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electroCore : Management's Discussion and Analysis of Financial

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08/14/2019 | 04:50pm EDT

Condition and Results of Operations

You should read this section in conjunction with our unaudited interim consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the SEC. As discussed in the section titled "Cautionary Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those under the caption "Risk Factors" in the aforementioned Annual Report.


We are a commercial stage bioelectronic medicine company with a proprietary non-invasive vagus nerve stimulation, or nVNS, therapy. nVNS is a platform therapy that modulates neurotransmitters and immune function through its effects on both the peripheral and central nervous systems. We are initially focused on neurology and our therapy, gammaCore, is cleared by the U.S. Food and Drug Administration, or FDA, for use by adults for the following three neurology indications: the acute treatment of pain associated with each of migraine and episodic cluster headache; and the prevention of cluster headaches. In neurology, we intend to pursue further label expansions to include prevention of migraine. Our ATOM trial to pursue label expansion into migraine in adolescents is currently on hold pending further developments in the Company's business plan, as described below in "Recent Developments." Finally, we are considering the potential for new indications in several additional indications as our nVNS technology is being broadly studied in a number of investigator-initiated studies.

gammaCore is the first FDA-cleared, prescription-only non-invasive VNS therapy. Historically, vagus nerve stimulation or VNS, required a highly invasive surgical procedure to permanently implant a costly medical device. These limitations prevented VNS from being used, other than for the most severe patients. Our lead product, gammaCore Sapphire, is a proprietary, simple-to-use handheld delivery system intended for multi-year use prescribed on a monthly basis and is both rechargeable and reloadable via individualized radio-frequency identification, or RFID, cards. gammaCore Sapphire permits patients to self-administer doses of nVNS on an as-needed basis for acute treatment, or at regular intervals for prevention therapy.

Non-invasive delivery of VNS or nVNS by our gammaCore Sapphire is enabled by a proprietary high-frequency burst waveform that safely and comfortably passes through the skin and stimulates targeted A-fibers in the vagus nerve. Multiple published studies suggest that VNS works through the modulation of neurotransmitters and has a measurable effect similar to several classes of commonly prescribed medications, including selective serotonin reuptake inhibitors, serotonin norepinephrine reuptake inhibitors, and GABA analogues. Research also indicates that VNS, including gammaCore, moderates the inflammatory response producing a measurable reduction in inflammatory cytokine production.

VNS works through suppressing neural circuits involved in pain sensation and neuroexcitatory activity in the brain, modulating the release of a variety of neurotransmitters, inducing changes in the autonomic signaling and inducing anti-inflammatory effects.

In January 2018, the FDA cleared our gammaCore therapy for the acute treatment of pain associated with migraine in adults. Migraine is a debilitating primary headache condition that affects approximately 12% of the adult population. Some reports suggest that up to 60% of migraine suffers are dissatisfied with, or have contraindications to, the current standard of care treatments for migraine, such as "triptan" medications. In April 2017, the FDA cleared gammaCore for the acute treatment of pain associated with episodic cluster headache ("CH") and in December 2018, the FDA cleared gammaCore for the prevention of CH. CH is an extremely painful form of headache affecting approximately 350,000 people in the United States. Prior to gammaCore, injectable sumatriptan was the only FDA-approved, commercially available acute CH treatment, and there was no FDA approved therapy for the prevention of CH; gammaCore remains the only FDA-cleared treatment available as both an acute and preventative therapy for CH. According to a 2016 market research survey, 87% of respondents reported dissatisfaction with the then-available treatment options for managing CH.



