electroCore - Earnings Call - Q3 2021

Transcript

Speaker 0

Greetings, and welcome to Electrocor's Third Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rich Cockrell.

Thank you, Rich. You may begin.

Speaker 1

Thank you all for participating in the electroCore earnings call. Joining me today are Dan Goldberger, Chief Executive Officer Brian Posner, Chief Financial Officer and Doctor. Peter Spotts, Chief Medical Officer. Earlier today, the company released results for the third quarter ended 09/30/2021. You can find a copy of the press release on the company's website.

Before we begin, I'd like to remind you that during the call, management will be making forward looking statements within the meaning of the federal securities laws, which are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements mentioned during this call that are not historical fact should be deemed as forward looking statements. All forward looking statements include, without limitation, the examination of operating trends and the company's future financial expectations are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements. Accordingly, you should not place undue reliance on these statements.

For a list that describes the risks and uncertainties associated with the company's business, please see the company's filings with the Securities and Exchange Commission. ElectroCore disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. This conference call contains time sensitive information that is accurate only as of this live broadcast today, 11/04/2021. And with that, I'll turn the call over to Dan. Go ahead, Dan.

Speaker 2

Thank you, Rich. Hello, everybody, and thank you for joining us today. I'm excited to report that Q3 twenty twenty one revenue was a record $1,500,000 Gross margins have expanded to more than 75% and net cash used in operations decreased to $3,400,000 for the third quarter of twenty twenty one. For the third quarter of twenty twenty one, total revenue of $1,500,000 increased approximately 38% from $1,100,000 in the third quarter of twenty twenty. Revenue from our government channel increased 46% to $946,000 for the quarter ended 09/30/2021, as compared to $646,000 in the third quarter of twenty twenty.

In our VA DoD channel, a total of 96 VA and DoD military treatment facilities have purchased gammaCore products through 09/30/2021, as compared to 67 through the third quarter of twenty twenty. Note that there are approximately 1,300 VA health care facilities and four seventy five military hospitals and medical clinics, so we still have plenty of growth ahead of us. Revenue from direct channels outside The United States increased 33% to $371,000 in the third quarter twenty twenty one as compared to $278,000 during the third quarter of twenty twenty. We look forward to continued revenue growth in The United Kingdom as the medtech funding mandate continues to roll out in spite of pandemic headwinds. Turning to our commercial headache channels in The United States.

Pharmacy benefit managers, including CVS Caremark and Express Scripts, provide gammaCore therapy to patients that have a high end benefit design that does not differentiate between drugs and devices. These patients are subject to a co pay of between $25 and $75 per month depending on their specific benefit plan. Our unique Level two Healthcare Common Procedure Coding Systems or HCPCS code, K1020 noninvasive vagus nerve stimulator, became effective 04/01/2021. This is an important milestone in our efforts to obtain reliable insurance coverage for gammaCore therapy. Previously, all of our prescriptions were coded as miscellaneous, which made for an easy initial coverage denial for an insurance company.

On 08/04/2021, we announced the release of an article entitled gammaCore four cluster headaches in the Journal of Pharmacoeconomics, highlighting the cost savings of gammaCore's noninvasive vagus nerve stimulation therapy platform for patients with cluster headaches. The paper validated that gammaCore both reduces the frequency and severity of cluster headaches and provides per patient cost dominance and cost savings in the first year of therapy versus standard of care alone. Subsequent to the end of the quarter on October 2021, we announced the publication of a peer reviewed paper entitled Noninvasive Vagus Nerve Stimulation for Treatment of A Retrospective Review of Prescribing in England in the British Journal of Healthcare Management. The study is one of the largest clinical audits of patients with cluster headache and highlights that of the six fifty five patients who started on gammaCore, forty six point three percent of patients were prescribed at least one refill and thirty point nine percent were prescribed two or more refills. These real world results suggest a durable benefit for patients utilizing gammaCore's noninvasive vagus nerve stimulation for cluster headache in England.

