electroCore, Inc. Q3 FY2021 Earnings Call

Greetings, and welcome to electroCore's Third Quarter 2021 Earnings Call. 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.

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 Dr. Peter Staats, Chief Medical Officer. Earlier today, the company released results for the third quarter ended September 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 in the company's future financial expectations, which 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, November 4, 2021. And with that, I'll turn the call over to Dan. Go ahead, Dan.

Thank you, Rich. Hello, everybody, and thank you for joining us today. I'm excited to report that Q3 2021 revenue was a record $1.5 million, gross margins have expanded to more than 75%, and net cash used in operations decreased to $3.4 million for the third quarter of 2021. For the third quarter of 2021, total revenue of $1.5 million increased approximately 38% from $1.1 million in the third quarter of 2020. Revenue from our government channel increased 46% to $946,000 for the quarter ended September 30, 2021, as compared to $646,000 in the third quarter of 2020. In our VA, DoD channel, a total of 96 VA and DoD military treatment facilities have purchased gammaCore products through September 30, 2021, as compared to 67 through the third quarter of 2020. Note that there are approximately 1,300 VA health care facilities and 475 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 of 2021, as compared to $278,000 during the third quarter of 2020. We look forward to continued revenue growth in the United Kingdom as the MedTech Funding Mandate continues to roll out despite 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 2 health care common procedure coding systems or HCPCS code K1020 non-invasive vagus nerve stimulator became effective April 1, 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 August 4, 2021, we announced the release of an article entitled gammaCore for cluster headaches in the Journal of pharmacoeconomics, highlighting the cost savings of gammaCore's non-invasive 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 GBP 450 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 Non-invasive Vagus Nerve Stimulation for treatment of cluster headache, 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 655 patients who started on gammaCore, 46.3% of patients were prescribed at least one refill and 30.9% were prescribed two or more refills. These real-world results suggest a durable benefit for patients utilizing gammaCore's non-invasive 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 experts to help us negotiate with an initial group of 30 regional and national benefit providers. I marked Blue Cross Blue Shield as 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 face 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 third quarter of 2021 as compared to $112,000 in the third quarter of 2020. 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 the 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, Dr. Peter Staats, to provide an update on our various research and clinical initiatives. Peter?

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. On August 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-6 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 led to a 31% 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 continued 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-6, 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 of 2021, we announced the company received Section 510(k) 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 continua in adults. Paroxysmal hemicrania and hemicrania continua are both rare forms of trigeminal autonomic cephalgias that are typically debilitating and difficult to treat. GammaCore, nVNS now has five distinct FDA clearances in primary headache or virtually 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 Health Canada to expand the label of gammaCore, nVNS to include the acute and preventive treatment of migraine 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 of 2021, we announced the United States Patent and Trademark Office has issued patent number 11,097,102 relating to devices, systems, and methods integrated with smartphones that allow patients to self-manage medical conditions, such as migraine headache, by electrical non-invasive 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 non-invasive therapy. This IP may provide a foundation for combining the company's clinically proven therapy with digital health platforms that could enable healthcare 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?

