Opsens Inc

TSX:OPS

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the OpSens Reports Second Quarter of Fiscal Year 2022 Financial Results.

[Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners.

[Robert Blum]

All right. Thank you, Scott. Good morning, everyone, and thank you all for joining us today for the OpSens Second Quarter Fiscal Year 2022 Conference Call for the period ending February 28, 2022. With us on the call representing the company today are Louis Laflamme, OpSens President and Chief Executive Officer; and Robin Villeneuve, OpSens Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

Before we begin with prepared remarks, just a couple of comments. Today's call will contain forward-looking statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected, and the company undertakes no obligation to update these statements, except as required by law. Information about these risks and uncertainties are included in the company's filings as well as periodic filings with regulators in Canada and the United States, which you can find on SEDAR and the OpSens website. Today's discussion will include adjusted financial measures, which are non-IFRS measures, they should be considered as a supplement to and not a substitute for IFRS financial measures.

Finally, today's event is being recorded and will be available for replay through both the webcast and conference call dial-in information provided in the press release. So with that said, let me turn the call over to Louis Laflamme President, Chief Executive Officer for OpSens. Louis, please proceed.

[Louis Laflamme, executive]

Thank you, Robert, and good morning to all of you. We are excited to speak with you today, again, to discuss the developments within the business. Let me also take a minute to greet the French speaking audience.

[Foreign Language]

Similar to last quarter, the challenges brought on by the Omicron variant continued to impact sales in the second quarter as procedure volumes decrease, and we encountered supply chain disruption that limited our ability to ship certain orders. Fortunately, with the Omicron variant subsiding in North America, we have seen an increase in activity recently and are expecting an increase in the revenue in the third quarter compared to the most recent second quarter. This is consistent with what I mentioned last quarter, as we remain very optimistic that the second half of fiscal year 2022 will show resumption in revenue growth. I will expand more upon the growth trends we are seeing as we now are set about halfway through the third quarter as well as the initiatives we are taking to further expand and enhance our sales organization to now take advantage of these new trends in the market.

Bottom line, we see continued commercial adoption for our products despite the slowdown in overall hospital-related procedures and supply chain challenges the last few quarters. On the development side of our business, we remain equally optimistic to the prospects we communicated last quarter as we remain on track for an anticipated approval in mid-2022 for Canada, and the second half of 2022 in the U.S. for our next generation medical guidewire, which we are calling SavvyWire.

As a reminder, in November last year, we completed the 20 patients in-man clinical safety and efficacy study, utilizing the SavvyWire, with all patients successfully treated without any adverse effects related to the product. We then submitted our clinical package for 510K clearance to the U.S. FDA, approval with Health Canada and submitted more recently for CE Mark as well.

We are responding to what we believe are normal courses of questions at this time and do not foresee any change to our estimated time line for approval. These submissions were clearly significant milestones for the team here at OpSens, but the ultimate goal is clearance and commercialization. I will expand a bit more on this in a moment as we feel we are now closer than ever to entering the massive and rapidly growing TAVR market with what we believe is a key innovative product for TAVR procedure evolution, which will drive future revenue and strategic value for OpSens.

Another key development was the signing of a 4-year extension of the supply agreement we have with Abiomed to continue supplying OpSens' sensor technology for Abiomed's Impella heart pump through April 2028. We are extremely pleased by the development as it validates our fiber optic sensor technology and continues to provide us with a strong and predictable base of revenue and growth.

So with those 3 high-level points, let's jump into a few more specifics. Starting with OptoWire. As you saw in the press release, sales within our coronary artery disease business or what we refer to as FFR and dPR were $4.6 million during the second quarter compared to $6.1 million in the year ago quarter. The results were impacted by supply chain disruptions and by the lower number of procedures in the hospitals due to the Omicron variant wave which hit hard in December and ran through mid-February. However, as I mentioned a moment ago, the tide appears to have turned, and we have seen an increase in activity recently, which should bode well for the current third quarter and the second half of the year.

