Helius Medical Technologies, Inc. (HSDT) CEO Phil Deschamps on Q4 2018 Results – Earnings Call Transcript

Helius Medical Technologies, Inc. (NASDAQ:HSDT) Q4 2018 Earnings Conference Call March 14, 2019 4:30 PM ET

Company Participants

Phil Deschamps – CEO

Joyce LaViscount – CFO and COO

Conference Call Participants

Steven Lichtman – Oppenheimer

Sean Lavin – the BTIG

Operator

Good afternoon ladies, and gentlemen and welcome to the Fourth Quarter of Fiscal Year 2018 Earnings Conference Call for Helius Medical Technologies. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the Company’s website for replay shortly.

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management, including statements regarding the potential FDA clearance of the PoNS device, the future commercialization of the PoNS treatment, expected future clinical and regulatory timelines and projected financial results.

These forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors sections of our most recent Annual Report on Form 10-K filed with the SEC. Such factors may be updated from time to time in our filings with the SEC, which are available on our website.

All statements made during this call are as of March 14, 2019. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, except as required by law.

I would now like to turn the call over to Mr. Phil Deschamps, Helius Medical’s Chief Executive Officer. Please go ahead, sir.

Phil Deschamps

Thank you so much, operator. And welcome everyone for Helius Medical’s fourth quarter and full year 2018 earnings conference call. I’m joined on the call today by Joyce LaViscount, our Chief Financial Officer and COO.

Let me provide you with a quick agenda on the topics that we intend to cover today. I’m going to start with the brief recap of our financial results during the fourth quarter followed by a discussion of our recent operational progress in the two countries where we are primarily focused Canada and the U.S. This discussion will include an update on our recent progress in Canada where we have now begun to commercialize our PoNS treatment and an update on our progress with the U.S. FDA.

Following these remarks, I’ll turn the call over to Joyce who will discuss our financial results for the fourth quarter and full year ended December 31, 2018, in greater detail and review our guidance for 2019 which we introduced in our earnings press release this afternoon. I’ll then share some additional thoughts on the key areas where Helius is focused in 2019 and the years to come before opening the call to questions.

Beginning with a brief recap of our Q4 financial results, we are very pleased to report our first revenue-generating quarter in Helius’s history. During the fourth quarter of 2018, we recognized $478,000 of license fee revenue related to the strategic alliance agreement we have with the Canadian company called HealthTech Connex and its operating entity Heuro Canada.

Under this important agreement, Helius is entitled to receive license fee from HealthTech Connex for the rights we granted to Heuro Canada, which is responsible for the development of neuroplasticity clinics to treat patients and the creation of replicable model for future clinic expansion in Canada. We believe that this relationship will facilitate the commercialization of our PoNS treatment in Canada.

Our operating expenses decreased approximately $130,000 to 5.7 million in the fourth quarter of 2018, which was driven primarily by reduced product development costs compared to the fourth quarter of 2017, and our cash balance as of December 31, 2018 was 25.6 million, compared to 5.6 million at December 31, 2017.

During the fourth quarter, we raised important growth capital to strengthen our balance sheet and support our strategic initiatives with the successful pricing of an underwritten public offering, led by BTIG and Oppenheimer in which we raised net proceeds of approximately 18.3 million. I would like to thank our new and existing shareholders who participated in this offering.

Moving to an update on our recent operational progress in Canada during the fourth quarter and subsequent months, Canada is the first country where we are commercializing our PoNS treatment and represent an important addressable patient population for Helius Medical Technologies. We believe that there are more than 350,000 patients in Canada living with chronic balanced deficit due to mild-to-moderate traumatic brain injury or mmTBI and importantly we estimate an additional 20,000 Canadians will be diagnosed each year.

