electroCore, Inc. (ECOR) Q3 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to electroCore Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Hans Vitzthum, Managing Director of LifeSci Advisors. Mr. Vitzthum, you may begin.

Thank you, operator, and thank you all for participating in today’s call. Joining me are Dan Goldberger, Chief Executive Officer; and Brian Posner, Chief Financial Officer; Tony Fiorino, Chief Medical Officer, will be available for Q&A. Earlier today, electroCore released results for the quarter ended September 30, 2019. A copy of the press release is available on the company’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the Federal Securities Laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements including, without limitation, our examination of operating trends and our future financial expectations are based upon the company’s current estimates and various assumptions. 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 a list and description of 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 the live broadcast today, November 13, 2019. And with that, I’ll now turn the call over to Dan.

Thank you, Hans. Hello, everyone, and thank you for joining us today. I joined electroCore on October 1, and I’m thrilled to be here. I studied the company rigorously before agreeing to take this role. And I concluded that the gammaCore device and associated therapy are well established by peer-reviewed science and enthusiastically received by prescribing physicians and their patients. Many of the anecdotes about quick, effective relief from debilitating headache are very compelling. The therapeutic benefits of gammaCore give me confidence that we can build a great company at electroCore. I spent my first few weeks getting to know our team and our various stakeholders, including key opinion leaders, prescribing physicians and our distribution channel partners. I’ve had six turnaround assignments since 2003, and only one of them was ultimately disappointing for investors. I firmly believe that electroCore can be the biggest success of my career. Brian will discuss the numbers in more detail, but the key headline is revenue growth of 10% sequentially from $623,000 in the quarter ended June 30, 2019, to $683,000 in the quarter ended September 30, 2019. Our direct sales into the VA and DoD health care systems in the United States and the National Health Service in the UK will continue to drive near-term sales. Additionally, I’m optimistic that our initiative into the workers’ compensation channel will yield positive results in the near future. We continue to devote significant efforts to obtain reliable reimbursement for gammaCore through the pharmacy benefit, or PBM, channel in the United States. I’m working with our team to perform a rigorous top-down analysis of that business opportunity as well as evaluating several alternatives. We’ve planned to complete that analysis this quarter, seek Board approval for any proposed revisions to our commercial strategy and proceed with any required implementation as we enter 2020. As you know, this past spring, management announced a comprehensive redeployment and cost reduction plan intended to focus on three things; current and near-term revenue generating opportunities, streamlining our clinical development program and reducing our quarterly cash burn to extend our cash runway into the beginning of 2021. We continue to believe that this plan best positions us for long-term success. I’m pleased to report the continuation of positive trends in growing our business. By the end of the third quarter, we had reached approximately 2,600 physicians who had written at least one prescription. This demonstrates physicians’ growing comfort with the efficacy and safety of gammaCore, which, unlike drug alternatives, carries no systemic side effects or drug-drug interactions. During the third quarter, we had nearly 70% sequential growth in paid months of therapy across all lines of business, rising to 1,736 paid months in the third quarter from 1,023 in the second quarter. These positive trends will be converted to electroCore revenue through our distribution channel in coming months. Patient demand for gammaCore continues to grow. We previously announced a renewed focus on revenue channels where the current prescriber base and payer coverage are most concentrated, including the Veterans Administration and Department of Defense covered under our Federal Supply Schedule contract effective as of January 15, 2019. United Kingdom, where recent innovative technology program award for cluster headache treatment offers patients the potential to get their gammaCore therapy paid for and other potential revenue opportunities in the pain management field, including workers’ compensation providers. Let me point out that the Federal Supply Schedule, or FSS, which includes both Veterans Affairs and the Department of Defense, represents more than 20 million covered lives. Approximately, 1% of those covered lives are probably eligible for second- or third-line therapy for cluster headache or migraine. That’s a total addressable market of more than 200,000 patients that we are just beginning to penetrate. The FSS is a very significant opportunity for electroCore, and we’re very pleased to see it gaining the traction that we had hoped for. Revenue attributed to this channel was $278,000 in the third quarter, up from $119,000 in the second quarter. To date, 48 VA and military treatment facilities have purchased product, up from 35 in the second quarter. During the third quarter, we shipped 553 months of therapy to the VA and DoD facilities, representing a significant increase from the 233 months of therapy in the second quarter. We’ve redeployed a significant portion of our sales function to the VA and military treatment facilities, and we expect shipments to continue to accelerate in those channels. Turning now to the United Kingdom, where we’ve generated $170,000 of revenue in the third quarter, up approximately 10% from $155,000 in the second quarter. As previously reported, UK’s National Institute for Health Care Excellence, or NICE, published draft guidance on the use of gammaCore in cluster headache. They concluded that evidence supports the case for adopting gammaCore to treat cluster headache in the NHS, or National Health Service. gammaCore reduces the frequency and intensity of cluster headache attacks and improves quality of life. In the draft guidance, NICE highlights that the use of gammaCore in addition to standard-of-care therapy could save approximately $563 per patient in the first year as compared to standard of care alone. It’s estimated that 25,000 people in the UK with cluster headache are likely to respond to treatment with gammaCore. The comment period for the draft guidelines closed on August 2, and we expect the final guidelines to be published in December. We believe this would be a significant catalyst that could drive robust growth in that important market. We are particularly pleased to be included in the draft guidance as NICE and NHS are among the most rigorous evaluators of new therapeutics and technologies. In the U.S. commercial market, payers continue to respond favorably to gammaCore’s noninvasive approach, superior safety profile and Level 1 peer-reviewed science but it’s still slow to move our contracts forward. We’re continuing contractual discussions with large national and regional payers. CVS has renewed our contract and a significant number of claims submitted through the prior approval, or PA process, are being adjudicated in our favor. Unfortunately, the PA paperwork requirements is a burden on prescribers and their patients, and we’re working with our fulfillment partners to streamline that process. We look forward to updating you on the payer determinations for coverage and reimbursement as they go into effect. In August 2, 2019, we announced that we’d entered into a distribution agreement with Doctors Medical LLC to provide gammaCore therapy to patients with workers’ compensation injuries and personal injury claims. This agreement further validates our proprietary nVNS technology and is a significant step forward in our mission to make gammaCore available to the broadest possible patient population. Doctors Medical placed an initial order during the third quarter, and we look forward to their launch in the first half of 2020. Now turning to our clinical programs, we’re tightening our focus and advancing only those studies designed to expand our current label and support payer discussions. We continued to enroll patients in a company sponsored PREMIUM II study during the third quarter. To date, we’ve enrolled and randomized more than one-third of our target of 400 patients. We remain on track to complete enrollment in the next year. Last month, FDA requested additional information about our 510(k) submission to extend gammaCore’s label into migraine prevention. We met with the agency last week to discuss their concerns, and we’re on track to provide a formal response to the information request in early 2020. While the proposed label could expand our ability to market gammaCore more broadly, we do not believe the FDA process is impacting prescriptions for our existing indications. While PREMIUM II is the only company sponsored trial that we are advancing currently, our gammaCore technology continues to be evaluated in a number of investigator-initiated studies that are largely funded with grants from third-party agencies. We will report on those as they read out in the future. At this point, I’ll turn the call over to our Chief Financial Officer, Brian Posner, to review the financials. Brian?

