InspireMD, Inc. (NSPR) Q3 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the InspireMD Third Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Feffer. Thank you, Mr. Feffer. You may begin.

Thank you, Devin. Good morning, everyone, and thank you for joining us for the InspireMD's third quarter 2018 business update conference call. On the call with us today is Jim Barry, Chief Executive Officer of InspireMD; and Craig Shore, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for your questions. Before we begin, let me take a minute to note that this conference call may contain forward-looking statements. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. Such information is subject to known and unknown risks, uncertainties, and other factors that can influence actual results or events and cause actual results or events to differ materially from those stated, anticipated, or implied in the forward-looking information. Listeners are cautioned not to place undue reliance on forward-looking information as no assurance can be given after the future results, levels of activity, or achievements. With that, I will turn the call over to Jim Barry. Jim?

Thanks, Jeremy, and thanks everybody for joining us this morning. During the third quarter, we continued to execute our multi-faceted commercial strategy designed to make our novel best-in-class CGuard Embolic Prevention System which we prefer to as CGuard EPS, the treatment of choice for patients in need worldwide. For those of you who may be new to the story CGuard EPS is a highly differentiated minimally invasive treatment for carotid artery disease designed around our proprietary and elegantly simple MicroNet technology to dramatically reduce or even eliminate the incidence of stroke following carotid artery disease procedures. Worldwide an estimated 15 million people suffer from stroke annually resulting in 5.7 million deaths and five million left permanently disabled. What's more troubling is that the incidences of stroke among young people aged 20 to 64 is increasing rapidly. One of the major risk factors of stroke is carotid artery disease or high grade carotid stenosis. So we believe there exists a need for a new minimally invasive product that addresses the risk of stroke in patients with carotid artery disease that today often leads treating physicians to pursue a more invasive surgical treatment known as carotid endarterectomy. One key part of our growth strategy is expanding our reach in educational initiatives beyond the intervention typically performed carotid stenting procedures to also include vascular surgeries. Approximately 80% of patients with high-grade carotid stenosis are treated surgically with carotid endarterectomy performed by vascular surgeons with all the risks associated with an invasive intervention. From our perspective, this requires a different approach as vascular surgeons so far seem to be hesitant to adopt carotid artery stenting due to stroke risks associated with conventional carotid stents. However, this is a key point of differentiation of CGuard as a result of our proprietary MicroNet mesh technology which continues to show tremendous benefit in preventing stroke. We believe that we will continue to gain traction particularly given the ever increasing support from the vascular surgeon community that we are seeing, as well as the growing body of clinical evidence for treating carotid artery disease with CGuard EPS at least to significantly improved long-term patient outcomes versus conventional carotid stenting. This could result in a paradigm shift from most patients being treated today by surgery to the majority of patients being treated minimally invasively with CGuard EPS tomorrow. We recently established two of our first centers of excellence at two of the leading hospitals in Germany and Italy which are key markets for CGuard. The first is at the Augusta Hospital Clinic for Vascular Surgery in Düsseldorf, Germany. The second is at the Maria Cecilia Hospital in Cotignola, Italy. These centers which were established in July of this year will continue to train and educate surgeons and interventionalists on the benefits of CGuard as a safer choice for carotid revascularization and stroke prevention and will allow clinicians to share their positive experiences using the device in their daily practice. The opportunity for CGuard is significant. Globally it's estimated that as many as 13 million people have high grade stenosis of the carotid arteries. Of those, just 2.2 million have been diagnosed and only 600,000 receives some form of treatment. As noted earlier, approximately 80% are surgically treated by carotid endarterectomy and the remaining 20% are treated with conventional stents. While the majority is treated with surgery, despite its known risks in invasive nature, it's largely due to the increased risk of stroke associated with conventional carotid stenting. Our MicroNet technology however effectively reduces the spaces between conventional stent stress preventing the protrusion of plaque through the stent stress, which has been shown in prior studies