NASDAQ, TSX: NVCN
VANCOUVER, March 23, 2017 /PRNewswire/ - Neovasc Inc. (“Neovasc” or the “Company”) (NASDAQ, TSX: NVCN) today announced financial results for the quarter and year ended December 31, 2016 (all figures in U.S. dollars unless otherwise indicated).
“While the ongoing litigation continued to dominate the Company’s narrative in 2016, we expect to know the outcome of our U.S. appeal later this year, bringing closure to this chapter in the Company’s development,” commented Neovasc CEO, Alexei Marko. “The evidence stemming from the 26 cases of the Tiara’s use and the hundreds of commercial cases with Reducer underscore for us that we remain on a path to advancing the standard of care for mitral regurgitation and refractory angina and improving the quality of life for patients suffering from these devastating diseases.”
The Company’s proprietary product for treating mitral valve disease, Tiara, continues to perform well and has now been used to treat 26 patients under both early feasibility and compassionate use cases across North America and Europe. 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. The 30-day survival rate for the first 24 patients (those treated more than 30 days ago) is 21 of 24 or 88% and there has been no 30-day mortality observed in any of the last 15 patients. One patient is now over three years post implant. The Company expects to begin enrolling patients in the coming weeks into its European CE Mark trial, with initial cases in Italy.
Sales of the Neovasc Reducer (“Reducer”), the Company’s innovative device to treat refractory angina, grew 91% year over year in 2016. There has been steady growth in the adoption of the product as implanting physicians see many of their patients who were refractory to other angina treatments returning with significant improvement in symptoms following implantation with Reducer.
Results for the quarters ended December 31, 2016 and 2015
Revenues
Revenues for the quarter ended December 31, 2016 were $2,761,122 compared to $2,224,046 for the same period in 2015. Reducer revenues increased by 47% to $282,515 for the quarter ended December 31, 2016 compared to $192,013, for the same period in 2015. Contract manufacturing and consulting services revenues were slightly increased in comparison to the same period in 2015. Due to a recent agreement with Boston Scientific Corporation (“Boston Scientific”) the Company expects a decline in revenue in the coming periods. This is consistent with the Company’s strategy to focus its business towards development and commercialization of its own products, the Reducer and the Tiara.
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.
Cost of Goods Sold
The cost of goods sold for the quarter ended December 31, 2016 was $2,052,969, compared to $1,942,140 for the same period in 2015. The gross margin for the quarter ended December 31, 2016 was 26%, compared to 13% for the same period in 2015. In 2015, the Company issued a credit note to a single customer, which reduced margins from 23% to 13% for the fourth quarter of 2015.
Expenses
Total expenses for the quarter ended December 31, 2016 were $7,437,156, compared to $8,352,093 for the same period in 2015, representing a decrease of 11%. The decrease results from a $1,037,249 decrease in general and administrative expenses offset by a $273,035 increase in clinical trial and product development expenses for the Company’s two new product development programs.
Selling expenses were $141,733 for the quarter ended December 31, 2016, compared to $292,456 for the same period in 2015, representing a decrease of 52%, due to lower sales consulting, less travel and lower stock compensation costs in 2016. General and administrative expenses were $2,461,433 for the quarter ended December 31, 2016, compared to $3,498,682 for the same period in 2015, representing a decrease of 30%, due to a decrease in litigation expenses of $537,872 and a $296,782 decrease in share-based payments. Product development and clinical trials expenses were $4,833,990 for the quarter ended December 31, 2016, compared to $4,560,955 for the same period in 2015 representing an increase of 6% due to an increased investment in the Tiara development program.
Losses
The net profit for the quarter ended December 31, 2016 was $37,213,791, or $0.54 basic earnings and $0.47 fully diluted earnings per share, compared with a loss of $7,383,608, or $0.11 basic and diluted loss per share for the same period in 2015.
Results for the years ended December 31, 2016 and 2015
Revenues
Revenues decreased 4% year-over-year to $9,512,796 for the year ended December 31, 2016, compared to revenues of $9,929,940 for the same period in 2015. The reduction is primarily due to the decrease in surgical patch sales. The Company ceased its production of surgical patches (product sales) in the second quarter of 2015.
Reducer sales for the year ended December 31, 2016 were $1,004,948, compared to $526,412 for the same period in 2015, representing an increase of 91%. The Company started its sales of the Reducer in the first quarter of 2015 as it initiated its focused commercialization of the product in Europe.