As we look at the sales around the world, there were certainly bright spots as we were able to mitigate the impact in a few key areas. In part particular, EMEA was up 9% compared to the second quarter of a year ago and up 13% sequentially. As you recall, the variant rolled through this region earlier than in others, which help, but more importantly, the team has done a tremendous job of improving the performance of distributors in the region to enhance educational activities. I believe the work that has been accomplished in the last few months should bode well for continued improvement in this region. In Canada, similar to what I mentioned last quarter, while the variant impacted procedure volumes, those impacts were offset by a multiyear contract we received where we were selected as the main coronary pressure guidewire for the eastern part of the province of Quebec.

This has been a nice growth driver for us and with the hopeful return of normalized procedure volume should only elevate our performance in Canada. The impact was most felt in the U.S. and Japan. In Japan, the impact was primarily due to supply chain disruption that prohibited our ability to obtain certain components for deliveries in Japan. However, we expect reversals of this trend into Q3 and into Q4 to finish the year on a strong note.

Taking a step back, as you may recall, when the pandemic first hit, we reduced the number of employees dedicated to business development in the field, particularly in the United States, as access to cath labs and hospitals were restricted by sanitary measures. We have remained cautious since that time and have managed our business prudently. While we could have ramped up the hiring of additional salespeople earlier, we wanted to try and see the proverbial light at the end of the tunnel before jumping all the way in. Well, we feel the time is right now to launch a more aggressive expansion of our sales organization. As such, we have started accelerating hiring for these positions in the past few weeks to intensify our sales force in North America.

Additionally, we brought on board a new Chief Commercial Officer, Brad Davis, to lead our global commercialization strategy and more specifically expand our U.S. commercial operations. Brad was formerly Vice president, Global Marketing and health care economics and reimbursement at Cardiovascular Systems, or CSI. During his nearly 7 years tenure at CSI, the company tripled coronary atherectomy revenue and grew peripheral atherectomy revenue faster than the market to achieve U.S. atherectomy market share leadership while expanding into new product categories.

Prior to CSI, Brad held numerous commercial roles of increasing responsibility at Guidance and Boston. I believe Brad's 21 years of sales, marketing and strategy experience will prove to be instrumental in growing our commercial Optowire operation and even more so as we look to commercialize our SavvyWire later this year. So with Brad's enhanced leadership of our sales team, the hiring of a new sales professionals in the U.S. and with a hopeful return of more normalized procedure volumes, I believe we are well positioned to have a strong second half of fiscal 2022.

One final point I will make on our compensation efforts is that we continue to make progress with our GPO relationships. We are making good progress with the 2 current GPOs we have signed thus far and believe we are making strong progress in adding to this going forward. I hope to have more news for you on this shortly.

Transitioning to our business partnerships for a moment, where several companies are integrating OpSens sensors into their products, used in medical applications. As I mentioned at the beginning, I am excited to have signed a 4-year extension of our agreement with Abiomed. Overall, sales through OEMs were $2.4 million in Q2 2022 compared to $1.8 million in Q2 2021, with the vast majority of those sales going to Abiomed. We are pleased to continue this long-term mutually beneficial relationship and look forward to many successful years of working together.

Let us now transition to our Industrial segment, which leverage our fiber optic sensing technology and knowledge by offering key solutions in optical temperature, pressure, strain and other critical parameters for various industries, including aerospace, nuclear and power electronics. For the quarter, revenue was approximately $1 million compared to $979,000 in the year ago quarter.

Looking forward, the long-term opportunity in this segment continues to get more attractive as we are working on an increasing number of potentially significant projects where OpSens proprietary fiber optic sensing components could be integrated into these critical projects, including the international EUREKA Network project, the international thermal nuclear experimental reactor or ITER project, fuel monitoring for aerospace and many others. The team at OpSens Solution continues to do a great job, and I look forward to the continued success in leveraging our fiber optic sensing technology to a wide variety of commercial applications.

With that overview on our commercial base operation, let's jump into our lead development program, or TAVR. During the second quarter, we made substantial progress, completing the 20-patient in-man clinical study utilizing the SavvyWire in November, and soon after submitting our package for U.S., Canada and EMEA clearances. Our team is diligently addressing this round of typical questions from the regulatory authorities. We believe we remain on track for approval later this year.

