Nova Eye Medical Limited (EYE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nova Eye Medical FY '20 Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Tom Spurling, Director of the company. Please go ahead.

Thank you. Good morning, everyone. Thanks for taking the time to listen to our story. As the introduction, I'm pleased to be appointed this morning as a Director of Nova Eye and Victor Previn is with me. I will lead the discussion, but please feel free to ask questions at the end for both me or Victor. If we could just kick off on Page 3. Obviously, the divestment of our Capital Equipment business for $100 million was a big focus over the last 12 months. And we now have a company that can focus on the fastest-growing segment of the ophthalmic market that is consumable surgical devices for glaucoma disease management. That is our primary focus. On the 31st of July or 2nd of July, we announced at 31st of July, we completed the acquisition of Molteno, a company in New Zealand that has a very well-regarded glaucoma drainage device. And we are in the mode to build a portfolio of complementary novel consumable glaucoma devices. Glaucoma, and we've spoken a number of people on the call who've been with us a while have -- we've spoken about the renaissance of -- and realization of pharmaceuticals are no longer considered the best treatment option. That remains the theme. The theme is just getting stronger, and device solutions are demonstrating better efficacy and better returns for patients. So the whole area of glaucoma continues to abound with opportunity. We have 2 technology -- 2 prudent technologies at the moment, and we are developing new generation treatments based on these platforms for different stages of the disease. We have a nice stream of doctors wanting to work with us to develop new technologies and bringing to attention technologies. Now additionally, and as also a number of you have been long-term holders of our shares, we continue to do with 2RT, we'll develop and fund the commercialization pathway of our proprietary 2RT laser for patients with intermediate AMD. That remains a very, very large opportunity. It is longer term, of course, than glaucoma. And we'll provide a little bit more on that at the end of the call. So on to the next page. So our current technologies, Molteno for glaucoma and 2RT for early and intermediate AMD. iTrack most importantly is an intervention that leaves no piece of equipment in your eye, leaves nothing behind. And so therefore, preserves future treatment options. This theme is something that is resonating, continues to resonate with the glaucoma community. The Molteno device we acquired in July is for patients with the late stage of the disease, where the drainage systems are so compromised that there must be an insert, you can see the size of that insert in the picture there, insert into the eye to assist with drainage. Over the page. This slide, we are attempting to depict the number of where each of our technology sits in the disease cycle, glaucoma disease cycle, and that there are opportunities for growth presenting themselves by obtaining technologies and development technologies within that different parts of the disease cycle. It's a complex disease with many aspects to it. And each of these provides us with -- that gives us highlights of the complementary nature of Molteno and iTrack, but it also shows that there's opportunities for the future and opportunities for growth. With the divestment of the laser and ultrasound business, there were 250 people roughly in the group. We now have 50. Most of those are in the United States. This graph -- this slide shows the functions and the places we are: in New Zealand, in the South Island underneath. Here at Adelaide for leading Australia. In the U.S.A., we have our business in Fremont, California, in the San Francisco Bay Area. And in Germany, we are in the process of opening or we've just opened an office in Berlin. The previous office in Berlin that we had in the previous business in Germany was sold to Lumibird. Over the page, Tom. Here's a snapshot. Market cap today $45 million, cash of $26.5 million. We've got a bit of a more detail on that cash coming up. Enterprise value $18.5 million. Directors and management own 14%. Our revenues are now $12.8 million or worse, sorry, into FY '20. It's negative EBITDA, as you'd expect. Our cash flow, cash outflow from operations was $3.5 million or minus $3.7 million. The highlights, of course, on the Page 8 are the cash sale and the $61 million return to shareholders. We're very happy to have been able to provide that. On the profit loss. So this -- on Page 9, we have unfortunately, our financial statements, which were released a very large and very complex. It's very difficult to actually determine what -- the essence of what we have. So this tries to simply show our revenue is from iTrack and 2RT. It did go down by 21%, and it has been materially affected by COVID-19. Through March, second half of March, April, May and into the first half of June. Sales were nearly stopped completely, particularly in April. That had a material effect on our year-on-year sales performance. We mentioned we've been holding our various partners around the world and industry colleagues. There is some evidence. All of them are reporting some evidence of return to normality, and that's obviously a hard word we would say during July and August, but we remain very wary of where it's headed. So -- but there is evidence of return to sales more, obviously, much better than April and May. Most importantly, we managed to reduce operating expenditures by 23%. That's $5 million -- $4.5 million. And so in a comparative sense, we