Neovasc Inc (US) (NVCN) Reports Q1:17 Financial Results; Shares Rose


Neovasc Inc (US) (NASDAQ:NVCN) announced financial results for the first quarter ended March 31, 2017 (all figures in U.S. dollars unless otherwise indicated).

“It was another quietly successful quarter,” commented Neovasc CEO, Alexei Marko . “We recently treated two additional patients with the Tiara, one of whom represents the start of our European CE Mark study which is now approved in both Italy and Germany ; our success rates with the Tiara to treat mitral regurgitation continue to support Tiara as one of the leading transcather mitral valve therapy programs, and sales of our patented treatment for refractory angina, Reducer, continue to perform well across Europe .”

The Company’s proprietary product for treating mitral valve disease, Tiara™, continues to perform well and has now been used to treat 28 patients under early feasibility, compassionate use and clinical study protocols across North America and Europe .  The 30-day survival rate for the first 26 patients (those treated more than 30 days ago) is 23 of 26 or 88% and there has been no 30-day mortality observed in any of the last 17 patients.  The first patient treated with the Tiara is now past three years’ post implant.  Importantly, the Company has begun enrolling patients into its European CE Mark trial, with an initial case performed in Italy and additional cases to be scheduled in Germany and Italy over the coming months.  Implantation is completed through a short trans-apical procedure and typically results in complete resolution of the patient’s mitral regurgitation without significant residual leaks or obstruction of the ventricular outflow tract.

European sales of the Neovasc Reducer™ (“Reducer”), the Company’s innovative device to treat refractory angina, grew in the quarter by 22% over the same period last year, reaching $260,000 .  The growth is a function of both new centres adopting the technology and higher volumes at existing installed centres. Underlying the adoption and higher volumes are the positive efficacy results physicians and patients are witnessing post implantation with Reducer, specifically reduced pain and angina discomfort, and improved quality of life.

Results for the quarters ended March 31, 2017 and 2016

Revenues

Revenues for the three months ended March 31, 2017 were $1,481,360 compared to revenues of $2,006,742 for the same period in 2016, a decrease of 26% and consistent with the Company’s plan to continue to focus its business away from its traditional revenue streams towards development and commercialization of its own products, the Reducer and the Tiara. Reducer sales for the three months ended March 31, 2017 were $260,765 , compared to $213,765 for the same period in 2016, representing an increase of 22%.

Contract manufacturing revenues for the three months ended March 31, 2017 were $133,963 , compared to $606,783 for the same period in 2016, representing a decrease of 78%.  The decrease in revenue for the three months ended March 31, 2017 compared to the same period in 2016 is primarily due to the loss of Boston Scientific Corporation (“Boston Scientific”) as a customer.  In December 2016 , the Company entered into an agreement for Boston Scientific to acquire the Company’s advanced biologic tissue capabilities and certain manufacturing assets and make a 15% equity investment in Neovasc, for a total of $75 million in cash.  Under the terms of the approximate $68 million asset purchase agreement the Company has been granted a license to the purchased trade secrets and know-how and access to the sold facilities to allow it to continue its tissue and valve assembly activities for its remaining customers, and continue its own tissue-related programs, including advancing the Tiara through its clinical and regulatory pathways.  The Company believes that going forward contract manufacturing revenues will be derived from a smaller customer base as the transcatheter aortic valve market matures.

Revenues from consulting services for the three months ended March 31, 2017 were $1,086,632 , compared to $1,186,194 for the same period in 2016, representing a decrease of 8%.  The loss is indicative of the trend the Company is seeing in consulting service revenue.  The Company anticipates that its consulting services revenue will decline in the long-term as its consulting customers continue to transition to becoming contract manufacturing customers or cease to be customers at all.

Cost of Goods Sold

The cost of goods sold for the three months ended March 31, 2017 was $808,628 , compared to $1,445,644 for the same period in 2016.  The overall gross margin for the three months ended March 31, 2017 was 45%, compared to 28% gross margin for the same period in 2016.  The Company has seen its gross margins increase due to a change in the product mix as Reducer revenues reflect an increasing proportion of the overall revenues.

Expenses

Total expenses for the three months ended March 31, 2017 were $8,489,404 , compared to $10,075,039 for the same period in 2016, representing a decrease of $1,585,635 or 16%.  The decrease in total expenses for the three months ended March 31, 2017 compared to the same period in 2016 reflects a $2,578,692 decrease in general and administrative expenses and a $970,736 increase in product development and clinical trial expenses to advance the Tiara and the Reducer development programs.

Selling expenses for the three months ended March 31, 2017 were $187,168 , compared to $164,847 for the same period in 2016, representing an increase of $22,321 , or 14%.  The increase in selling expenses for the three months ended March 31, 2017 compared to the same period in 2016 reflects costs incurred for commercialization activities for the Reducer.