Thank you, Peter. For the quarter ended September 30, 2021, electroCore reported net sales of $1.5 million compared to $1.3 million in the second quarter of 2021 and $1.1 million 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 third quarter of 2021 was $1.1 million as compared to $895,000 for the second quarter of 2021 and $733,000 for the third quarter of 2020. Gross margin for the third quarter of 2021 was 76%, compared to 71% in the second quarter of 2021 and 68% in the third quarter of 2020. 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 third quarter of 2021 were approximately $5.1 million, a reduction of approximately $1 million from $6.1 million in the second quarter of 2021. Operating expenses decreased by $100,000 from $5.2 million in the third quarter of 2020. Research and development expense in the third quarter of 2021 was $470,000 as compared to $825,000 in the second quarter of 2021, a decrease of approximately $355,000 sequentially. The decrease in R&D expense during the quarter was due to the timing of expenses in connection with the GAP-PTH program. R&D expense decreased by $159,000 from $629,000 during the third quarter of 2020. SG&A expense in the third quarter of 2021 was $4.6 million as compared to $5.3 million in the second quarter of 2021, and consistent with the year-ago period. GAAP net loss in the third quarter of 2021 was $4 million compared to a GAAP net loss of $2.9 million in the second quarter of 2021. GAAP net loss decreased by 11% or $500,000, as compared to a GAAP net loss of $4.5 million in the third quarter of 2020. In the second quarter of 2021, the company recorded a total gain of $2.3 million on the extinguishment of debt and a tax benefit from the sale of New Jersey NOL carryforwards. Adjusted EBITDA net loss in the third quarter of 2021 was $3.1 million as compared to $4.1 million during the second quarter of 2021 and as compared to adjusted EBITDA net loss of $3.3 million in the third quarter of 2020. 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 a 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 September 30, 2021, was approximately $3.4 million as compared to $3.2 million in the second quarter of 2021 and $4.1 million in the third quarter of 2020. The second quarter of 2021 amount is exclusive of cash proceeds from the sale of NOL carryforwards. Cash, cash equivalents, and marketable securities at September 30, 2021, totaled approximately $39 million, as compared to approximately $23.7 million at June 30, 2021. During the third quarter, the company raised net proceeds of approximately $18.8 million through a public offering of 20.7 million shares of its common stock. And now I'll turn the call back over to Dan.

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 million as of September 30, 2021. The recent publication in pharmacoeconomics confirming cost dominance of GBP 450 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 Dr. Staats 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 December 31, 2021, we expect revenue to exceed $1.5 million. 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 U.K. 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 December 31, 2021, the company expects net revenue to exceed $5.45 million, a 55% or more increase from $3.5 million of revenue in 2020. We currently expect to end the year with approximately $34.5 million in cash, indicating that operations will require approximately $4.5 million of cash during the fourth quarter of 2021. We believe that our cash balance will allow us to execute our operating plan through next year and beyond. Mike Romaniw 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 DeShon'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 U.K. market as the pandemic hopefully recedes once and for all, growth in our U.S. commercial channel driven at first by cash pay 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 health care 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.

Our first question is from Jeffrey Cohen with Ladenburg Thalmann.

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

Yes, absolutely. The first point to mention is that there is some seasonality in that channel around the September 30 year-end. They moved some business into September, followed by a couple of quieter weeks at the start of October as they complete their accounting. This has been a consistent pattern we've observed. During the summer, we restructured our field sales team under Mitch's leadership, and the new team has been undergoing training and is now starting to engage with current customers and look for new opportunities at VA hospitals. We are combining this effort with our inside sales team and the customer experience team led by Lisa Martin. Additionally, it appears that the pandemic is finally easing. I feel optimistic as we've started to see some acceleration in activity over the past few weeks, and I look forward to positive developments in the upcoming months.

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?

Yes. So on that last point, we've got tremendous success in the U.K. and support from NHS and their health care 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 U.K. subsidiary. There are various countries around Europe where we are working through the national health care 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.

Okay. Got it. And then lastly for me, just for Dr. Staats. You talked about this PTSD pilot study. Could you talk a little bit about the size of that study in terms of its power? And then perhaps you could comment on whether there have been any measurements or discussions related to depression?

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 made. 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 measurement of interleukin-6, which is an inflammatory cytokine that, frankly, was associated with high mortality in the patients with COVID. So this is 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, et cetera, but the scope of the problem out there in our veterans is really quite high. The scope of the disease is out there is probably close to 3% in sub-capacity, 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.

Would you expect the agency to want to do some imaging in the case of PTSD? I apologize for interrupting regarding my question about depression.

Sure, we have conducted imaging studies over the years, including several functional imaging studies that have shown an improvement in brain activity. What we previously discussed is additional data that has already been gathered. There are many papers available on Google Scholar or the NIH website that support the use of nVNS for PTSD. You can find a lot of existing research on this topic. Regarding depression, it is not an area we are focusing on at this time, but I would like to point out that the implanted vagus nerve stimulator received FDA approval for anxiety and depression back in 2005. I believe that other VNS strategies have demonstrated similar types of clinical activity that we could potentially replicate. To sum it up, we are not currently pursuing a depression indication, but it remains a possibility.

