Neovasc Part II: Recent Developments Provide Even More Upside Than Previously Thought
By The Wall Street Fox → Monday, November 25, 2013
Since I first highlighted Neovasc (NVCIF) in an article published last month, the stock has jumped more than 50% and the company announced several bullish updates that make an even stronger case for why this severely undervalued medical device company should be trading at much higher valuations.
Neovasc is developing two groundbreaking devices for the cardiovascular space, and has a profitable core operating business that produces tissue like leaflets for aortic heart valves and stents. Phillip Frost and his company OPKO Health (OPK) both have a stake in Neovasc.
My original NVCN article was published on October 28th ((A)).
On October 29th ((B)), Neovasc presented at the 2013 TCT in San Francisco and announced positive pre-clinical results for its Tiara device.
On November 6th ((C)), Neovasc reported positive top-line results of its COSIRA trial, which assessed the safety and effectiveness of their novel product, The Reducer.
On November 13th ((D)), Neovasc received its first US patent for its novel Tiara device, a transcatheter mitral valve.
On November 20th ((E)), Neovasc released strong quarterly earnings showcasing the potential of their core PeriPatch division.
Neovasc's share price has experienced a steady rise in the past month, and there is still a considerable amount of value that is not yet reflected in today's share price. The recent company updates will allow shares to continue their run, here's why.
Core Business and Earnings
Neovasc's quarterly earnings released last week were better than any could have hoped. The company's core tissue division continues to post solid figures, and its revenue growth has been outstanding. For Q3 2013, revenues increased 80% year over year and 30% quarter over quarter to $3.6 million. This growth is largely due to the sharp increase in consulting services that Neovasc provides to medical device companies. Consulting service revenues jumped 350% year over year, increasing from $530,000 to $2,400,000. This growth should continue to accelerate as more companies receive FDA approval and begin selling their heart valve devices that utilize Neovasc's Peripatch tissue.
Neovasc posted increased gross margins of 41% for Q3, compared to 36% a year prior. The company's margins are impressive, and they are bound to continue their improvement once the company stops producing surgical patches. Neovasc recently divested their surgical patch division to LeMaitre Vascular for $4.6 million. The terms of this transaction require Neovasc to continue the production of the patches for LeMaitre until LeMaitre obtains approval from the FDA for their production facilities. This is expected to occur in Q4 2013 or Q1 2014. Once Neovasc completely divests its surgical patch production, the company will be able to dedicate more people, clean room space, and materials to their more profitable tissue products, which should result in higher profit margins for the company. The robust growth of Neovasc's Peripatch division, its state of the art clean room facilities, and its unique relationship with its customers, as explained in my previous article, support my valuation of approximately $3.00 per share.
Neovasc announced top-line results from their COSIRA clinical trial on November 6th and they were spectacular, officially paving the way for widespread adoption of the device. The Reducer is already CE marked in Europe, and plans to begin US trials soon. The Reducer provides treatment to more than 2.5 million patients who suffer from refractory angina ((RA)), which currently has no effective treatment. While there are still final results yet to be published, it is now certain that the Reducer will meet all necessary standards and soon be a viable treatment for all patients suffering from RA. The company is still analyzing the data, and plans to release the complete results near the end of 2013.
It's difficult to accurately value The Reducer because there is truly no comparable device out on the market today, which is why there is so much excitement behind this device and Neovasc in general. The closest comp is Adrian, a medical device company that was sold to Medtronic (MDT) for $800 million in 2010 (plus commercial milestone payments). Adrian produced a novel catheter-based device that alters blood flow to aid in reducing blood pressure. The Reducer is a novel catheter-based device that alters blood flow in the heart's venous system to provide life-changing relief to RA patients. At the same valuation, The Reducer would be worth $14 per share.
