our release, we are pleased to report revenues from Reducer of over $262,000 compared to $159,000 in the same quarter last year. We've seen Reducer sales growth in each quarter since launch and we remain satisfied with our trajectory.
Turning to expenses, total expenses for the quarter were $8.4 million compared to $9.6 million for the same period in 2015, a 12% decrease. The decrease in expenses is mainly attributed to a decrease in G&A expenses primarily due to lower litigation fees for the quarter.
Product development and clinical trial expenses to advance both the Tiara and the Reducer programs remain relative consistent to the same period in 2015. Operating losses for the quarter were $29.1 million or $0.44 loss per share as compared with $0.11 loss per share in the same period in 2015.
The $21.5 million increase in the operating loss incurred for the three months ended September 30, 2016 compared to the same period in 2015 can substantially be explained by $21 million damages provision related to the CardiAQ litigation. The damages provision represents a loss of $0.31 per share and the litigation expenses for the quarter represent a loss of $0.03 per share compared to a loss of $0.04 per share for litigation expenses in the same period in 2015.
As the CardiAQ litigation, the total litigation cost since the initial claims were filed in June 2014 are $19.6 million of which $1.9 million were incurred in this quarter and we expect the company may require approximately $5 million to cover litigation expenses up to an including couple of quarter, if applicable. During the third quarter of 2016 our net cash outflows were $11.1 million and we ended the quarter with $25.5 million in cash and cash equivalents, of those operating expenditures approximately $4.3 million was spent on litigation and approximately $4.3 million was spent on development activities for the Tiara and Reducer.
Aside from the litigation expenses, we are satisfied that if we’re correctly allocating our cash resources towards the development of our key product lines and that our expenditures on other activities are significantly offset by the ongoing contribution from our tissue business and Reducer’s revenue. As you will note from our third quarter filings as of September 30, 2016 the company is in the working capital deficit position as a result of recognizing a damages provision of $91 million.
As discussed above while we intend to continue to vigorously defend ourselves in the litigation with CardiAQ, the outcome of these matters include in when the company will be required to pay somewhat [ph] over $91 million damages awards is not currently determinable. Litigation is inherently uncertain therefore until these matters including the CardiAQ litigation and the class action securities litigation are being resolved to their ultimate conclusion by the appropriate courts.
The company cannot give any assurances as to the outcomes. If we’re unsuccessful in defending these claims including any appeal of the verdict and the litigation with CardiAQ or unable to settle the claims in a manner satisfactory to the company.
We may be faced with some difficult monetary 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 that such financing will be valuable on favorable terms or at all. As a result of the above noted circumstances, material uncertainty exists and cost substantial doubt about the company’s ability to continue as going concern.
We will continue as always to update the market as material events occur. I will now hand the proceedings back to Alexei.
Alexei Marko
Thank you, Chris. Today I’ll start with reviewing Reducer and then we’ll move on to Tiara.
In Reducer update as it has been since launching a device seven quarters ago was positive. Revenue was up for the seventh consecutive quarter and we’re now over $1 million a year run rate, we’ll see numbers are still small, we continue to add new implanting centers and reorder rates are encouraging.
Position feedback is promising and with each passing quarter, we’re seeing increased awareness to the product within the clinical community. There’s more and more position to see improvements sometimes very dramatic improvement in patients that we implant with Reducer.
The number of presentations on Reducer at medical conferences is steadily increasing serving to further broaden awareness. We had a number of very positive presentations on the product at TCT and expect to see this trend continue with more presentations, results and live cases at conferences in the coming month.
The bottom line is, this is a solid start and with limited resources we’re building a quality franchise in Europe that we expect to grow steadily over the coming years and then we’ll be able to support our US approval program. Moving onto Tiara, there’s going to be little doubt that the progress in the momentum we build within this company in the quarters and year’s leading up to June 2014 was this substantially affected by the CardiAQ claims against this.