Our next question comes from RK with H.C. Wainwright.

What has been your experience so far regarding cash pay sales revenue penetration? Additionally, how motivated are patients to pay for their treatment, particularly when their insurance provides minimal reimbursement?

Thank you for your question, RK. We began this initiative last summer, and we currently have over 50 prescribers across the country participating in these cash-pay pilot programs. We've been pleasantly surprised that around 65% to 70% of patients who receive a prescription actually choose to pay the out-of-pocket cash price when their physician strongly recommends it. While I can't guarantee that we will maintain this high conversion rate, we are definitely off to an exciting start.

Perfect. That's pretty good. And then for the VA stream, you currently have interactions with about 96 centers as of the third quarter steady growth, of course, with the number of centers that you're interacting with. As you said, with COVID receding, what's the benefit? Or what are your thoughts on trying to do a big bolus of resources so that '22 gets to a good start especially in the biggest revenue channel that you have?

We are exploring different investment scenarios for 2022. We have reorganized our sales team with Mitch DeShon joining us last spring. He assembled and trained his team over the summer. We expect to see the results of this investment starting in the current quarter, which ends on December 31, but we anticipate showcasing the effectiveness of combining our field sales and inside sales teams in the first half of next year. If we can prove the efficiency of our initial team during this period, we will certainly approach the Board to discuss increasing our investment in the sales team to drive accelerated growth in 2022.

Okay. And the last question is on the U.K. 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 '21 and also into '22? And in that same range, when we look at other geographies outside of U.K., is there one or two geographies in your mind that you think will become meaningful, let's say, in the next 12 to 18 months?

COVID has posed a greater challenge in the U.K. and Europe compared to the U.S. On a personal note, we have a small team in the U.K., and two of our employees contracted COVID in September and October. They have recovered now, but it significantly impacted our activities. As a result, our recovery in the current quarter will be somewhat slower. However, all the necessary elements for achieving around 10% sequential growth in the U.K. business as the MedTech Funding Mandate is implemented are in place. We anticipate a return to growth as we move into next year, depending on the pandemic's progression and with support from the NHS in the U.K. Additionally, Canada and Australia are likely to begin accelerating as we enter 2022, but it's too early to determine the potential of our European distributors due to the complications of Brexit and the pandemic.

Our next question comes from John Vandermosten with Zacks.

I also have a question about the VA and the trends there. Congratulations on the nice increase in the number of facilities you're serving. Regarding older facilities compared to newer ones, do the older facilities continue to show steady growth, or are they flat? I'm trying to understand how this might influence our revenue forecasts as we add more facilities.

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, 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 1.5 years.

There's certainly been a lot of disruption. We'll need to wait another year to see how things develop. I wanted to ask about gross margin, which was a strong point. Your gross margin is higher than our long-term estimates. Should we consider adjusting our estimates upward? From what Brian mentioned, it seems these improvements might be sustainable. Is that your perspective, or are there potential issues that could lower the margin in the future?

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

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 would get in the third quarter?

That's a fair assessment.

Okay, that's good news. The other question follows up on one of the analysts' inquiries about the distributors and their current trends. If you analyze each distributor, could you categorize them according to their status in making sales? It would be helpful to have more clarity regarding their progress, particularly in Australia and Europe. Some of them have already introduced products and are prepared to move forward. I would like to understand better where each stands in terms of initiating sales.

Yes, to reiterate, Canada and Australia are leading the way, successfully selling through their inventory and returning for restocking. We have seen some success with specific prescribers in Europe, but it's challenging to identify clear trends due to factors like the impact of Brexit and the fluctuating pandemic situation. I wish I could provide more detailed insights, but that's not possible at this stage.

Okay. And then my last question is about cash pay. Is there any price difference between what a cash pay customer would pay compared to what an insurer would pay if they were fully covered without a high deductible health care plan?

Yes. We have been engaging in significant price discovery through our pilot activities during the first half of this year. We will continue to refine that price discovery. It is indeed different, but I would prefer to keep it at that.

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

Thank you, operator, and greatly appreciate everybody's time and attention. And 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.

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