to occur in a majority of conventional carotid stents. This is one of the key proprietary features of CGuard that is intended to make it a significantly safer option. If we take the roughly 600,000 patients who are treated at approximately $1,600 a stent that equates to a $1 billion addressable market. Obviously if the remaining 1.6 million people who are diagnosed but untreated were to undergo treatment that would drive a significant increase in the size of the market and we believe CGuard can evolve into the standard of care and begin to find its way into the treatment of these patients. We are still in the early stages of executing our growth plan, and given our current revenue run rate, we believe, that we have significant opportunity in front of us just within our existing markets. A second part of our commercial growth strategy is completing our geographic expansion where strategically relevant. To that end, during the third quarter, we announced that we had received regulatory approval and reimbursement to begin marketing CGuard in Mexico, and we immediately moved to initiate commercial launch. This follows an earlier approval and positive reimbursement decision in India, reflecting our continued progress in opening new territories. In parallel, we are increasing our focus on growing within existing key markets in Europe. And to that end, we recently hired a new Vice President of Sales and Marketing who is based in Germany. In terms of our U.S. regulatory initiatives, we are progressing with the pre-clinical testing required for the preparation of an investigational device exemption application known as an IDE. We remain on track to file our IDE with the FDA in mid 2019. We look forward to sharing additional updates on our U.S. progress on future calls, but suffice to say that securing U.S. regulatory approval remains another top priority for our team. We continue to accumulate a growing body of safety and efficacy data that will serve to enhance our growth initiatives that we just outlined. At the recent Cardiovascular Research Foundation's Transcatheter Cardiovascular Therapeutics Conference known as TCT, the preliminary cumulative three-year follow-up data efficacy, stroke prevention, and durability data from the PARADIGM-Extend trial was presented. PARADIGM-Extend is a continuation of the PARADIGM clinical trial and investigator led clinical study evaluating the use of CGuard EPS in all comer symptomatic and asymptomatic carotid artery stenosis patient population with various stages of disease progression and increased stroke risk. Overall cumulative data that was presented showed no stroke or stroke related deaths between 24 and 36 months and the absence of any device-related issues in the first 93 patients who had reached the three-year follow-up time point of the 251 patients in the PARADIGM-Extend cohort. This follows similarly positive 24 months data that was presented at the Europe PCR Conference in May in which the data presented showed no major stroke in the current procedural or post procedural period up to 30 days and no stroke or stroke-related deaths between 12 and 24 months. In addition, the duplex ultrasound data confirmed normal vessel healing with CGuard EPS with no indication of any long-term instant restenosis which has been commonly reported in other conventional and next-generation dual layer metal mesh stents. These data are core to our ongoing efforts to transition interventionists and vascular surgeon from traditional carotid stents to CGuard. Additionally, we look forward to the presentation of additional three-year data at the 45th Annual Symposium on Vascular and Endovascular Issues, Techniques, Horizons also referred to as a VEITH Conference in New York later this month, where this data will be presented to vascular surgeons from all over the world and who represent the majority of attendees at this major Vascular Surgery Conference. On the IP front, we continue to solidify the intellectual property position surrounding CGuard, IRON-GUARD, and future pipeline products through the issuance of two additional key U.S. patents covering InspireMD's proprietary MicroNet stent jacket combined with a stent scaffold. These also will include allowed claims related to drug eluting technologies. We now have 11 U.S. patents issued or allowed with an additional 9 pending and dozens more issued allowed or pending outside the United States. In closing, I fundamentally believe in the enormous potential of our MicroNet technology to dramatically reduce the risk of stroke. We have made and will continue to make substantial progress both increasing penetration into existing markets and pursuing regulatory approval in new markets, most notably, the United States. We believe each of these initiatives represents an enormous potential commercial opportunities that can deliver significant value for our shareholders while offering a new stroke treatment paradigm to clinicians and patients alike. As always, we continue to appreciate the support of our shareholders and look forward to answering your questions after Craig presents the financials.