To those newer to the company, the SavvyWire is our new intelligent pre-shaped structural guidewire with integrated pressure monitoring, aim at improving procedural efficiency and clinical outcomes by allowing multiple steps over the same device without exchange. The device has been designed to support the minimalist TAVR approach, which has been growing among structural art positions. With the SavvyWire, physicians can expect to diagnose and implant the valve over the same device while getting continuous and accurate hemodynamic measurements. The introduction of this [ novel ] and advanced guidewire that has the ability to both deliver a valve while allowing continuous hemodynamic pressure measurement during the procedure is considered to be a significant benefit to the medical community, especially given the rapid growth in TAVR procedures.

The press and medical buzz around the guidewire have been tremendous, which we believe [indiscernible] well for our commercialization efforts. As a reminder, recently at a few high-profile industry events, positive data was presented at TCT 2021 in November, where Savvy wire was featured in 4 presentations by leading medical specialists, including Dr. Genereux, who presented for the first time clinical data validating the robustness of the OpSens pressure measurement in assessing pressure gradient before and after TAVR procedure compared to the different diagnostic modalities.

Additionally, world renowned cardiologist, including Rodés-Cabau at the Quebec Heart & Lung Institute, Dr. Thomas Modine from CHU Bordeaux from France, Dr. Hemal Gada from UPMC Pinnacle; and Dr. Reda Ibrahim from Montreal Heart Institute, all discussed the benefit of the SavvyWire. While we await the agency's clearance, we are advancing commercial preparations to ensure a successful product launch. This includes ramping up our manufacturing capabilities and developing a strong sales and marketing strategy. Brad Davis experience here has been tremendous. We look forward to communicating more with you in the future on the status of the FDA, Health Canada and EMEA clearances for the SavvyWire.

Before I turn it over to Robin for a more detailed review of the financials, let me quickly summarize. While the pandemic has had many turns and bumps along the way, which has impacted our business, we are seeing increased volumes over the past month or so, which we believe bodes well for the back half of the year. The supply chain disruption we encountered which impacted our sales primarily to Japan, appear to be resolved and we are expecting normalized shipments in the upcoming quarters. As a result, we have ramped up our sales and marketing activities and brought on board key individuals to help lead the commercialization not just of OptoWire, but SavvyWire as well.

Again, we think Q3 is setting up to find growth again. Our industrial team continues to do a great job as we gear up for some exciting projects in the coming years and with the signing of a 4-year extension with Abiomed, the stability of that base of business remains in place for many more years. And with TAVR study completed, our 510(k) submission with the FDA and the filing with Health Canada, we are closer than ever to commercializing our disruptive new SavvyWire technology later this year.

We feel confident to sign at least one additional GPO contracts in the coming weeks. And finally, what I think is always something important to point out, our balance sheet remains strong allowing us to execute on our strategies to drive value creation going forward. As always, I want to thank all of our employees for their hard work and dedication. We have accomplished several important milestones and development, and we see many more opportunities ahead.

Let me now turn the call over to Robin for a further review of the financial results. Robin?

[Robin Villeneuve, executive]

Thank you, Louis, and thanks to everyone joining us on the call. As we hit on a few of these items, I will try to add additional details where I can. The company reported sales of $8.1 million during the second quarter. This was broken down as $4.6 million in our coronary artery disease lines of business, $2.4 million in our optical medical systems, which is mainly our agreement with Abiomed for integration of our pressure sensor into the Impella pump, and $1 million in our Industrial segment.

When you look at gross margins, margins were stable at 51.5% in Q2 2022 compared to 51.7% last year. We continue to believe we will see year-over-year increase in gross margin percentage due to higher sales volume and there are really good economies of scale combined with enhanced productivity.

From an operating expenses standpoint, as planned, overall operating expenses increased by $2.1 million during the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021. The increase is largely explained by our investments in sales and marketing as we are ramping up our sales efforts to continue growing market share in the U.S., along with increases in our R&D and general and administrative costs, pertaining to higher headcount, stock option expenses and professional fees.