General and administrative expenses for the three months ended March 31, 2017 were $3,248,713 compared to $5,827,405 for the same period in 2016, representing a decrease of $2,578,692 , or 44%.  The decrease in general and administrative expenses for the three months ended March 31, 2017 compared to the same period in 2016 can be substantially explained by a $3,164,430 decrease in litigation expenses, offset by a $462,676 increase in share-based payments.  Due to certain black-out periods during 2016 the Company was unable to grant annual option grants to directors and officers of the Company.  The 2016 annual awards were granted in 2017.  The charge for 2017 reflects stock-based compensation for both the annual grants for 2016 and 2017.

Product development and clinical trial expenses for the three months ended March 31, 2017 were $5,053,523 , compared to $4,082,787 for the same period in 2016, representing an increase of $969,736 , or 24%.  The increase in product development and clinical trial expenses for the three months ended March 31, 2017 represented an increased investment in the Tiara development program.

Other Income and Loss

The other loss for the three months ended March 31, 2017 was $28,299 , compared to $1,319,023 for the same period in 2016, a decrease of $1,290,724 .  Included within other loss is a charge of $211,884 for post-judgment interest on the damages provision related to the litigation with CardiAQ Valve Technologies Inc. (“CardiAQ”), (see “Trends, Risks and Uncertainties” and “Contractual Obligations and Contingencies” in the Company’s first quarter Management’s Discussion and Analysis).  The decrease in the other loss can be explained by a $52,636 decrease in the loss on foreign exchange and by a $1,505,875 increase in the unrealized gain on the damages provision.

Losses

The operating losses and comprehensive losses for the three months ended March 31, 2017 were $7,844,987 and $7,927,304 respectively, or $0.10 basic and diluted loss per share, as compared with losses of $10,881,138 and $7,677,054 , or $0.16 basic and diluted loss per share for the same period in 2016.  The $1,697,269 decrease in the operating loss incurred for the three months ended March 31, 2017 compared to the same period in 2016 can be substantially explained by a $2,578,692 decrease in general and administrative expenses (of which $3,164,430 was a decrease in litigation expense and $462,676 was an increase in stock-based compensation charges) offset by a $970,736 increase in product development and clinical trial expenses.  The Company has incurred significant costs in defending itself in lawsuits filed by CardiAQ.  Total litigation costs since the initial claims were filed in June 2014 are approximately $21.9 million and the Company may require an additional $1 million to cover additional litigation expenses up to and including the appeal hearing, currently scheduled for August 2017 .

Discussion of Liquidity and Capital Resources

Neovasc finances its operations and capital expenditures with cash generated from operations and equity financings.  As at March 31, 2017 the Company had cash and cash equivalents of $16,206,632 compared to cash and cash equivalents of $22,954,571 as at December 31, 2016 .

Cash used in operating activities for the three months ended March 31, 2017 , was $6,308,755 , compared to $10,903,712 for the same period in 2016.  For the three months ended March 31, 2017 , operating expenses were $6,153,498 , compared to $10,256,486 for the same period in 2016.  This can substantially be explained by a decrease in litigation expenses of $3,164,430 offset by an increase in product development and clinical trial expenses of $970,736 .

The Company’s working capital deficit is $24,221,853 as at March 31, 2017 compared to a working capital deficit of $17,497,931 as at December 31 , 2016.  Unless the Company is successful in an appeal of the verdict in the litigation with CardiAQ, or otherwise is successful in reducing the amount of the approximate $112 million damages award to an amount less than the $70 million held in escrow, the Company will require significant additional financing in order to pay the damages and to continue to operate its business.  There can be no assurance that such financing will be available on favorable terms, or at all.

Going Concern

The Company may be faced with significant monetary damages in the litigation with CardiAQ that could exceed its resources and/or the loss of intellectual property rights that could have a material adverse effect on the Company and its financial condition.  These circumstances indicate the existence of material uncertainty and cast substantial doubt about the Company’s ability to continue as a going concern.

Outstanding Share Data

As at May 10, 2017 , the Company had 78,897,345 common voting shares issued and outstanding.  Further, the following securities are convertible into common shares of the Company: 9,234,029 stock options with a weighted average price of C$3.57 .  The fully diluted share capital of the Company at May 10, 2017 is 88,131,374.

Shares of Neovasc are up nearly 7% to $1.77 in after-hours trading Wednesday. NVCN has a 1-year high of $3.34 and a 1-year low of $0.37. The stock’s 50-day moving average is $1.60 and its 200-day moving average is $1.39.

On the ratings front, Ladenburg Thalmann analyst Jeffrey Cohen upgraded NVCN to Buy, in a report issued on April 5. According to TipRanks.com, Cohen has a yearly average loss of 7.6%, a 33% success rate, and is ranked #3707 out of 4563 analysts.

Neovasc, Inc. operates as a medical device company that develops, manufactures, and markets products for the rapidly growing cardiovascular device marketplace. Its products include the Neovasc Reducer for the treatment of refractory angina and the Tiara technology in development for the transcatheter treatment of mitral valve disease. It operates through the following geographical segments: U.S., Europe, and the Rest of the World.