Thanks, Dan. For the quarter ended September 30, 2019, electroCore reported net sales of approximately $683,000 compared to $151,000 in the third quarter of 2018. Net sales were $623,000 in the second quarter and $410,000 in the first quarter of 2019. These increases in revenue reflects increased sale in the United States and the United Kingdom. Total operating expenses for the third quarter of 2019 were approximately $11.2 million compared to $13.6 million in the third quarter of 2018. The decrease was due primarily to a reduction in the SG&A expense, which declined to approximately $8.1 million in the third quarter of 2019 from approximately $11.3 million for the comparable period in 2018 primarily driven by a decrease in compensation and other expenses consistent with the cost reduction plan implemented in June 2019. The third quarter of 2019 included severance costs of $800,000. Adjusted EBITDA net loss from operations for the third quarter of 2019 was a loss of $8.5 million, a 33% decrease when compared to adjusted EBITDA loss of $12.7 million for the same period last year. The company defines adjusted EBITDA net loss from operations as GAAP net loss from operation, excluding income tax expense, stock compensation expense, restructuring and other severance-related charges, legal fees related to stockholders’ litigation and total other income and expense. A reconciliation of GAAP net loss from operations to non-GAAP adjusted EBITDA net loss from operations has been provided in the financial statement tables included in today’s press release. Cash, cash equivalents and marketable securities at September 30 totaled $33.5 million as compared to $68.6 million at December 31, 2018. Net cash burn was $7.6 million for the quarter ended September 30, 2019. It should be noted that the September quarter cash burn included approximately $800,000 of outflows, largely related to severance and CEO recruitment costs. By comparison, our net cash burn was $16.2 million in the first quarter and $11.2 million in the second quarter of 2019. Based on our current cash resources, revenue and expense forecast, we continue to believe that we will have adequate resources to fund our operations into the beginning of 2021. And now I’ll turn the call back over to Dan.