reduced the loss materially. So we are -- and the cash flow, given there's some noncash costs in there, the cash flow was better as shown on Page 10. A quick reconciliation of EBITDA from continuing operations, some working capital improvement and the government stimulus from the U.S. government of $1.5 million has given us -- that stimulus comes in the form of a loan. And the loan is not -- and technically, it will be written off, subject to some fairly complicated calculations, which we understand the Congress in the U.S. has not yet agreed to. So we're not yet -- we've not yet recognized that as income, but we don't expect to have to pay very much back, if any. So $3 million improvement in free cash flow was very important to us. On Page 11, we're very pleased. Cash retained $26 million. This is a bit ahead of where we thought we'd be. Our income tax advisers on the transaction have -- we've had some good tax advice. We expect to pay $8.1 million of tax from -- primarily from the profit on the transaction, which is a bit less tax than we thought. So we're retaining $26.5 million, which is a bit ahead, $4 million ahead of what we thought we were going to return. On Molteno. Molteno was -- Anthony -- doctor -- Professor Anthony Molteno in New Zealand was an ophthalmologist -- is an ophthalmologist at the time that invented the idea of glaucoma drainage device. Just to reiterate, that is for late-stage disease. We have patients that need additional permanent help to establish the flow of fluid through the eye. And so those devices that you see in the picture are placed inside the eye and are used as -- to provide that drainage for severe, complex late-stage glaucoma. Anthony Molteno invented this space, and we -- it has a fantastic safety profile. When we say invented, we're talking about back in the late '60s. So we've got 50 years of safety with this device and its predecessors. On 13, there's a few statistics on the sale of the market. It's about AUD 1 million. Most importantly, it is underpenetrated. There are 2 companies that sell devices like this one, a Baerveldt device is what it's called from Johnson & Johnson and the Ahmed Valve from a company called New World Medical. New World Medical is actually -- just if you don't know them, and some of you do, it's not a large company. I don't think its revenues exceed $100 million. Johnson & Johnson, of course, is a very large company. And so we believe that using our sales infrastructure -- most of the sales from Molteno we acquired were in the United States, half of them. And so the ability to use our existing sales infrastructure in the United States to expand Molteno sales is strong. We also are in the process of our distributor network, iTrack distributor network in the rest -- outside the U.S. We're also in the process of consolidating and selecting distributors to extend -- incorporate Molteno and iTrack where possible into 1 distributor. And we had already commenced work on a next-generation Molteno to build on the wonderful safety profile to give us that pipeline we discussed earlier. Over to 2RT, Tom. a potential breakthrough therapy for patients with intermediate AMD. 70% -- 77% reduction in the rate of progression to late-stage in 75% of patients. Now as I've said, a number of you have held stock in our company for a while and have heard that story for a couple of years now. It remains a very, very strong story and a very -- there's a very large unmet need. There has been no deterioration in the opportunity in front of us. We have been focusing on the U.S. regulatory pathway, so we have been engaged in the question-and-answer process. It's a formal question-and-answer process that the FDA provides. You ask questions. They provide an answer within the time period. Those sorts of things. So we've been engaged in that backwards and forwards over the last 12 months using a team that we have -- a team of consultants in the U.S. that we've built up. At this stage, it's important we don't intend -- we intend to use some money to get our study the investigational device exemption lodged to determine that pathway, to pay the consultants, that is a relatively nominal amount of money, less than AUD 500,000, far less than $500,000 and -- but we are -- the study itself, we would intend to seek investment partners that will give our shareholders access to the potential benefits of this without having to use any of our cash. That's a pretty important -- it's an important decision. We don't believe our shareholders want to nor should. We have interest. We have interest from third-party investors, and we'd like to structure something to get that done. On the outlook, we see the market development, clinical market development and preparation for aggressive sales post COVID-19. We've got our team and our costs down. We haven't lost the fundamental capability, but we have certainly paid things down. Even travel, for instance, is obviously materially down, and we're all getting better like every business at using electronic communication means. That's going to be good for us. Product development and next-generation iTrack to improve the surgical utility of the device for deployment post-COVID market recovery later in this F '21 financial year. We want to file that 2RT IDE, and we will be managing our cash flow very prudently. Victor is -- apart from this meeting, we'll be going out to buy border and table off eBay. So we have a very humble new office here in Kent Town, just on the outstrips of the city and with secondhand furniture, and so we've been very prudent. Now with -- that is the end of the formal presentation. As I said, Victor is also here for questions. I guess we can open it to questions.