Thanks Jim. Revenue for the third quarter ended September 30, 2018, was $759,000 compared to $718,000 during the same period in 2017. The increase was primarily due to an increase in sales of CGuard EPS as a result of our transition from our prior exclusive distribution partner for most of Europe to local distributor as well as expanding into new geographies such as India, Mexico, and Vietnam. Total CGuard revenue was $604,000, an increase of 15% from $526,000 in the third quarter of 2017. On a year-to-date basis, through September 30, CGuard grew a robust 72% versus the comparable period in 2017. The company's gross profit for the third quarter ended September 30, 2018, was $198,000 compared to $153,000 for the same period in 2017. The increase in gross profit was largely attributable to the increase in volume of sales. Gross margin increased to 26% in the three months ended September 30, 2018, from 21% in the same period in 2017, driven mainly by a higher average sales price of MGuard Prime EPS and a reduction in cost of one of the main components of CGuard EPS. Total operating expenses for the quarter ended September 30, 2018, were $2.2 million a decrease of over 3% compared to the same period in 2017. The decrease was driven by a decrease in salary expenses primarily due to a salary related accrual in 2017, and a decrease in share-based compensation expenses, partially offset by an increase in quality assurance and regulatory expenses related to annual routine audit activities which included certain validation reviews required every two years. Financial expenses for the quarter ended September 30, 2018, were $32,000 compared to $1,000 for the same period in 2017. Net loss for the quarter totaled approximately $2 million or $0.05 per basic and diluted share compared to a net loss of approximately $2.1 million or $6.56 per basic and diluted share in the same period in 2017. As of September 30, 2018, cash and cash equivalents were $11.2 million compared to $3.7 million as of December 31, 2017. We currently have approximately 37.6 million shares outstanding. There are an additional 3.3 million shares underlying the Preferred B all held by a company affiliate and 1.3 million shares underlying the Preferred C. As a result of our most recent offering this past July in which we raised gross proceeds of $10 million, we also have outstanding pre-funded warrants to purchase approximately 2.4 million shares issued in lieu of common stock sold in the offering. The reason for the issuance of these pre-funded warrants was to ensure certain shareholders didn't go over certain equity beneficial ownership threshold, but importantly there was no price protection for any of these pre-funded warrants. Assuming all the underlying shares of the Preferred B and Cs and pre-funded warrants were to convert our shares outstanding would be 44.7 million. I'd also like to mention that the July 2018 offering completed the recapitalization of the company. This was something we worked very hard on over the past year or so and we're pleased to have this accomplished. At this point, we like to open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Steve Criberg [ph] from Foresight Investing. Please proceed with your question.

Good morning. I looked at the Investor Presentation and the number you just quoted, you agreed with that about the total potentially full dilution number of shares outstanding of 44 some million, but I'm having trouble reconciling that with the 8-K you filed on July 5th where you said that in the July 29th offering you issued 10.85 million common units which translates to 10.85 million common shares and another 10.85 million Series B warrants to purchase one share for each of the warrants. So that's about 22 million shares and then the 8-K went on to say that in addition you issued 22.48 million pre-funded units, each which represents 22.48 million pre-funded warrants to purchase one share each for each warrant and another 22.48 million series B warrants. And when I add all that up I get way more than 44 million shares, perhaps you could clarify for me what I'm misunderstanding in that 8-K you filed on June 29th.

Right. Okay, thanks for your question. So the numbers you're quoting are actually fully diluted. I'm talking about the common shares outstanding. So for just two things, one you also talk a little bit about the sue that was issued by Wainwright which is not included in the numbers I quoted. So we basically have 44.7 million shares outstanding but then there's another 40.1 or 40.7 million warrants outstanding. So if you would actually look at our fully diluted number is actually 86 million shares. I think that’s what you’re alluding to. I'm just talking about the shares outstanding and the actually underlying shares are the Preferred B and C and the prefunded are actually almost identical for underlying shares anyway, that's why we like to include them as this better shares outstanding.

So if all warrants in Series D warrants and pre-funded warrants if everything's converted, there's really 86 million shares -- there would be 86 million shares, is that right?

Exactly.

Okay. Thank you for clarifying that for me. Who is your main competitor making carotid stents and is there any technology embedded in their stents that would have the same functionality as your stent, the CGuard?