We believe our PoNS treatment is the first and only therapy that adequately addresses this underserved patient population. With this in mind, we are focused on making PoNS treatment as widely available and accessible to Canadian patients as possible and we are very pleased by the progress that we’ve made in recent months. In October, we received a medical device license from Health Canada, which certifies that our PoNS device meets the agency’s safety and effectiveness and quality requirements and allows us to market PoNS treatment as an adjunct to physical therapy for chronic balance deficit in patients with mild-to-moderate TBI.

During the same months, we announced our strategic alliance agreement with HealthTech Connex and Heuro Canada. We believe that this is an important strategic alliance agreement will allow us to commercialize our PoNS treatment in Canada as efficiently and cost-effectively as possible by avoiding the need to fund the development of an extensive commercial infrastructure.

During the fourth quarter, we continue to make important stride in establishing our distribution infrastructure to commercialize PoNS treatment in Canada. We engaged our first two neuroplasticity clinics and completed our training of these clinics as well as our assessments of their delivery system to provide our PoNS treatment. In recent months, our teams have also been intensely focused on expanding the requisite infrastructure to support commercialization of our PoNS treatment in Canada including our quality management system, our post marketing surveillance system and our distribution infrastructure by selecting and partnering with a third-party logistics provider.

As a result of these efforts, earlier in March, we celebrated one of the most important milestones in our company’s history, marking our transition to a commercial-stage company by beginning treatment of the first Canadian patients in these two neuroplasticity clinics. This is an incredibly exciting inflection point for our company and we look forward to treating as many patients as possible as these two neuroplasticity clinics while working to engage in certified new clinics in key geographic areas across the country.

On a related note, I had the opportunity to visit one of these clinics earlier this week at the request of the patients who were being treated with the PoNS treatment. They requested my presence because they wanted to collectively thank me as a representative of our organization for bringing this treatment into their lives after experiencing early benefit of the treatment. This was very easily one of the most professionally and personally satisfying events in my life.

We expect the experience we gained from commercializing our PoNS treatment in Canada will also help us to prepare for successful commercial launch in the U.S. and other future markets once we receive marketing approval from the FDA and other regulators. In advance of establishing broad-based reimbursement coverage, our initial patients in Canada are expected to be largely cash paid.

We’ve established relationships to collaborate with third-party financing companies to provide our patients with a variety of options to pay for their treatment. We also intend to gather and anonymized health economic data on the patients treated in the neuroplasticity clinics, which will be used to support the pursuit of reimbursement coverage in Canada and future markets where our PoNS device is clear and commercialized. I’ll share more of our specific expectations for Canada later in my prepared remarks.

Turning to an update on our regulatory progress in the U.S., on August 31, 2018, we submitted our request for de novo classification and 510(k) clearance of our investigation of PoNS device with the U.S. Food and Drug Administration. As a reminder, this important regulatory milestone with the culmination of a multiyear strategic effort, which included establishing important clinical data, demonstrating the safety and efficacy of our PoNS device including two double-blind randomized controlled clinical trials with combined enrollment of a 163 participants and preparing an extensive submission package to support our request for regulatory clearance of this novel technology.

On January 25, 2019, we announced that we received a request for additional information or AI letter from FDA related to our submission for de novo classification and 510(k) clearance. As part of the substantive review phase of the de novo to 510(k) review process FDA has the option to request additional information that the agency believes is necessary to continue or completed to review.

After receiving a request for additional information, companies are provided a 180 days to submit a complete response to each item in the request. With this in mind, I’m very pleased to announce that we submitted our response to FDA AI, letter allowing FDA to resume their review. I’d like to congratulate our regulatory team for preparing an additional information request by FDA in such a timely fashion.

In addition to facilitating the FDA’s review of our regulatory submission in the U.S., we are also focused on establishing clinical experience programs for our PoNS treatment. As a reminder, our clinical experience programs or CEP are established in partnership with leading, early adopter, neurorehabilitation centers in the U.S., which include academic and research institutions, hospital system, high volume independent neurorehabilitation centers.