These two publications add to our growing bibliography of positive health care economics evidence, which is very powerful in our conversations with private insurance companies in The United States and distributor prospects around the world. Armed with our unique code and recent publications, we are ramping up discussions with insurers. We've engaged policy reporter to help us negotiate with an initial group of 30 regional and national benefit providers. Highmark Blue Cross Blue Shield was our first positive benefit determination, and we're now negotiating their fee schedule. We subsequently won our second positive benefit determination from Blue Cross Blue Shield of North Dakota.

While we work towards broader insurance coverage, note that more and more Americans have high deductible insurance plans, which means that patients are likely to be faced with a cash pay obligation even when coverage is available. To fill that gap, we've been aggressively testing several cash pay business models and direct to consumer promotions. Net revenue from The U. S. Commercial headache channel was $158,000 for the 2021 as compared to $112,000 in the third quarter of twenty twenty.

Approximately $124,000 of our U. S. Commercial revenue in the third quarter came from cash pay programs, specialty pharmacy and direct from electroCore, and the balance was paid by insurers through the pharmacy benefit managers. Going forward, our U. S.

Sales Function is focused on the following revenue growth initiatives. First, going deeper into our 96 existing VA hospital customers, leveraging our VA hospital success to open new VA hospital customers and recruiting additional commercial prescribers to our cash pay business models while we work towards broader commercial insurance coverage. We've grown our U. S. Sales function in recent months through a combination of our inside customer experience team, territory business managers and sales agents in the field.

I look forward to reporting accelerating growth in our U. S. Channels as our team becomes more productive in coming months. As the number of commercial prescribers offering our cash pay alternatives increases, We will also evaluate direct to consumer marketing investments to drive revenue growth in future quarters. At this point, I'm going to ask our Chief Medical Officer, Doctor.

Peter Stotts, to provide an update on our various research and clinical initiatives. Peter?

Speaker 3

Thanks, Dan. We continue to advance NVNS across several trials in our FDA cleared indications as well as in our intellectual property throughout this quarter. At 08/10/2021, we announced the publication of a peer reviewed manuscript, Transcutaneous Cervical Vagal Nerve Stimulation in Patients with Post Traumatic Stress Disorder, or PTSD, a pilot study of effects on PTSD symptoms and interleukin-six response to stress in the Journal of Affective Disorders reports. The manuscript reports the results of a randomized, double blind sham controlled study conducted at Georgia Institute of Technology and Emory University. The results confirmed previous animal and human signals and show that three months of treatment with NVNS leads to a thirty one percent reduction in PTSD symptoms compared to sham on the PTSD checklist or PCL, as well as a significant decrease in hyperarousal symptoms and a decrease in overall and somatic or gastric symptoms.

At the conclusion of the study, patients who continue to use NVNS for a further three month open label period showed a significant improvement in their overall symptoms reported by the Clinical Global Index. Furthermore, NVNS effectively blocked the increase in the levels of inflammatory cytokines or IL-six that is overexpressed in patients with PTSD who are exposed to a traumatic script. PTSD is prevalent in our veterans, represents a high unmet medical need and is highly relevant in the migraine population in the VA and Department of Defense. In September, we announced the company received Section five ten clearance from the United States Food and Drug Administration, or FDA, of the company's submission to expand the label of gammaCore NVNS to include the treatment of paroxysmal hemicrania and hemicrania continuum in adults. Paroxysmal hemicrania and hemicrania continuum are both rare forms of trigeminal autonomic cephalosive that are typically debilitating and difficult to treat.

GammaCore NVMS now has five distinct FDA clearances in primary headache, more than any other headache therapy we are aware of. Subsequent to the end of the quarter, on October 14, we announced the publication of an amended medical device license from the Health Canada to expand the label of gammaCore NVNS to include the acute and preventive treatment of migraines in adolescents between 12 and 17 years of age. In addition to our ongoing clinical and regulatory activities, we have been investing in our intellectual property portfolio. In September, we announced the United States Patent and Trademark Office has issued patent number 1197102 relating to devices, systems and methods of integrated with smartphones that allow patients to self treat medical conditions such as migraine headache by electrical noninvasive stimulation of nerves. The 102 patent is the eighth U.