The company intends to appeal the decisions of the trial court, at the Federal Circuit Court on the basis of the company believes the decision in May and October were incorrect. The exact timeline for this appeal and related activities including filing for a stay of payment pending appeal is uncertain at present, but we will be moving towards this as quickly as possible and we’ll provide update to our shareholders as material events occur.
Today in my brief comments, I want to provide some context on our path forward and outline why today, while the company continues to face headwinds due to ongoing litigation activities. We remain committed to advancing our core technologies to provide new treatments for patients suffering from advanced heart disease.
First that we disagree with much of Boston court decision, its decision did confirm our ability to continue to develop Tiara without restriction, this is key. In fact, we do not believe that another party can develop Tiara as it currently is designed and being implanted in patients today.
While the years of work, the engineering, the testing, the re-testing, the clinical activity all the follow-up and positive patient outcomes we don’t believe that any one can duplicate that exact device nor the next generation versions of our Tiara valve and delivery systems that we’re currently developing. Tiara is showing its potential as a viable clinical treatment for patients with severe MR, who’re at high risk for surgery and we intend to bring this to market to treat these sick and in need patients.
We’ve now implanted 20 patients with Tiara with additional patient scheduled for implantation within the next few days and weeks. The data presented last month at TCT showed our 30-day survival rate at 84% and we now have patients out almost three years who continue to thrive with our Tiara valves.
We’re confident that these results from Tiara will continue to improve as we learn with each case and continue to refine the technology and work on next generation devices. As I mentioned last time, we’re well into the planning and preparation phase for our CE Mark study and we’ll be making further announcements about the studies, the timeline become more clear.
While we would all like patient enrolment to advance more quickly, we’re continuing to proceed following a conservative approach and selecting our patients carefully. We continue to learn with each case and we’re looking to broaden our inclusion criteria as we steadily gain confidence in the efficacy of our device and our ability to safely treat a range of patients.
We also continue to develop next generation Tiara products that will treat a broadened range of anatomies. I’ll close my prepared remarks and open the floor for Q&A.
As I’m sure, all being [ph] well understand there are many questions related to the ongoing litigation that we unfortunately cannot answer at the present time. We’re simply not in a position to comment further on pending litigation beyond what we’ve already stated today and what is in our latest regulatory filings.
With that said, I would like to turn the call back over to our moderator and open the floor for any questions that you have.
Operator
[Operator Instructions] your first question comes from Jeffrey Cohen from Ladenburg Thalmann Financial. Jeffrey, please go ahead.
Jeffrey Cohen
I’m not asking questions about the legal activities. Just a couple of questions are coming to mind for me is are, Alexei could you repeat where you’re stating as far as the CE Mark study.
Any further clarity on timeline? Near future, further future of 2017 sometime.
Alexei Marko
2017 sometime, yes we have made our first filings. We’ve been working with the centers that are going to be part of this study to get them prepared and ready to go, but we’re still waiting on some key responses from regulatory bodies.
So I don’t have a firm timeline yet, but in the near future we’re hoping to get it going in early 2017.
Jeffrey Cohen
Okay and is that contingent upon a certain number of implants now? Or you see the implant number is growing?
Alexei Marko
Sorry, is your question is the overall study size for the CE Mark contingent on a certain number of implants or you’re talking about the early feasibility implants, just to clear?
Jeffrey Cohen
Yes, the early feasibility. You’ll continue to implant at a clear paced to be on 20, you’re going beyond now but that’s not having any effect upon the CE Mark study status.
Correct?
Alexei Marko
Yes, we don’t believe so, we’re looking the two as independent of one and another that said, we will of course continue to implant early feasibility patients and compassionate use patients until such time as we have the CE Mark study up and running.
Jeffrey Cohen
Okay, got it and could you give us a little flavor as far as the R&D spend now, what you described some next generation efforts for Tiara valves as their overall percentage, could you give us a flavor for what percent of efforts are being geared toward other generations or sizes or configurations?
