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Neovasc (NASDAQ: $NVCN) In Dark Waters

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Neovasc (NASDAQ: $NVCN) is facing multiple Class Action lawsuits alleging violation of federal securities law, amidst dealing with a fatal blow from an FDA decline.

Neovasc (NASDAQ: $NVCN) is manufacturing and developing special medical devices catered for the cardiovascular market. The company is operating in the healthcare equipment and supplies industry within the healthcare sector.

Through careful selections and clinical trials, Neovasc is able to provide advanced products like Reducer™ (granted Breakthrough Device designation by FDA) for treatment of refractory angina in the European market and Tiara™, a technology for the treatment of mitral regurgitation (MR), which has had two clinical trials across Europe, Canada, and the USA.

Their medical device Reducer™ failed to get FDA approval.

On this news, the Company’s share price fell 42%, to close at $1.06 per share on October 28, 2020, on unusually heavy trading volume.

Shortly thereafter two law firms Brualdi and Pomerantz announced each a class-action lawsuit against Neovasc Inc. and certain officers, on behalf of Neovasc shareholders, who had purchased $NVCN stock between November 1, 2019, and October 27, 2020, or between October 10, 2018, and October 27, 2020.

This started when the FDA directed Neovasc in February 2019 to gather further evidence on their product, Reducer™, before filing for a Pre-Market Approval (PMA). But Neovasc announced in November 2019, that they would submit a PMA for Reducer™ – without having collected this additional evidence.

A big no-no in the equity markets, as it’s bordering to manipulation.

This is exactly what the lawsuits are alleging, by claiming that “Neovasc made false and/or misleading statements and/or failed to disclose some important factors about their products and company’s business” thereby violating federal securities laws.

For now, all of which are only allegations, until proper court resolutions take place. Which could take years. In the meantime, the company will most likely be able to continue its commercial activities with Reducer™ in Europe.

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Neovasc insiders may have bought shares in the last year, but they didn’t sell any.

Institutional investors are holding 22.34% of the 22,647,100 shares outstanding, based on the available 13F form filings, with very little change in their positions on top of the lawsuits. The FDA decline produced a larger shake-up.

So far, the company has had 2 reverse stock splits, one of 1:100 in 2018 and another 1:10 in 2019. Funds remain the critical challenge for Neovasc, partially indicative of the -0.43 P/E ratio. Negative net income and high leverage could adversely affect future financial conditions. Their main headache is cash – as the company’s got money “until at least the end of Q1 2021.”

 

Neovasc’s and the industry’s current status


The company’s recent Q3 report indicates that it is using the cash generated from operations as well as equity and debt to fund its operation and capital expenditures. Neovasc experienced a 5.43% fall in gross profit while total non-current assets seem stable. The company is having an ROE of 2.43% compared to the industry standard of 4.37% indicating inefficient use of capital.

Comparing financials with companies like $TMDI, $SINT, $NVCN has the lowest net income, and its revenue is in between the other two companies. $TMDI has the highest revenue and net income.

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The operations of Neovasc is based on technological development, which involves a series of pre-clinical studies and clinical trials before commencing sales, making regulatory approval key. Although the company got approval for some of its products, any products from its subsidiary Neovasc Medical Ltd and B-Balloon hasn’t got approval.

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Neovasc has also filed for the CE mark for its product, Tiara – a symbol that must be affixed to many products before they can be sold on the European market – which they expect to receive in the first half of 2021.

With the approval, the company would be able to sell Tiara™ in the European Union.

Growth in the medical device industry is driven by chronic diseases, infections, and epidemics like COVID-19 but data security issues, industry competitiveness, and governments’ regulatory across the world bring a new set of challenges.

According to the Business Research Company’s report, from 2015 to 2019 the global medical device market has experienced a 4.4% CAGR and reached a valuation of $456.9 billion. This valuation fell 3.15% in 2020 due to the pandemic but is expected to recover in 2021 and continue growing at a CAGR of 6.1%, reaching $603.5 billion by 2023.

Increasing with $146.6 billion in only three years.

Other companies like Edwards Lifesciences Corp (NYSE: $EW), an American medical technology company, offer similar transcatheter heart valve relevant service and products as Neovasc. This being said, currently, there is no transcatheter mitral valve replacement device approved for use in the U.S.

 

Time will show the outcome of the lawsuits – and if the allegations, in fact, are true and the company, as well as certain officers, have violated federal securities law the likely outcome is a hefty settlement fine and a cleansing of management.

The company does seem to have a promising product mix, with active commercial activities and proven records in Europe. It’s an unfortunate development, but sometimes lawsuits are a price of doing business, particularly when management might have rushed a little too much.

Worst case is that the company runs out of cash.

Unless any new developments occur, or additional dirt surfaces, the stock will probably move in the same low range +/- 0.1 in the foreseeable future, until the CE Mark review results arrive in early-mid 2021.

 

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Luka Marjanovic

Partner

Luka holds a Bachelor’s in International Business and a Master’s in International Management. During his undergraduate studies he worked as a research assistant in the field of Big Data; founded his own consulting firm providing services to local SME's in various sectors and invested in the capital markets; as well as working pro-bono providing education and career counselling. Prior to his business education, he studied Biology-and-Biotechnology, and served in the Danish Royal Army as Second Sergeant, leading and managing a group under extreme conditions and pressure. Luka has spent significant time abroad, living and working in seven different countries. When he's not in the office, he's chasing the next gusts windsurfing, carving the mountain snowboarding or out in the forest for a jog.

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