S. Patent issued to electroCore in the company's mobile connectivity platform, with additional U. S. And international matters pending. ElectroCore is building a portfolio of intellectual property, IP, around smartphone connected noninvasive therapy.

This IP may provide a foundation for combining the company's clinically proven therapy with digital health platforms that could enable health care providers to use remote patient monitoring or remote therapeutic monitoring reimbursement codes. That combination, in turn, may enable future business models and expand revenue streams for the company's products. At this point, I'll turn the call over to Brian for a review of our financials and other guidance items. Brian?

Speaker 4

Thank you, Peter. For the quarter ended 09/30/2021, electroCore reported net sales of $1,500,000 compared to $1,300,000 in the 2021 and $1,100,000 during the same period of 2020. This represents a quarterly revenue increase of 17% sequentially and 38% over the same period last year. Gross profit for the 2021 was $1,100,000 as compared to $895,000 for the 2021 and 733,000 quarter of twenty twenty. Gross margin for the 2021 was 76% compared to 71% in the 2021 and sixty eight percent in the third quarter of twenty twenty.

The increase in gross margin was largely due to increased sales resulting in a more favorable absorption of labor and overhead costs and product mix. Total operating expenses in the 2021 were approximately $5,100,000 a reduction of approximately $1,000,000 from $6,100,000 in the second quarter of twenty twenty one. Operating expenses decreased by $100,000 from $5,200,000 in the third quarter of twenty twenty. Research and development expense in the 2021 was $470,000 as compared to $825,000 in the second quarter of twenty twenty one, a decrease of approximately $355,000 sequentially. The decrease in R and D expense during the quarter was due to timing of expenses in connection with the GAP PTH program.

R and D expense decreased by $159,000 from $629,000 during the third quarter of twenty twenty. SG and A expense in the 2021 was $4,600,000 as compared to $5,300,000 in the 2021 and consistent with the year ago period. GAAP net loss in the 2021 was $4,000,000 compared to a GAAP net loss of $2,900,000 in the second quarter of twenty twenty one. GAAP net loss decreased by 11% or $500,000 as compared to a GAAP net loss of $4,500,000 in the third quarter of twenty twenty. In the second quarter of twenty twenty one, the company recorded a total gain of $2,300,000 on the extinguishment of debt and a tax benefit from the sale of New Jersey NOL carry forwards.

Adjusted EBITDA net loss in the 2021 was $3,100,000 as compared to $4,100,000 during the 2021 and as compared to adjusted EBITDA net loss of $3,300,000 in the third quarter of twenty twenty. The company defines adjusted EBITDA net loss as GAAP net loss, excluding depreciation and amortization, stock compensation expense, restructuring and other severance related charges, legal fees associated with stockholders' litigation, total other income and expense, extinguishment of debt and the provision and benefit from income taxes. A reconciliation of GAAP net loss to non GAAP adjusted EBITDA net loss has been provided in the financial statement tables included in the press release we issued earlier this afternoon. Net cash used in operating activities during the quarter ended 09/30/2021, was approximately $3,400,000 as compared to $3,200,000 in the 2021 and April in the third quarter of twenty twenty. The 2021 amount is exclusive of cash proceeds from the sale of NOL carry forwards.

Cash, cash equivalents and marketable securities at 09/30/2021 totaled approximately $39,000,000 as compared to approximately $23,700,000 at 06/30/2021. During the third quarter, the company raised net proceeds of approximately $18,800,000 through a public offering of 20,700,000 shares of its common stock. And now I'll turn the call back over to Dan.

Speaker 2

Thanks, Brian. We're pleased with our operating results this quarter, and we're in a strong financial position with cash and cash equivalents of $39,000,000 as of 09/30/2021. The recent publication in Pharmacoeconomics confirming cost dominance of GBP $4.50 per patient when gammaCore therapy is used provides further support to our payer and distributor negotiations. Longer term clinical indications beyond cluster and migraine headache, supported by the ongoing clinical developments that Doctor. Stotts discussed, could greatly expand the market for NVNS therapy.