These programs enable Helius to train physical therapist at these centers and provide PoNS treatment to individuals with chronic balance deficit in advance of FDA clearance as part of an open label clinical study sponsored by Helius and approved by institutional review boards. Our clinical experience programs were designed to accomplish the following three goals.

One, gain real world experience in providing our PoNS treatment to patients in the clinical setting, which we believe will help us to further validate our proposed commercial model; number two, build relationships with these leading early adapter neurorehabilitation centers and with key opinion leaders in the field of TBI; and number three, accumulate important clinical evidence to be used in support of our discussions with insurers as part of our strategy to obtain broad reimbursement for our PoNS treatment.

Given that we are now commercializing the PoNS treatment in Canada, we intend to gather health economic data from the patients treated in the Canadian neuroplasticity clinics. We have thus amended the protocols to our CEPs to focus on obtaining other important clinical evidence including data on the durability of patient outcomes at 6 and 12 months post-PoNS treatment in order to generate further support for the durability of our PoNS treatment.

We believe that this additional validation will resonate with payers and provide important support for our pursuit of broad-based reimbursement coverage. We announced our first CEP partnership in September and in the intervening months, we have since established a total of five CEP partnerships with the following institutions.

The Ohio State University Wexner Medical Center in Columbus, Ohio; Northwell Health’s Feinstein Institute for Medical Research in Manhasset, New York; Oregon Health and Science University in Portland, Oregon; The Kessler Institute for Rehabilitation and Kessler Foundation in Hanover, New Jersey; and the Baylor Research Institute in Dallas, Texas.

Consistent with our expectations, we began recruiting and enrolling patients in the participating clinical site at both the Ohio State University Wexner Medical Center and at Northwell Health’s Feinstein Institute for Medical Research at the end of 2018 and continue to make progress on the activities with our new sites added in 2019. I’ll discuss our expectations for 2019 in greater detail in a moment.

Before I turn it over to Joyce for our Q4 and full year 2018 results, I wanted to acknowledge that we are aware of disparaging comments of the Company’s PoNS treatment myself and the executive staff of my organization through a short report released in January of this year. I’m not going to devote any undue attention to the numerous false and misleading statements assorted as facts in this report.

My exemplary executive staff, CFO and COO, Joyce LaViscount; Chief Medical Officer, Jonathan Sackier; Chief Commercial Officer, Jennifer Laux; General Counsel, Diane Carman; and Head of HR, Ellyn Ito along with 25 professional employees will simply continue to operate under the ethical and professional guidelines we impose on ourselves as we serve our shareholders, healthcare professionals and patients and began changing the lives of those affected by mmTBI with our innovative PoNS treatment.

Joyce will now walk you through the fourth quarter financial. Joyce?

Joyce LaViscount

Thanks, Phil. We reported revenue of 478,000 for the fourth quarter of 2018 compared to no revenue in the prior year period. This revenue was license fee revenue related to the satisfaction of our performance obligation as part of the strategic alliance agreement with HealthTech Connex and Heuro Canada.

Operating expenses for the fourth quarter 2018 decreased 129,000 or 2% year-over-year to 5.7 million. The change in operating expenses was driven by a $1.1 million or 34% decrease in research and development expenses, which was due to reduced product development cost. This was offset almost entirely by a 1 million or 38% year-over-year increase in general administrative expenses primarily due to increased expenses related to our commercial infrastructure build out.

Loss from operations for the fourth quarter of 2018 was 5.3 million compared to a loss from operations of 5.9 million for the prior year period. Total other expense for the fourth quarter of 2018 decreased to 2 million or 93% year-over-year to a 147,000 compared to 2.1 million in the fourth quarter of 2017.

The year-over-year decrease in total other expenses was driven primarily by the change in fair value of derivative financial instruments, which was a loss of $221,000 for the fourth quarter of 2018 compared to a gain of 2 million in the fourth quarter of 2017.