Thanks, Brian. Going forward, we are intensely focused on growing revenue in the channels where we are reliably getting paid and rightsizing operating expenses to reflect more realistic expectations. I’m working with our team to revise and refine our strategy for each line of business. The Board and I will be reviewing our strategic priorities and opportunities on a regular basis, and I look forward to communicating any significant changes in, or additions to, our strategic plan with our stakeholders in the future. I expect revenue in the current quarter to increase slightly from the third quarter in the range of $700,000 to $800,000. As Brian said earlier, we are confident that cash on hand will be adequate to execute our current plan into the beginning of 2021. And with that, operator, please open up the call for questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Craig Bijou, Cantor Fitzgerald. Please proceed with your question.

Good afternoon, guys. Thanks for taking the questions.

Hi, Craig.

Dan, let me start with you. I guess, just as you come in, I know you’re only on the job a little bit more than a month now. But maybe, what are some of the things that were surprises to you, positive, negative? And then is there any more color or detail you can provide on some of the analyses that you’re doing or the – to look at some of the strategy and any potential changes that could come about?

Sure. Thanks for the opportunity. You asked about surprises, and I’ve got to tell you that the surprises have been to the upside with respect to how well-received the therapy – gammaCore therapy is among both patients and prescribers and the health and the enthusiasm of our team here. The company went through a pretty substantial restructuring, and a lot of the heavy lifting has already been done. We’re doing very well in the UK, we’re doing very well in the VA system, and we’ve started to get some traction in the military treatment facilities. Those are all channels where we are reliably getting paid. And of course, the big opportunity continues to be among commercial payers and that’s going to continue to be a process. And so we’ve got to allocate resources appropriately.

Great. Thanks. And maybe following up on some of your comments on the migration prevention trial. So any color on what the FDA was looking for? What steps are you taking now to submit or to respond in early 2020? And then it sounds like it’s worthwhile for you guys to move ahead with that indication based on the discussion. So just any more color on kind of the plan there?

Sure. We filed that paperwork with the FDA to extend the label to prevention of migraine. The agency came back with a list of questions and clarifications, which is the, sort of, standard operating position – standard operating policy in my experience with the FDA. We had a productive meeting with them. We understand, with greater precision, what they’re looking for, and we’ll be able to answer all of their questions in a formal submission, again, well before the deadline in March. I expect there’ll be another round of questions after that. And in the meantime, we will continue to progress with our PREMIUM II study in the unlikely event that the FDA ultimately says they want more data.

Okay. That’s helpful. And last one for me. I appreciate the color or the transparency on what to expect from revenue in Q4. And I know you’re not going to provide 2020 guidance, but just, is there any way or maybe help us think about how we should think about potential revenue acceleration or – in 2020 and maybe, which of the – your segments would drive that revenue growth?

So I apologize, but I’m going to have to dodge the question because I haven’t had an opportunity to present our 2020 plans to the Board yet, and I should really wait for Board approval. But I’m very, very enthusiastic about acceleration, both in the UK business with – when the nice guidance gets published and promulgated. We’re doing very, very well in – under the FSS contract, and I think that business is going to accelerate. And I look forward to sharing what we believe can happen in the commercial channel as well once we go through the approval process with the Board, and so early next year.

Okay. Thanks for taking the question, guys.

Our next question is from Josh Schimmer, Evercore. Please proceed with your question.

Thanks for taking the questions. Dan, with the same caveat that you’re just getting your bearings there, it is obvious that gammaCore is well below where it needs to be, and 10% sequential growth is nice but not nearly enough when you’re coming off such a small denominator. So which of the changes that you’re implementing? Do you think are going to be most impactful for accelerated adoption? We’re not going to see a change – a meaningful change in the fourth quarter. When is the reasonable time frame to look for that acceleration? And then last, your comments on pursuing potential reimbursement alternatives suggest maybe a lack of confidence in procuring some of the key PBM contracts in a reasonable time frame. Is that an accurate interpretation? What might cause that assessment or analysis now, especially in light of some of the prior communications from the company, which did sound quite confident that maybe there were only some technical issues that needed to be overcome to put those contracts in place? Thank you.