We continue to build our intellectual property portfolio, and we're planning some very exciting next generation product platforms to leverage that asset. For the current quarter that ends 12/31/2021, we expect revenue to exceed $1,500,000 Our VA DoD channel slowed in the first two weeks of October as those hospital customers worked through their September 30 year end accounting, and our UK business was impacted by COVID during the month of October. Both channels have seen a return to growth in recent weeks, giving us confidence in our revenue projection and the sales momentum we will carry into next year. For the year ending 12/31/2021, the company expects net revenue to exceed $5,450,000 a 55% or more increase from $3,500,000 of revenue in 2020. We currently expect to end the year with approximately $34,500,000 in cash, indicating that operations will require approximately $4,500,000 of cash during the fourth quarter of twenty twenty one.

We believe that our cash balance will allow us to execute our operating plan through next year and beyond. Mike Romanow and his operations team have driven gross margins to 76% in the quarter ended September 30, a healthy increase from earlier this year. Brian Posner's finance team has maintained discipline around operating expenses, and I have faith in their continued vigilance as we make targeted investments in the commercial channels and product development. We look forward to further penetrating our large opportunity in the VA DoD channel in The United States under Mitch Deshaun's capable leadership. While Ian Strickland is leading the growth of our international businesses through the continued rollout of the medtech funding mandate in The United Kingdom and our growing group of distributors in other countries.

As we look towards 2022, I see many growth drivers, including continued penetration of our VA DoD channel in The United States, continued penetration of The UK market as the pandemic hopefully recedes once and for all, growth in our U. S. Commercial channel, driven at first by cash paid business models and bolstered by our efforts to gain insurance coverage and expansion of our international distributor network. I want to recognize our dedicated staff for their hard work and commitment in these trying times and thank the healthcare professionals and their patients for their loyal support of gammaCore therapy. At this point, I'll ask the operator to open the line for questions.

Speaker 0

Thank you. We'll now be conducting a question and answer session. Our first question is from Jeffrey Cohen with Ladenburg Thalmann. Proceed with your question.

Speaker 5

Dan, Brian and Doctor. Staats. How are you?

Speaker 3

Fine. Thank you. Great.

Speaker 5

A few from our side. So firstly, Dan, could you talk about the VA and DoD channels as far as any type of predictability and how you're seeing trends formed both at new facilities coming on as well as existing facilities?

Speaker 2

Yes, sure. The first thing is that there is a little bit of seasonality in that channel just around the September 30 year end. They pull a little bit of business forward into September. And then there's about two quiet weeks in the October while they finish up their accounting. And that's a pattern that we've seen previously.

Over the course of the summer, we rebuilt our field sales function under Mitch's leadership and that new group of folks has been in for training now and they're getting they're out now in the streets, detailing the existing customers and starting to prospect for new VA hospitals. And we leverage that capability with our inside sales, the customer experience team that Lisa Martin runs. So I'm and also look, the pandemic once and for all seems to be receding. So I think hope springs eternal, but we're starting to see things accelerate just in the last few weeks and looking forward to great things in coming months.

Speaker 5

Okay, got it. And could you talk about Europe a bit as far as your commentary about growing distributors and maybe talk about are there any reimbursement processes going on for any CE countries?

Speaker 2

Yes. So on that last point, we've got tremendous success in The UK and support from NHS and their healthcare economics arm, NICE. Wales is likely to come on towards the end of this year, but that may slide into next year. Brexit has been a little bit of a headwind because we run the rest of Europe through our UK subsidiary. There are various countries around Europe where we are working through the national healthcare system to try and drive additional reimbursement in different territories and all of that just makes us much more attractive as a distribution partner for the independent distributors.

So again, we had a pretty good cadence of announcing distributor wins throughout 2021 and looking forward to continuing that as well as generating repeat business in 2022.

Speaker 5

Okay, got it. And then lastly, for me is for Doctor. Staats. You talked about this PTSD pilot study. Could you talk a little bit about the size of that study as far as the powering?

And then perhaps you could comment on has there been any commentary, any measurements out there as far as anyone looking at depression?

Speaker 3

Sure. It's a long and complicated set of questions, but I'll dive in. The study itself was a relatively small study, started with 20 patients randomized to receive either sham or active therapy. And what they had data on was eight Mate. And it was a sham device versus an active device.