Alexei Marko
Yes, I don’t have a percentage effort that I can pull off the top of my head but we’re starting to suffice to say we’re increasing our efforts in that area. Obviously we’ve been very happy with the early results from Tiara, but I think as we’ve said all along we learn from each case and as we screen patients what changes might help us, so we’re starting to work on those things now.
I think you’re going to see those efforts increasing in the coming quarters.
Jeffrey Cohen
Okay and one more from me. Conference reserved in the next three months of which you may be presenting any papers, posters or presentations?
Alexei Marko
Over the next months I think, I think the next thing that we’ll be presenting out I expect will be ACC. Certainly, Europe ECR is the next major conference that we would be focused on and then obviously following that TVT.
Jeffrey Cohen
Perfect. Okay that’s it from me.
Thanks very much.
Operator
[Operator Instructions] your next question comes from John Gillings from JMP Securities. John, please go ahead.
John Gillings
Just first a quick follow-up on the CE Mark trial and the timing, appreciate the update there. Just wanted to see, one of your competitors recently mentioned that they were experiencing some delays because the CE Mark regulatory process was delaying them a little bit, was becoming a little bit more challenging, is that similar to what you’re seeing or is there anything else we should be thinking about in terms of the timing of the trial?
Alexei Marko
I think that it certainly seems that the bar for getting transcatherer valves approved in Europe it has been going up, I think it’s certainly the notified bodies are asking for more than they certainly did a few years ago for say TAVI valve. But I think what we’re hearing back is within the realm of what we expect and we’re our way through it.
So I don’t think we’re seeing any deals that we didn’t expect or having any hurdle stone, it is that we didn’t expect to see.
John Gillings
Okay that’s helpful and then on the Reducer side. You put up another nice quarter of growth and I know you guys are cautious about spending right and that certainly makes sense, maybe you can just help us think through kind of how the rollout is going and any factors that we should be thinking about, as we think about the ongoing growth in that products going forward?
Alexei Marko
To-date we’ve been very measured in how we’ve been rolling this out, we’ve been focusing heavily in Italy and we’ve been seeing some very good success there. We have started selling at Germany and we’re working our way through the reimbursement hurdles within Germany, but we think we’re going to see steady growth in the German market and we’re also starting to see some very nice adoption in the UK.
I actually just got word that we have five cases scheduled at single center tomorrow there. So we’re seeing some real uptake from certain positions within the UK market.
So it’s early days yet, but we’ve been very happy with results and I think what really is helping as it should is that, when these positions treat, a handful of patients and they see some or most or in some cases all of them come back with dramatic improvements and their [indiscernible] of that have been really non-responsive for perhaps many years. It really is hitting home with them and they are looking to use it in additional patients and growing their usage of it, so yes we’re seeing steady growth and we’re very encouraged by what’s happened so far
John Gillings
Okay just to stick with Reducer for a minute. You’ve mentioned some of the presentation at TCT.
I was able to attend one was a series of presentations on refractory engine and the final one was about Reducer, it was titled something like when you don’t have any other options. It seemed like the interest in the room and certainly the tone of the presentation was quite positive for this very difficult patient population and I know it hasn’t been very long since TCT, but I just wanted to see is there any color you’re hearing from the field that would suggest that maybe there’s a little bit of an uptick from some of the positive comments that were made at the conference.
Alexei Marko
Yes, we’re. yes I think there were some very good presentations on Reducer and it was exactly as you said it was presented in a very positive light by some key opinion leaders and I think that is definitely been noticed and we should see an uptick from that.
And again as we see more and more presentations at smaller conferences, quite often we’re hearing about live cases now that are being done at regional conferences that we really didn’t even know about until they happened, so it seems to be gaining some momentum and things like that what we’re doing at TCT definitely helped.
John Gillings
Okay, that’s great. Thanks a lot guys.
Operator
[Operator Instructions] there are no further questions at this time. Please proceed.
Alexei Marko
Terrific. Thank you again for attending our conference call and we look forward to talking with you again soon.
Operator
Ladies and gentlemen, this concludes your conference call today. We thank you for participating.