As we explained, we are making additional investments in sales and marketing and research and development over the coming quarters to capitalize on the opportunities to accelerate growth of our OptoWire and to prepare the commercialization of our SavvyWire.

EBITDA, which we define as net income loss plus tax, financial expenses, depreciation of PP&E and right-of-use assets, amortization of intangible assets and stock-based compensation costs was a negative $1.4 million in the second quarter of 2022 compared to a positive $0.9 million in the second quarter of 2021. The decrease is mainly due to higher operating expenses of $2.1 million, as previously explained.

Looking at net income. We are reporting a net loss of $2.4 million in the second quarter of 2022 compared with the net income of $41,000 in the year ago second quarter. The net loss is due to our investments to capitalize on business opportunities with additional spending in sales and marketing, R&D and others, our operating expenses increasing $2.1 million, as I mentioned earlier.

Finally, on the balance sheet, we ended February 28, 2022, with $30.9 million in cash and cash equivalents. The company prepaid the entire balance term loan and the amount of $5.8 million in September 2021.

With that, I will turn the call over to Louis.

[Louis Laflamme, executive]

Thank you, Robin. Thank you to all our investors for their continued interest and support of OpSens. We are working hard every day to capitalize on the opportunities ahead of us to position OpSens for long-term success.

Operator, let me now turn the call over to any questions.

[Operator]

[Operator Instructions]

Our first question comes from Rahul Sarugaser from Raymond James.

[Rahul Sarugaser, analyst]

So my first question is, of course, we recognize that this quarter was squarely set during the Omicron spike. So we've seen the softness across the sector. I guess my question really is, as you are now ramping your sales and marketing organization for TAVR, which we estimate conservatively assuming approvals would be launched in early next year, given that we have the remainder of 2022, how do you see the strengthened sales and marketing team affecting your legacy sales of OptoWire for the remainder of the year?

[Louis Laflamme, executive]

Yes. Well, first, thanks for your question, Rahul. And again, I mean, we see a lot of potential with the OptoWire. So of course, as you know, SavvyWire is important for our strategy to be more relevant for doctors, hospitals and GPOs and having a second product in our portfolio. But today, we feel that with the volumes that are coming back to a more normal situation in hospitals. And there is a lot of opportunities for us to grow in all of our markets with additional resources.

And in particular, in the U.S., we see potential. I mean, new hirings are having right now, I would say, quicker impact than what we had in the past. So we are confident that -- and already, we saw this in Q3, we can show better performance in U.S. Obviously, for EMEA and Canada remains strong. And we are expecting a rebound in Japan, where, as you saw, it was from a revenue standpoint, a difficult second quarter. So overall, to your question, we think that -- I mean, the investment we are doing today is really strategic because there is opportunities to capture much more market share in U.S. and all over the world.

[Rahul Sarugaser, analyst]

Perfect. So my second question is now focusing specifically on the clinical time lines associated with the TAVR application. You had said that you don't expect any changes. So what we had originally anticipated based on your previous comments is that the Health Canada late calendar Q2 FDA late calendar Q3. Are these time lines, in fact, what you're looking at? Is there a possibility for that to be flipped given sort of the way the FDA has been moving recently with medical devices?

[Louis Laflamme, executive]

I would say it's always a challenge to speculate on this. But what we can see that is really factual is that communications have been really positive, really fair, quite practical from all those agencies. So we feel that we are -- we have been making good progress and doing the demonstration that the [indiscernible].

[Operator]

Our next question comes from Justin Keywood from Stifel GMP.

[Louis Laflamme, executive]

Operator, I was not finish with the answer. But from a Health Canada standpoint, they have done a lot of work when we did the request to perform the first in man. So because of that, we think they are already well advanced in validating the safety of the SavvyWire. So back end of first half of calendar year 2022 makes sense. And in U.S., there was good interactions. And we don't change our time line where we've been talking about September, October time frame, and we are still going after this. So I'm now ready to receive the question from Justin, assuming that Rahul has completed his question.