[Operator Instructions] The first question comes from Dennis Hulme from Taylor Collison.

I was just interested for more information about 2RT. Firstly, with your discussions with the FDA about trial design, is your expectation that the endpoint would be visual acuity? Or are you likely to have an imaging endpoint for the study?

That's a very good question. Because this is an early stage treatment well before the visual acuity starts to decline, a visual acuity endpoint is not really the answer for this study. So no, there will be a range of other metrics, which include examination, extensive examination of the retina using multi mobile imaging, and that is used to determine biomarkers in the eye, which has seem to progress as the disease progresses. Visual acuity is not the endpoint in the study.

Okay. And secondly, you mentioned involving -- potentially involving third-party investors in funding the trial. Can you just give us a little bit of color about the sort of structures that might be involved? And what sort of interest the company might retain in the product or the dilution that might come from the involvement of third party investors? How might this look?

Look, that is still under discussion. However, the intent would be that we would essentially joint venture this with a third party. [indiscernible] the joint venture loosely. But basically, we would essentially plan to present our 2RT technology into a U.S. entity, and we would invite some U.S. investors to join us within an entity. So that between us, we can vend in and they can fund the study.

One of the -- there's been a fair bit of work done within the Lumibird transaction to make sure that all the assets associated with 2RT have now been consolidated into a single Australian proprietary limited company, which has -- one of the intentions of that work we did during the Lumibird transaction was to make sure that we had a structure that could be easily used for that vending in process. So there's -- legally, we're in good shape to do something. It's...

Okay. No, that's good to hear. And then also, I just had a question on iTrack. My recollection is that sales were declining in the December quarter before the pandemic hit. Can you just give us some color about what factors were behind that decline that was seen late last calendar year?

If you look at some of our larger competitors, you'll notice that they also had a decline in sales. So there are -- it is a very reclusive market at this point in time, and there is some, shall we say, there are a bunch of new players entering the marketplace. So that's essentially diluting everyone's focus. Everyone's ability to...

Doctors' focus.

Doctors' focus. There are only so many doctors at this stage that have adopted this new technology. And the new players and all of the mix market is spread across the early adopters. Now we -- from the trends that we see, we expect that, that call of early adopters to the maturity phase to grow materially. And we fully expect that a very large proportion of the glaucoma professional will become our franchise, ours and our competitors'. However, there -- certainly towards the end of last year, there was a certain period where a bunch of other players entered the marketplace, and that spread the sales of our product and others along that, relative to...

It's very -- it's possible to get adopted to try things. And if he does that, it did dilute sales for us during that -- during the first half of FY '20. But certainly COVID was the -- had a major impact from March, April, May and then into start of June.

Were you able to get any sense about whether doctors were coming back after trying the competitive products? Or is it just all too messy with the COVID effect?

We've certainly seen an improvement in sales. And so some doctors yes indeed are coming back. However, overall, it is challenging for all of us to get our [ recipe ] from the doctors and therefore, to spread the message. So our conferences and sort of face-to-face discussions are usually the port for that. And in this COVID period, it is very difficult to achieve that.

Same for everyone.

Yes. And we -- our sales have ROI improvement trends. And that's largely because surgical time is coming back on, and we do have some fairly aggressive reps chasing in the business.

[Operator Instructions] The next question comes from [ Cush Silver ], private investor.

Congratulations on the sale of the business. Just had a couple of questions on iTrack and 2RT. So if I start off with iTrack. I know there are a lot of advantages with iTrack and say iStent. But just the Glaukos' sort of sales momentum as it feels quite significant. I think last financial year, they had about 230-odd million in sales. I just wanted to sort of get your opinion on why the potential take-up of that, maybe a bit more significant, because of the sort of number of sales staff or the time it takes for the procedure? Just wanted to get your opinion on iStent versus iTrack?