And they were able to really show a statistical difference in a variety of metrics, looking at this. And one of the things that's exciting to me is it's not just a psychological response, but it's actual measurements of interleukin six, which is an inflammatory cytokine that, frankly, was associated with high mortality in the patients with COVID. So it's a real pro inflammatory cytokine that was able to be shown to be altered. This study, of course, is not going to be enough in and of itself for an FDA clearance, etcetera. But the scope of the problem out there in our veterans is really quite high.

The scope of the disease is out there. It's probably close to three percent in subcapacity, not in the non veteran population. So this is a big unmet medical need. The signal was very strong, however, and I think it will lead us to the next set of studies as we're processing this and what needs to be done next for a true FDA study and filing.

Speaker 5

You expect in the case of PTSD for some for the agency to want or for you to want to do some imaging? And then I'm sorry to cut you off for my depression question.

Speaker 3

Sure. No, you didn't cut me off. I segued. So we have had imaging studies done over the years. There have been a number of functional type of imaging studies that have been done demonstrating an improvement in brain activity as well.

So those are what we just talked about was kind of an additional to data that's already been done. And brief search of NVNS and PTSD will show a number of papers out there on Google Scholar or the NIH website, etcetera. So you can find a lot of stuff that, in fact, already has been done that are supportive of this. Now the second question about depression is not an area that we have decided to invest in today. But I would just mention that the implanted vagus nerve stimulator, originally Cyberonics, received an FDA approval for anxiety depression back in 02/2005.

And I personally am of the belief that things that other VNS strategies have shown are really in our domain of being able to do similar types of demonstration of clinical activity as well. So long and short of it is, we are not at this moment looking at a depression indication, but it's in the realm of possibility.

Speaker 0

Our next question comes from RK with H. C. Wainwright. Please proceed with your question.

Speaker 6

Thank you. Good afternoon, Dan and Brian. Hi,

Speaker 7

RK. On

Speaker 6

the cash pay sales revenue lines, what has been your experience to date in terms of penetration? And also from your experience, how motivated our patients to pay to treat their symptoms, especially when they don't get too much reimbursement from their insurances?

Speaker 2

So thanks for the question, RK. We currently have we started this last summer and we currently have 50 plus prescribers around the country enrolled in one of these cash pay pilot programs. And we've been very upside surprised that something like 65% or 70% of the patients that get a prescription written do ultimately pay that out of pocket cash price when it's highly recommended by their physician. So I don't I'd love to be able to say that we're going to be able to maintain that high conversion ratio. But right now, we're off to a very exciting start.

Speaker 6

Perfect. That's pretty good. And then, for the VA stream, currently have interactions with about nine to six centers as of the third quarter, steady growth of course with the number of centers that you're interacting with. As you said, with the COVID receding, What's the benefit or what are your thoughts on trying to do a big bolus of resources so that 2022 gets to a good start, especially in biggest revenue channel that you have?

Speaker 2

So we are looking at various scenarios, investment level scenarios for 2022. We rebuilt our sales function with Mitch Deshaun joining us last spring and he put together his team over this summer and trained them. So we're going to start to see some of that investment in the current quarter, in the December, but really demonstrate the productivity of that combination of a field sales function and our inside sales function in the first half of next year. If that goes if we can demonstrate the productivity of our initial team in the first half of next year, absolutely, we'll be coming back to the Board to say, okay, we want to ramp up our investment in the sales function to drive more accelerated growth in 2022.

Speaker 6

Okay. And my last question is on The UK channel. It being kind of flattish for the current quarter. What should we think for that channel during the next couple of months left in 2021 and also into 2022? And in that same vein, when we look at other geographies outside of UK, is there one or two geographies in your mind that you think will become meaningful, let's say, in the next twelve to eighteen months?

Speaker 2

So COVID has been a bigger challenge in The UK and in Europe than it has been in The U. S. And it's actually been kind of personal. We've had we have a small team in The UK and two of our employees in The UK had actually came down with COVID in September and October. But they're all they're healthy again, but it's a big impact on our activities.