[Operator]

The next question comes from Justin Keywood from Stifel GMP.

[Justin Keywood, analyst]

On the comments of the Omicron variant impacting procedures, but also the comment on supply chain disruptions, leading to some softer sales. How would you bucketize those 2 headwinds as far as an impact? Are they equally impactive or is one more than the other?

[Louis Laflamme, executive]

I would think that they were both equally -- in terms of dollar value, the impact was probably similar for both the -- we add customers in North America where their monthly volume went from, let's say, something like 60 or 70 units a month to 20 during this period of Omicron spike and not because patients were not willing to get at the hospital. It was more because the staff of the hospital were sick. So there was -- it was not obviously in all of it all like this, but there was a good amount of volume that has been impacted because of this. And in Japan, obviously, the supply disruption had an impact that was more than $1.3 million. So in a normal situation, we think we would have achieved similar growth than what we had in the past and are looking forward to find growth again in Q3 and Q4.

[Justin Keywood, analyst]

That's helpful. I think it's well understood the impact from the variant and we've heard this from a number of customers selling -- or companies selling into the hospital. But on the supply chain impact, what gives you confidence that this will normalize as we're hearing that there could be some constraints going through for the year?

[Louis Laflamme, executive]

Well, it has been from our standpoint, everything was much closer to normal in March. And so far, April is going fine. So I don't expect -- I don't foresee any additional significant issues like we had. There is still different normal things that we have to work out. But similar to what we had in usual operations. So we think there was a specific situation that happened during Q2, but we are confident that the supply chain that we have is really strong to meet the customers' demand.

[Justin Keywood, analyst]

Okay. Understood. And then on the OpEx, I understood that there's increased sales hires ahead of the potential SavvyWire approval. Is this level of OpEx? Is that what we should expect in the near term? Or is there additional investments to be made?

[Louis Laflamme, executive]

When we look on the third quarter, you can expect to see administration expenses being down just because there was a certain stock option, which is a noncash expense impact in Q2, which we won't have in Q3. For sales and marketing, you can expect to see an increase by between $500,000 to $750,000. And this is a combination of hiring of new human resources.

And also, I mean, we will have the EuroPCR event, which is the biggest cardiovascular conference in Europe. So we'll have this during the month of May and OpSens is going to invest a good amount of resources because, I mean, there is sort of -- you have some presentation about the SavvyWire concept. You will also have some after will be well displayed there. And we feel it's a good investment to do because even if we have been doing great in Europe, there is opportunities to do much better since we think the OptoWire is clearly the best pressure guidewire for coronary artery disease.

So you can expect to see a certain increase in sales and marketing. And from an R&D standpoint, it will be similar. We have a great team in place that is going after short-term innovations that are well aware by the market, also working on some long-term projects that will be -- we think disruptive and highly value creators for the company.

[Operator]

Our next question comes from Scott McAuley from Paradigm Capital.

[Scott McAuley, analyst]

Just to briefly kind of circle back on the supply chain and just in terms of either availability of materials and also impact on inflation, either on kind of your cost of goods and/or shipping, things like that. Are you seeing any impact from these? Are you expecting any kind of on the balance of the year? Or are you pretty confident in the process moving forward and your costs moving forward?

[Louis Laflamme, executive]

I would say the inflation do not have an impact substantially on our costs. We've seen different small increases. But I would say that the biggest driver that we have for the cost of goods sold in our case is the yield that we get into production. So -- and we are working on this, doing multiple actions to improve our performance. So on the inflation, I would say, it seems to be under control. We have good partnership with our suppliers. So it's going well on that side. The availability of raw material is the element that has been impacting the Q2 results.

But again, we feel that there was a punctual event. And so far, Q3 has been going well.

[Scott McAuley, analyst]

That's great. Switching over to the SavvyWire. Obviously, kind of working to lay the groundwork for that commercialization, hopefully, upon approval. Kind of how are you expecting those sales to ramp? Like are you thinking day 1 on FDA approval, you're hoping to have some customers who will be purchasing and using the new product? Are you kind of expecting that to take kind of a few quarters to materially impact kind of your revenues?