I'll start off and then hand over to Tom. So yes, their procedure is faster. It is a simpler procedure. Ours is a far more comprehensive longer procedure, we would argue that we have a better safety profile and better efficacy. However, if doctors are looking for a fast solution, then the Glaukos' solution is a very fast surgical time and that is -- that resonates with many of our customers. So if you have to have a look at the investment Glaukos made in building that sales channel, Glaukos multiple years down the track is still very cash flow negative, and that represents their investment in building that sales pipeline. So it's -- they've divested -- Tom, how much money have they invested in building a sales channel today, in of $500 million?

I do -- I have done it on a per sales dollar, and we're weighing in front of different sales dollar. But yes, it's like hundreds of thousands, probably [ milli ] by now.

Yes. And the bottom line is that they are well-performing company. And those are certainly raising the -- on the sales front. However, they spent a ton of money doing that.

Sure. Okay. And the next-gen iTrack, sort of what type of changes that we have over the current procedure. Can you actually disclose that? Or?

It's a significant reduction in procedure time and a simpler methodology to essentially place the catheter. So our catheter, it's like an angioplasty catheter, is currently manually deployed. So it is manually put into the canal of Schlemm and advanced by forceps. So we are designing equipment to essentially semi automate that process so that it can be done in a semi-automated manner, which will make it simpler and easier for patients, also for doctors to treat patients.

No, that's great. Great. And I think you might have just mentioned it before, but with the sort of -- what's the trend like for iTrack sort of over July, August?

Yes. Well, that it's actually been quite good, to be honest. What that is -- we're just finishing August. So I don't -- I just got Friday sales. They're actually looking reasonably good versus the pcp and certainly compared with March, April, May and June. So we always -- we nervously wait, and we worry about what's going on in America, but it does seem quite good. We noticed Alcon and Glaukos have both reported similar trends.

That's great. Great. And just one final question. Just in terms of 2RT time line, so what kind of time line can we expect sort of from filing with the FDA? And how long would they sort of take the turn around? And then what sort of trial lengths are you looking at?

Well, we're looking to try and -- a big milestone will be outreach to investors, obviously, that has to be a successful outreach. And as we said, we're not planning on spending your money now, our shareholders' money on this. So we'll be carefully working -- the critical path will be -- sorry, I'll start again. The FDA approval process is one that can be finished within the next few months. The decision to go ahead with the study will be a function of the financial resources that we need to master.

So we would hope that by early next year, we will have things in place for both the FDA and for the investment from third-party investors. And the study, the answer to your question, the study is a 3-year study.

But we also -- I mean there are hurdles. I mean we talk casually about our U.S. investors, but that will actually need this Foreign Investment Review Board potentially that will have to be involved as well now. So there are some hurdles we've got to walk through.

Okay. Great. And again, congratulations in exciting set of products and business going forward.

I think that's worth saying to the people on the line, the business -- and several of you have spoken to Victor and I over the years, but we had a very vast, complex business. And now it has certainly slimmed right down, and we're focusing on some very high-value things. And it's certainly a lot simpler for investors, a lot simpler to manage. So we're actually really excited, really excited.

[Operator Instructions] The next question comes from Campbell Taylor from Taylor Collison.

Yes. Tom and Kevin, well done. Can you hear me?

Yes, we can.

My question is just around the disclosure actually. I think the company has previously done a great job with iTrack in terms of releasing results around sales growth, sales force increases, et cetera, et cetera. And in this presentation, it sort of feels like that's been taken out. I'm just wondering why and whether it's just a one-off and you will provide further information going forward on the iTrack business?

It wasn't intentionally -- I mean there is less -- we try to keep the disclosure simple, Campbell. We're happy to keep refining those. So I -- we won't rule out providing a bit more information as things get better. It's very hard at the moment with the -- with COVID-19 and managing all the operating costs in the sales force. We had guys unable to get to customers. So we've had to do a lot of work on our staffing and our operating expenditures. We don't have the same trade shows that we're used to. So we'll take that as an action, Campbell. Thank you.

Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Spurling.

Okay. Well, thanks very much for taking the time to listen, everyone. As I said, we're really excited that we have some technologies. We don't have -- we've got some cash in the bank. We don't want to -- we will not be squandering that. We're living prudent lives on Zoom, and we are looking forward to reporting some good results in the next few months. Thanks a lot.

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.