Sorry, there are several questions there, and if I don’t hit them all, Josh, please remind me. But in the current quarter, we’re already halfway through it, and I’ve got a pretty good feel for how product and revenue is going to flow. But I think I’m very optimistic that you’re going to start to see a step-up in the first quarter of next year as we realign certain things primarily in our U.S. distribution – in our U.S. sales function and rightsize our distribution channel. You’re also going to see some expense reduction items as we roll into the first half of next year, as we rightsize some of our service providers. Your question around the payers, as you know, we’ve invested a lot of time and energy and cash, frankly, in the pharmacy benefit channel, and we are continuing to go in that direction. There are some of the smaller players that have suggested putting us through the medical benefit channel, and I don’t want to leave that untapped. So what you’re seeing is a little bit of both, not by any means abandoning of the pharmacy benefit channel in any way. It’s just that those guys are taking forever to put us through their systems.

And is there anything you can do to accelerate that or they’re just on their own time frame now?

The short answer is, no, I’m not aware of anything we can do to accelerate the PBMs. They are pushing back hard – to the best of my knowledge, they’re pushing back hard on the CGRP antibodies, and we’re getting caught up in that larger battle as well.

Thanks very much.

[Operator Instructions] Our next question is from David Turkaly, JMP Securities. Please proceed with your question.

Yes. Hi. This is actually Dan on for Dave. Just a quick one on FSS shipments. Looks like they doubled again over the second quarter. Would you just be able to give us any color on any approximate internal targets for this channel that you might have for the full year? And then how should we think about contributions from this channel and how they could come into sales for 2020 and going forward from there? Thanks.

So I’ve got a very crisp forecast, but I’m not sharing any guidance with you just yet. So keep asking. As far as contribution, we’ve got very healthy pricing under the FSS contract and it’s a very efficient channel and call point for us. We’re not sharing the revenue with a lot of distribution channel partners. So contribution is very, very lucrative in that business model.

Got it. Just one more. You mentioned that you’ve shipped to 48 of the VA treatment facilities. Can you just give us an idea of how many of these facilities exist? And how quickly you feel you could reach a higher portion?

So there’s roughly 160 campuses around the country that cover VA or military treatment facilities or both. We’ve had sales, booked revenue from…

48.

48 of them, and we’ve got 10 reps in the field now. So it’s a reasonable number to cover. Maybe not all 160 of them, but we can get pretty good coverage.

Great. Thank you very much.

Our next question is from Ahu Demir, Noble Capital Markets. Please proceed with your question.

Hello. Thank you for taking my question. My question will be to you, can you give us some information about the term covered lives as of third quarter?

So we are – we’ve created a lot of confusion about what we mean by covered lives. And I think the right number to give you today is 60 million covered lives, of which 20 million-plus are covered through the FSS contract and another 30 million or so are covered through our CVS contract that’s previously been announced.

Okay. And is there any update on the First Databank hold or Express Script? Or I remember from Frank mentioning Prime Therapeutics contract. Is there any update on those channels?

So yes, there are updates, but we have not announced anything publicly.

Okay. My last question will be a follow-up for the migraine prevention. And in case you would be required to do PREMIUM through data prior to receiving the clearance. When do you think the time line would be for the pipeline data from PREMIUM to range? Like, what is the worst case scenario if you are required to conduct and complete the trial, when would you expect to receive the data?

So I think they are two separate questions or issues. We’re very confident that we can get the label extension based on the data and the responses that we have access to today. The PREMIUM II study, and I think we said this on the call, we’re about one-third enrolled, and we’d love to finish enrollment in the first half, but it may take a little bit longer to complete enrollment further into next year. So I don’t have very crisp visibility on current enrollment rates and how long to project that process.

Okay. I have one more question, if it’s okay. How does it change the recent acute migraine approval label? How does it change gammaCore’s position in the landscape? Does it – do you think it any differently? Do you position the treatment any differently? Do you think you will lose some market share for that – with that approval?

I’m not sure I understood the question. Are you asking about one of the new drugs that’s been approved?

Correct, yes, in the acute treatment.

Tony, do you want to go ahead and field that one?

Sure. I don’t think it really changes how we approach the sales pitch on gammaCore in the acute setting. It’s not yet available on the market. In fact – and we expect that they will be facing hurdles in terms of third-party payer coverage because of the availability of generics in the frontline acute setting. I mean, there are some issues with the drug that – in terms of side effect profile.

Okay. Thank you for taking my questions.

We have reached the end of the question-and-answer session. And I will now turn the call back over to Dan Goldberger for closing remarks.

All right. Thank you, everybody, for joining our call, and we look forward to providing our next update of the year-end results. Have a great evening. Bye.

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