[Louis Laflamme, executive]

I would say that -- I'm sure we already have, I mean, interest from people that would like to use the SavvyWire. We will still be -- we have to go in a very systematic manner there. From a regulatory standpoint, it's important to do a limited market release. We also think that it's really useful to fine-tune all the marketing strategy, everything in the cath lab to make sure that it's going well. So you can expect that it will take few quarters before having a really massive revenues coming from the SavvyWire.

This being said, we want to go as fast as we can. So to respond to your question is that, of course, we are not going to sell to all hospitals that are making the requests on day 1. We'll go gradually with few centers, but the plan is still to be fairly aggressive. I mean we are putting in place right now a team to capitalize on this very significant commercial opportunities in front of us. So we'll try to go as fast as possible, but you need to plan for a certain number of months before getting substantial revenues.

[Scott McAuley, analyst]

Absolutely. That's great. And just lastly for me. I think you had mentioned briefly on the previous call around publication of the SavvyWire data that you have to date. Is that still something you're planning for in kind of the near term? Or is that something you're hoping if and when it's approved to have it published around then to kind of bolster that sales and marketing effort?

[Louis Laflamme, executive]

Yes, we are confident that before the next earnings call, we should have a couple of papers that will be published on the SavvyWire. Again, the interest from the community around this concept is really good.

[Operator]

[Operator Instructions]

Our next question comes from Nicholas Cortellucci from M Partners.

[Nicholas Cortellucci, analyst]

My first question was that I think the last normalized environment we kind of saw was Q3 of last year, where you guys posted some really solid growth, $9.2 million revenue, 59% gross margin. Do you think that quarter was a good analogy for what we're going to see through the second half of this year?

[Louis Laflamme, executive]

I mean, let's say, I'll take the -- with the current demand that we get from our customers, if we would not have had the supply disruption in Q2, would have done better than Q3. So I think Q3 is an indication where -- I mean, Q3 of last year is an indication where there is good demand for the OptoWire. We think we have further developed our sales channels and the installed base of the monitor. So certainly, we'll trend towards that direction.

[Nicholas Cortellucci, analyst]

Perfect. Okay. And then my other question was about the GPO contracts. When do you think we're going to start to see the impact of those on the top line?

[Louis Laflamme, executive]

Yes. Well, again, the volume of procedures were down in U.S. during the Q2 2022. So obviously, you don't foresee necessarily the impact of GPOs but we think they will have an impact in Q3, and we are really positive about the relationships we are developing with those organizations.

[Operator]

Our next question comes from Sahil Dhingra from RBC Capital Markets.

[Sahil Dhingra, analyst]

This is Sahil for Doug Miehm. My first 1 is on Japan. So you have said that supplies -- the supply chain disruption is normalized now, but the COVID cases there are also down from the peak are still elevated versus last year. So do you still think the revenues would be -- would bounce back to normal levels?

[Louis Laflamme, executive]

Yes. We are confident that I mean, the OptoWire usage continued in Japan even if we don't see this in our revenues. So the partner there used some of the inventory they have to make sure that the customers were not impacted by this situation. And in Japan, that's a country where there is a lot of interest around FFR and we are confident that the demand will be there for the next quarters and the future years.

[Sahil Dhingra, analyst]

Okay. That is helpful. And in terms of the recovery in procedure volumes in the month of March, can you quantify that? Is it back to pre-pandemic levels?

[Louis Laflamme, executive]

I think it's not back at 100%, but we certainly saw in different customers, a rebound for at least 20% of procedures. If you compare that with Q2 remarks.

[Sahil Dhingra, analyst]

Okay. And my last question is on the approval time line in Europe for SavvyWire, when can we expect that?

[Louis Laflamme, executive]

On that, I would prefer to respond maybe in the next conference call. Right now to say that we think it's [indiscernible].

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

[Louis Laflamme, executive]

Many thanks to everyone for participating on today's call. We look forward to hopefully speaking with all of you again shortly.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.