So we're going to be a little bit slower recovering in the current quarter. That said, all of the mechanics for growing The UK business at that sort of 10% sequentially, as the medtech funding mandate rolls out are in place. And so we should see that return to growth as we roll into next year and the pandemic does whatever it does and get back to that steady growth with support from NHS in The United Kingdom. Outside, I think Canada and Australia are very likely to start to accelerate as we roll into 2022. And it's still it's a little bit too early to tell what our European distributors are going to be able to do between the challenges of Brexit and the pandemic.

Speaker 0

Thank you. Our next question comes from John Vandermosten with Zacks. Please proceed with your question.

Speaker 7

Hey, thank you and good afternoon. I also had a question on the VA and trends there. When you look at and congratulations on the nice increase in facilities that you're serving. When you look at older facilities and newer ones and think of it in terms of like a same store sales or comp basis. Do the older ones kind of maintain steady growth?

Or are they flat? Or I'm just trying to get a sense of how those are. So when we continue to layer these on, how it should affect our forecast there for revenues?

Speaker 2

Yes. It's a good question, John, and it's distorted by the pandemic. So I don't completely trust our trailing actual numbers. In general, the business is quite sticky. Once we have a prescriber who has had success with the therapy, they keep coming back.

But as the pandemic has come and gone and the VA hospitals in different cities have had to focus on pandemic response or doing vaccines. Right now, there's some disruption around doing booster shots. I don't trust the patterns that we see for the last year and a half.

Speaker 7

Okay. Yes, right. There's been a lot of disruption definitely. Okay.

Speaker 2

I

Speaker 7

guess we'll have to wait until another year passes and then we'll kind of see how those pan out. Gross margin was another bright spot that I wanted to ask about. You had a gross margin that's higher than our long term estimates there. Should we think about changing our estimates and moving them up a bit? Or it sounded like from Brian, it sounded like from what you were saying that these were sustainable types of improvements.

Is that kind of what you see? Or are there some issues in there that may bring those down a little bit in the future?

Speaker 4

In the short term, it really depends on labor and overhead absorption, which is obviously dependent on revenue and product mix as well. So and in the long term, though, we're confident that we will sustain very strong gross margins.

Speaker 7

Okay, great. So it sounds like it wouldn't be a problem to kind of bring them up maybe longer term to this level that you achieved in the third quarter?

Speaker 4

That's a fair assessment.

Speaker 7

Okay, great. That's good news. And then the other question, it kind of follows up on one of the other analyst questions about the distributors and how they're trending. So if you look at each of them and try to think of them in category of preparing to make sales or almost making sales or kind of making sales, can you clarify that a bit for each? It sounded like kind of you mentioned a little bit about Canada and Australia and Europe.

But I was wondering if there's any more clarity on kind of where each of them are in terms of getting sales going. And it looks like some of them have already added product and they have it ready to go. It's just yes, I just want to get a sense of kind of where it was.

Speaker 2

Yes. So just to reiterate, Canada and Australia are the furthest along and they're making they're selling through their inventory and coming back for replenishment. Certain we've had success in certain with certain prescribers in Europe, but it's too hard to read through it's too hard to determine patterns again between the disruption of Brexit and the waxing and waning pandemic nonsense. So I wish I could be more granular, but not yet.

Speaker 7

Okay. Okay. And then last one for me is on the cash pay. Just a basic question on how is is there any difference in pricing between the cash pay and what an insurer would pay if they were fully covered and didn't have a and did not have a high deductible health care plan?

Speaker 2

Yes. We've been doing quite a bit of price discovery with our pilot activities through the beginning through the first half of this year. And we're and we're going to continue to fine tune that price discovery. So yes, it's different. But I'd like to leave it at that, if you'll allow me.

Speaker 7

All right. Thank you, Dan, Brian, Doctor. Stotts. Always a pleasure to talk to you guys. Thank you.

Thank you.

Speaker 3

Thanks, John.

Speaker 0

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Speaker 2

Thank you, operator, and greatly appreciate everybody's time and attention. Also, I'd be remiss if I didn't point out Veterans Day next week, given the strong support that we have in the VA hospitals and the DoD military treatment facilities. So stay healthy, everybody.

Speaker 0

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.