The change in fair value of derivative financial instrument was primarily attributable to the change in our stock price, volatility and a number of derivative financial instruments being measured during the period.

The net loss for the fourth quarter of 2018 was 5.1 million or $0.21 per basic share compared to a net loss of 3.7 million or $0.19 per basic share for the fourth quarter of 2017. Dilutive loss per share was $0.22 and $0.26 for the quarters ended December 31, 2018 and 2017 respectively.

Turning to a brief review of our fiscal year results for the full year ended December 31, 2018. We reported revenue of 500,000 for the full year 2018 compared to no revenue in 2017. Our revenue in 2018 was comprised entirely of license fee revenue which was recognized in the fourth quarter in connection with the satisfaction of our performance obligation related to the strategic alliance agreement with HealthTech Connex and Heuro Canada.

Operating expenses for the full year 2018 increased 4.3 million or 19% year-over-year to 27.2 million compared to 22.9 million in 2017. The change in operating expenses was driven by an 8.7 million or 103% year-over-year increase in general and administrative expenses, which was primarily due to the increase in the stock-based compensation expense, resulting from the second quarter change in our functional currency to the U.S. dollars and the build out of our commercial operations infrastructure and higher headcount compared to the prior year. This was partially offset by a decrease of 4.4 million or 31% year-over-year in research and development expenses primarily due to reduced clinical trial and product development expenses.

Loss from operations for the full year 2018 was 26.7 million compared to a loss from operations of 22.9 million for the prior year. Total other expense for the full year 2018 decreased 3.2 million or 62% year-over-year to 1.9 million compared to 5.2 million in 2017. The year-over-year decrease in total other expense was driven primarily by the change in foreign exchange gain/loss, which resulted in a gain of 1.6 million for the full year ended December 31, 2018 compared to a loss of 1.7 million in the prior year period.

Net loss for the full year 2018 was 28.6 million or $1.26 per basic and diluted common share compared to a net loss of 28 million or $1.50 per basic and diluted common share for the full year 2017.

At December 31, 2018 we had 25.6 million in cash compared to 5.6 million at December 31, 2017. We had no outstanding debt obligations in either period. The increase in cash during the 12 months of 2018 was driven primarily by 40 million of cash provided by financing activities, including 35.3 million of net proceeds received from two offerings of the Company’s common stock and warrants, and 4.7 million of proceeds from the exercise of stock options and warrants. The increase in cash was partially offset by net cash used in operating activities of 19.6 million and net cash used in investing activities of 440,000.

Let me now turn to a review of our 2019 revenue guidance which we introduced in our earnings release this afternoon. For 2019, we expect total revenue in the range of $1.6 million to $2 million U.S. dollars. For modeling purposes for the full year 2019, our 2019 revenue guidance assumes an exchange rate of CAD1 to $0.75. We expect that all revenue will be generated only from contributions by the two founding neuroplasticity clinics that are operational and treating patients in Canada. We anticipate generating revenue of approximately CAD18,000 per device delivered to the Canadian clinic in 2019.

With that, I’ll turn the call back to Phil. Phil?

Phil Deschamps

Thank you, Joyce. Looking ahead to 2019, we will continue to focus on advancing our effective strategies in Canada and the U.S. In Canada, we are going to work to ensure the successful commercialization of our PoNS treatment as we progress through its initial stages. Specifically in 2019, we expect to engage three additional neuroplasticity clinics in Canada during the course of the year basically one in each of the last three quarters of the year and 2019 with a total of five clinics.

In the U.S., we remained focused on obtaining de novo classification and 510(k) clearance for our PoNS device. We will continue to provide FDA with any information necessary to facilitate its review of our submission, so we can bring our innovative PoNS treatment to more than 1.5 million U.S. patients that we estimate are living with chronic balance deficit caused by mild-to-moderate TBI.