For a more cautious valuation, take a look at Ventor Technologies, which was acquired by Medtronic for $325 million in 2009. Ventor was a developer of transcatheter heart valve technologies for the treatment of aortic valve disease, and developed a minimally invasive transcatheter-based device. The Reducer is also a minimally invasive transcatheter-based device. A similar deal for The Reducer would equate to $5.70 per share, and an average of the two above deals (~$550 million) would equal $9.64 per share. The sky is the limit for The Reducer, and with no sales team currently in place at Neovasc, it seems more than likely that a deal will be announced in the near future.
The Tiara, an early staged device that is considered by many to be the front-runner in effectively treating mitral regurgitation ((MR)), has made significant progress in the past few weeks. Near the end of October, the company presented at the 2013 TCT conference in San Francisco, where they presented positive pre-clinical data of The Tiara that illustrated the devices safety and effectiveness in animals (sheep and swine). A month ago, the Tiara and potential behind it seemed to be tossed up in the air, a hit or a miss, but after last month's published results, and plans to begin human trials in early 2014, the Tiara seems to be leaning towards a hit.
Approximately two weeks after positive data surrounding The Tiara was published, Neovasc received its first US patent covering the product, marking a significant milestone for the promising device. This patent is a valuable asset mainly due to how much ground is covered under it; the patent is extremely broad, and covers nearly 30 different claims, though this has been trimmed down from the original 70+ claims the company filed in their application. You can view the patent here.
If the Tiara proves to be successful in human trials, then the valuation behind Neovasc could be through the roof. With no device to be compared to, it's tough to estimate a value for The Tiara. If The Tiara proves to be safe and effective in human trials and Neovasc sells the device, then investors should expect a deal worth no less than $5 per share, and as high as $20 per share. The ball-park range is large, but the lifesaving potential behind The Tiara is even larger. Investors should keep an eye on the company as they progress towards successfully implanting The Tiara into humans. Any follow up data should have a positive impact on shares.
The Hidden Seller
Investors should never underestimate the power of one very simpleminded trader, who just so happens to own a ton of shares of a certain company. Neovasc has just that, a hidden seller who can't seem to tell the difference between selling high and selling low, or maybe just holds a personal vendetta against the company, or maybe is just too ignorant to realize what investors are willing to pay for shares of Neovasc.
This seller is most likely utilizing an iceberg order. An iceberg order is an automated program that divides large buy or sell orders into smaller lots so the public only sees a small portion of the order at a time. This person (or fund) is offering shares at $4.25, which equates to $4.05 for NVCIF, and has already sold more than 100,000 of them. It is unclear how many shares are left in this order, but once this order is complete and the seller has been exhausted of all their shares, this stock should breakout to new highs.
Neovasc has 57 million shares outstanding (including dilution), and insiders and management own nearly 80% of shares. This leaves a relatively small amount of shares to be traded, and once Neovasc unveils plans to monetize its Reducer product, this stock will jump regardless of who's selling.
Neovasc is currently undergoing a period of healthy consolidation after spiking nearly 50% in less than a month; however, from a sum of the parts perspective, Neovasc is still severely undervalued. The recent company updates, earnings, and the impending success of The Tiara in humans illustrate a clear picture of Neovasc preparing for takeoff.
With the Peripatch division worth upwards of $3, and the Reducer worth a conservative $6, shares of Neovasc should be trading north of $9 even if The Tiara turns out to be a complete dud. An optimistic estimate would value Neovasc north of $20, but it seems more than likely that the company will be acquired before those price levels can be obtained.
The current share price of Neovasc may be the last stop before this rocket blasts off, and it's leaving soon. All clues point to a value-creating deal to be announced (or explored) sometime in the first half of 2014. By then, Neovasc will have fully divested of their surgical patch business, will have released complete results for their COSIRA trial, and will have tested their Tiara device in humans, which will add value to the company and pave the way for clear negotiations with potential suitors. Shares of Neovasc are trending up, and it's not too late for prospective investors to open up a position in this promising medical device company.
Information was sourced from Neovasc's latest 10-Q and MD&A.