Contract manufacturing revenues for the year ended December 31, 2016 were $3,746,521, compared to $3,236,978 for the same period in 2015, representing an increase of 16%. The increase in revenue for the year ended December 31, 2016 compared to the same period in 2015 is primarily due to growing revenues from Boston Scientific. The Company believes that contract manufacturing revenues will decline in 2017 with the loss of Boston Scientific as a customer and recognizes that these revenues will be derived from a smaller customer base as the transcatheter aortic valve market matures.
Revenues from consulting services for the year ended December 31, 2016 were $4,761,327, compared to $5,812,814 for the same period in 2015, representing a decrease of 18%. The reduction 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 year ended December 31, 2016 was $7,091,761, compared to $6,938,134 for the same period in 2015. The overall gross margin for the year ended December 31, 2016 was 25%, compared to 30% gross margin for the same period in 2015. The Company has seen its gross margins decline due to a change in the product mix. The lower margin the Company has received on its sales to Boston Scientific are only partially offset by the higher margins on the Reducer revenue.
Expenses
Total expenses for the year ended December 31, 2016 were $39,243,928, compared to $31,750,140 for the same period in 2015, representing an increase of $7,493,788 or 24%. The increase in total expenses for the year ended December 31, 2016 compared to the same period in 2015 is primarily due to a $5,269,711 increase in general and administrative expenses (of which $6,111,912 relates to an increase in litigation expenses) and a $2,183,108 increase in product development and clinical trial expenses to advance the Tiara and Reducer development programs.
Selling expenses for the year ended December 31, 2016 were $696,638, compared to $655,669 for the same period in 2015, representing an increase of $40,969, or 6%. The increase in selling expenses for the year ended December 31, 2016 compared to the same period in 2015 reflects costs incurred in connection with commercialization activities for the Reducer in 2016. The Company has minimized its increase in selling expenses in the light of higher litigation costs and the impact of litigation on the Company.
General and administrative expenses for the year ended December 31, 2016 were $19,182,787 compared to $13,913,076 for the same period in 2015, representing an increase of $5,269,711, or 38%. The increase in general and administrative expenses for the year ended December 31, 2016 compared to the same period in 2015 can be substantially explained by a $6,111,912 increase in litigation expenses, offset by a $813,075 decrease in share-based payments. In 2016 the Company adjusted its compensation plan to directors, officers and senior management, decreasing the number of options granted by 75%, replacing these options with a smaller cash based bonus plan and increasing officers and senior management’s base salaries by 10%.
Product development and clinical trial expenses for the year ended December 31, 2016 were $19,364,503, compared to $17,181,395 for the same period in 2015, representing an increase of $2,183,108, or 13%. The increase in product development and clinical trial expenses for the year ended December 31, 2016 was due to a $1,183,962 increase in cashbased employee expenses as the Company hired additional staff to advance product development and a $2,076,259 increase in other expenses as the Company invested in its two major new product initiatives, offset by a $1,243,976 decrease in share-based payments.
Other Income and Loss
The other loss for the year ended December 31, 2016 was $49,471,477, compared to other income of $2,195,195 for the same period in 2015, a change of $51,666,672. This amount is made up of the $111,781,096 damages provision related to the litigation with CardiAQ Valve Technologies Inc. (“CardiAQ”), a $2,690,129 increase in the unrealized loss on the damages provision and a $1,894,473 increase in the loss on foreign exchange, offset by a $65,095,733 gain on sale of assets related to the agreement with Boston Scientific.
Losses
The operating losses and comprehensive losses for the year ended December 31, 2016 were $86,494,893 and $82,397,922 respectively, or $1.28 basic and diluted loss per share, as compared with losses of $26,730,490 and $35,116,695, or $0.41 basic and diluted loss per share for the same period in 2015. Litigation expenses for the year ended December 31, 2016 represent a loss of $0.20 basic and diluted loss per share compared to a loss of $0.11 basic and diluted loss per share for the same period in 2015. 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 2015 are approximately $21.06 million and the Company may require an additional $1-3 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 December 31, 2016 the Company had cash and cash equivalents of $22,954,571 compared to cash and cash equivalents of $55,026,171 as at December 31, 2015.
The Company’s working capital deficit is $17,497,931 as at December 31, 2016 compared to a working capital surplus of $54,274,867 as at December 31, 2015. Unless the Company is successful in an appeal of the verdict, or otherwise is successful in reducing the amount of the approximate $112 million damages award to an amount less that 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.
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