With respect to U.S. clinical experience program, we expect to continue recruiting and enrolling patients at CEP sites throughout the year. We’ve established our own neurorehabilitation center known as Helius Neurorehab adjacent to our corporate headquarters in Newtown, PA, which will operate as a clinical research site and serve as our sixth and final CEP site. We believe that the experience gained through the commercialization efforts in Canada as well as our U.S., clinical experience program will help us to establish our commercial infrastructure and provide us with insight that informs our commercialization efforts in the U.S. post-FDA clearance. In addition to pursuing our respective strategies in the U.S. and Canada, we will continue to pursue regulatory clearance in other markets that represents additional opportunities for PoNS treatment.

In Europe, we submitted an application for a CE Mark during the fourth quarter 2018 and in Australia we now expect to submit an application to the Therapeutic Goods Administration for marketing authorization during the second quarter of 2019. In terms of our clinical strategy, we are focused on generating additional clinical evidence to support our pursuit of reimbursement coverage for PoNS treatment for mmTBI related to chronic balance deficit in both our CEPs and after clearance in other clinical trials.

As I mentioned earlier, we plan to generate clinical evidence demonstrating the health economic benefits of our PoNS treatment by the Canadian neuroplasticity clinics and gather additional clinical support including data on 6 and 12 months participant outcomes as part of our clinical experience programs.

In addition to mmTBI we believe our PoNS treatment has the potential to treat a variety of conditions caused by neurological disease or trauma. We have completed pilot studies in multiple sclerosis and stroke and are working with the Russian distribution company to explore the effects of our PoNS treatment on patients with cerebral palsy in Russia. We will continue to evaluate the expansion of our portfolio of clinical support demonstrating our PoNS treatments ability to help patients suffering from the effects of these conditions.

And lastly in 2019, we will work to share our data at key neurological and neuromodulation medical meetings to establish our position as thought leaders in the industry and raise awareness of our groundbreaking PoNS treatment. As many on tonight’s call are potentially new to the Helius Medical Technologies story — excuse me, I would like to conclude my remarks by distilling our story into three key elements that give us confidence of our future success.

First, we believe the initial condition that we are targeting represents a compelling market opportunity with more than 1.5 million patients in the U.S. and 350,000 patients in Canada estimated the suffer from chronic balance deficit due to an mmTBI.

Second, these patients are critically underserved by treatment with physical therapy alone, which represents the current standard of care. Note that patients that receive physical therapy alone typically see only modest improvements in their symptoms, which tends to drift back once treatment is discontinued.

And third, our innovative non-invasive PoNS treatment represents a potential life-changing solution for these patients by comparison. Based on the observations from our clinical trials, we believe the PoNS treatment can potentially provide clinically superior outcome with the durability of treatment effect that suggests the permanent restoration of balance after only 14 weeks of treatment.

These benefits are supported by our two randomized controlled clinical trials, which as a reminder were comprised entirely of patients that had previously completed a physical therapy program to correct their balance and were deemed by their treating clinicians to have plateaued and continued to have a significant balance deficit after treatment before being randomized.

So in closing, by executing our commercial, regulatory and clinical strategy, we aim to position Helius to bring our PoNS treatment to the aid of as many patients as possible in 2019, and in the years to come, helping them live healthier, happier and more productive lives. I would really like to thank all of Helius employees and shareholders for their dedication and support for this important effort, as well as everyone on this afternoon’s call for their support and interest in Helius Medical Technologies.

With that Rob, let’s now get onto the calls.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Steven Lichtman from Oppenheimer. Your line is open.

Steven Lichtman

So, you mentioned in Canada, you had a chance to meet with some of your current patients. I’m wondering what you are also hearing from prospective patients in terms of interest? And what the two centers are up and running? What they are hearing from prospective patients and interest?

Phil Deschamps

Well, yes, I did get to meet them. It was quite a cool day. In Canada, there has been a lot of expectations for us to eventually clear our technology there. So, there has been a lot of people that have essentially been waiting for this day. The clinics are actually managed by the Heuro people, so we don’t really get involved in the forecast of their own patients and their own sort of waiting list or schedules. We basically measure their performance and our performance based on their orders on a monthly basis.