Yes, I put them into two different categories, there is manufacturing of conventional carotid stents which has been around really stents the mid-90s for intensive purposes and they hadn't really have not changed at all and that's basically from all of the major manufacturers out there, Boston Scientific, Medtronic, Abbott, all have conventional carotid stents. In and those come associated with the risks of stroke and that's why physicians have tended to shy away from those stents in many of the patients treated for carotid artery disease. There's a next-generation group that comes in which I include ourselves among which has -- we obviously have a mesh covered stent, there is another company called Terumo Medical which is a Japanese multinational, they have what I would call a dual layer stent. So it's almost a stent within a stent again trying to meet the same objective of reducing embolic particles going to the brain. And then there is a private company called W. L. Gore who has a platform technology of PTFE and they try to put a PTFE mesh on their stent. So far all of the clinical data that's available to all of us publicly is I don't think either of those two holds a candle to us never mind the conventional stent. So our clinical data has been and continues to be excellent, consistent, solid, and I think all of our competitors have sort of skin their knee along the way in different aspects…

Got you. The addressable market you talked about 600,000 interventions per year, it's so much for stent, that assumes one stent per procedure but I think I read some place that some procedures require more than one stent maybe two or even three.

That's right, believe it or not, we actually use an average of 1.5 stents per patient in that number.

Okay. So to get the addressable market you use 1.5?

That’s correct.

Okay. And how much do you expect it will cost you to get the IDE filed and then once the IDE is filed you still got to go through clinical trials for the FDA. You know order of magnitude what kind of cost you anticipate having to expand get through that process?

Yes, so we have about $1 million of expense in front of us to file the IDE and then upon IDE approval the clinical trial that we're currently looking at although again nothing has been totally finalized yet, we could be looking at anywhere from $12 million to $15 million.

So you're going to need to raise more capital and at some point most likely?

That's correct.

Okay.

If I may just add on to that, I mean there is number of ways that could happen, right. I mean if we continue to perform as we're performing commercially in Europe and get further validated with an IDE approval in the U.S. that may take numerous entities attention and there may be other ways of getting that file funded without having to go to the public markets.

Got you. You've done some significant clinical trial work already, does the FDA -- will the FDA recognize any event, will that allow you to kind of shortcut traditional clinical trial process?

Yes, no, unfortunately not. I mean look we've already had as we've said in the past we've already had a pre-IDE meeting with the FDA and we brought in both our U.S. investigators and our European investigators who have actually conducted clinical trials over in Europe and I would tell you the FDA has been pretty impressed with the data that we've been -- that's been coming out of Europe but I think that only just facilitate let's call it facilitates getting approval, we still have to do a trial for U.S. approval.

Okay. What countries are you approved in right now?

I mean we're approved, I mean basically all over the world with the exception of North America, China, Japan. I mean we're basically in Europe, Western Europe, Eastern Europe we have some markets in Asia, Latin America, that's pretty much it.

You can look in our recent filing and you can see a complete list.

Okay, thank you. What's the addressable market and where you're approved right now?

If you look at it it's probably let's call it I would say it's about 50:50 between North American and the rest of the world.

But rest of the world includes Japan and China and some places where you're not approved. So I'm just wondering and those are the biggest markets typically. So the countries where you're actually approved right now in selling, what ballpark would you think the addressable market is?

We have about a third of that I would say.

One-third, so somewhere in the $300 million range is.

Somewhat, yes. That's correct.

Okay. And you're still a fraction of that? And so the third quarter revenues showed a market -- the growth rate in the third quarter revenue showed a market deceleration from the first half of the year. But one would expect the opposite to be the case that growth rate should really be accelerating if the data is as good as you say. Could you comment on why we saw a deceleration in the growth rate in the third quarter and what your expectations are going forward for the market you're already approved in?

Yes, so not on expected for Q3 seasonally outside of the United States. Carotid artery stenting is an elective procedure and given the summer months in Europe, it's quite typical to have a bit of a soft quarter and that's what we saw. But again the good news is we saw an increase over last year's third quarter. So we remain quite bullish on certain things. We think our commercial strategy is going to continue to accelerate growth appropriately.

Thank you. [Operator Instructions]. There appear to be no further questions at this time. I'd like to turn the floor back over to Mr. Barry for closing comments.

Okay, thanks Devin. And that concludes today's call. Thanks again for all of you -- to all of you for joining us this morning and we look forward to providing additional updates in future quarterly calls.

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