Steven Lichtman

And then in the U.S. based upon when you filed when you think we will hear next from FDA?

Phil Deschamps

Your guess is as good as mine, Steve. From our perspective, what we felt really important about is as we believe that we’ve answered all of the questions that FDA requested from us. We know that once we now have submitted that the FDA will take up our file and there is no specific guidance as to when that — when they are scheduled to get back to us. We do note that FDA is an organization that designed to approve products and they get bonus on improving products not so much on the other side. So, we will have to see and rely on their own pressure to see when they get back to us, but we have no specific idea.

Operator

[Operator Instructions] And your next question comes from the line Sean Lavin from the BTIG. Your line is open.

Unidentified Analyst

It’s Marie. So I wanted to ask a question about the CEP program. I would love to hear a little bit of feedback of how those are enrolling — how quickly those are enrolling? And any patients’ feedback you are hearing I guess in the U.S. patient population?

Phil Deschamps

Yes, so, this is what we did Marie. When our Canadian launch was accelerated and we changed our focus on what the CEPs were going to do since we are going to be able to gather health economics data from our Canadian launch in real life patients. We changed our protocols in Canada as I was discussing. For those of you who know clinical trial programs, when you change a protocol you have to get a whole new IRB approval, you have to go through the whole process again.

So we did that at the end of the fourth quarter, and so now pretty much all of the IRBs have gotten back. So, we are essentially getting back into the recruiting of the trial. We also felt that we had the — every issue has a silver lining. And with FDA asking us our AI, we figured we would have enough little bit of time to be able to change the protocol to gather more comprehensive data since we were going to get it on that side. So, we are just starting to recruit patients, we had a few patients that finished treatment already and a few randomized, but it’s still in the single digits.

Unidentified Analyst

And I know that Steve asked a question about Canada, but I would love to hear if you can give also I know that you are planning online this year. Why don’t we see any revenue I guess from centers that you bring online in the second quarter given that you turned the first two round pretty quickly?

Phil Deschamps

Sure, so let me answer your second question first. We fully expect that we would drive revenue in those clinics, but today those clinics are not set up. So, we are only forecasting revenue in terms of things that we absolutely have in hand. And right now, we have in hand two centers and we Joyce’s guidance the $1.6 million to $2 million U.S. to be derived from those two clinics. And once the clinics come onboard, I will then be able to forecast their revenue. So, on a quarterly basis, as they come onboard, we will be able to change our guidance based on the knowledge of where those clinics are. So, we just want to be as responsible as we can and being able to project what we have in hand.

With respect to waiting list, again, it’s really, really important for us in a way that we have set up our Canadian system because the practice of medicine essentially is independent of us. We wanted to set ourselves up as a medical device manufacturer. So, we transfer our devices based on the demand of the clinics. What patients get treated in Canada? What diagnosis they have is really the jurisdiction of the clinics, and so we purposely do not get involved in understanding what waiting lists are, what the diagnosis are. All we do essentially make sure that we get our orders about three weeks before the month end and then we supply them with that treatment. So, that’s the reality and it’s really, really important for us to comply with all the regulatory rules that we are subjected to.

Operator

We are currently showing no additional participants in the queue. I will now turn the call back over to the speakers.

Phil Deschamps

Okay, well, thank you very much everyone and heartfelt thank you for all of you who are on the phone that are our existing shareholders. It certainly is not lost on us that we live by the generosity of our shareholders, and we hope that you found through this very important milestone that we have reached the last quarter and over the first three months of — the year are just so incredibly exciting for us. So, we look forward to giving you our quarterly reports as they come through. All the best to each and all of you.

Joyce LaViscount

Thank you.

Operator

That does conclude our conference call for today. Thank you for your participation.