The first three clearances of our gammaCore therapy were facilitated by the FDA's creation of a new regulatory category: External Vagus Nerve Stimulator for Headache (21 CFR 882-5892). Based on this category's description, we anticipate that some additional label expansions may be possible through the pathway under Section 510(k) of the Federal Drug and Cosmetic Act. In July 2019, the FDA accepted for review our 510(k) premarket notification for a new indication for use of gammaCore for the prevention of migraine. We expect to receive the FDA's decision by the end of 2019. Because the new indication of migraine prevention is supported largely by the Premium 1 study, which showed a trend in favor of gammaCore over a sham device in reducing the number of migraines per month but failed to achieve statistical significance, the FDA may not clear gammaCore for this use based on the Premium 1 results. Accordingly, we continue to enroll subjects in the Premium 2 clinical trial to support the label expansion for migraine prevention, if necessary, and to support the commercialization of gammaCore as a migraine prevention therapy should this indication receive FDA clearance. We expect to complete enrollment in Premium 2 the first half of 2020.

Our Therapy Delivery Platform

Our gammaCore therapy is the first and only treatment that non-invasively activates the therapeutically relevant fibers in the cervical trunk of the vagus nerve, using proprietary signals delivered in two-minute doses that are capable of passing through skin while minimizing the activation of skin pain receptors.

Our therapy is prescription-only, and patients self-administer discrete doses using a handheld unit. gammaCore Sapphire is a non-disposable, rechargeable and reloadable option for patients, with the therapy being dispensed through a prescription from a specialty pharmacy. After the initial prescription is filled, access to therapy is refilled monthly through the input of a unique, prescription-only authorization code. This code is currently delivered in the form of an RFID card, dispensed by mail by our specialty pharmacy distribution partner. In the future this refill may be dispensed directly through the internet using Bluetooth technology.

The prior iteration of the gammaCore delivery device was not reloadable and rechargeable and was supplanted by the gammaCore Sapphire during the third quarter of 2018. While we do not intend to market the non-reloadable, disposable version of our gammaCore product in markets where the gammaCore Sapphire is launched, in select cases, we may continue to use the prior gammaCore product, such as in clinical studies where a rechargeable version is not necessary. Certain customers, such as the Veterans Administration and the Department of Defense, may also continue to use the prior iteration of the gammaCore delivery device.

We have never been profitable and have incurred net losses in each year since our inception. Our net loss from operations for the six months ended June 30, 2019 and 2018 was $26.0 million and $27.2 million, respectively. As of June 30, 2019, our accumulated deficit was $64.3 million. We expect to continue to incur substantial net losses and negative cash flows from operations for at least the next several years. We intend to continue to make targeted investments in building our U.S. commercial infrastructure. We also intend to continue to make targeted investments in research and development to expand our gammaCore therapy.

We face a variety of challenges and risks that we will need to address and manage as we pursue our strategy, including our ability to develop and retain an effective sales force, achieve market acceptance of gammaCore among physicians, patients and third-party payors, and expand the use of gammaCore to additional therapeutic indications.

Because of the numerous risks and uncertainties associated with our commercialization efforts, as well as research and clinical development activities, we are unable to predict the timing or amount of increased expenses, or when, if ever, we will be able to achieve or maintain profitability. Even if we are able to increase sales of gammaCore, we may not become profitable. If we fail to become profitable or are unable to sustain profitability, then we may be unable to continue our operations at planned levels and be forced to further reduce or terminate our operations.

As of June 30, 2019, we had cash, cash equivalents and marketable securities of $41.1 million. Based on our available cash resources and cash flow projections, we believe we have sufficient funds to continue operations for at least the next 12 months and currently anticipate that there will be adequate resources to fund our operations into the beginning of 2021. See "-Liquidity and Capital Resources."



Critical Accounting Policies and Estimates

The Company's significant accounting policies are described in Note 1 of the Company's consolidated financial statements included elsewhere in this filing and our audited consolidated financial statements and related notes thereto for the for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC. The Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent Developments

On May 29, 2019, the Company announced significant adjustments to the deployment of personnel and resources across the organization. The effort was intended to focus the Company on currently available and near-term revenue opportunities and on clinical programs specifically designed to expand the gammaCore product labeling. To achieve this goal, the Company has reduced the size of its organization, including its field sales force and clinical operations. The Company is focusing its resources on high-value geographic and other sales territories where the current prescriber base and regional payer coverage are most concentrated including:

(i) regional payers, some of whom have recently amended their policies to permit reimbursement for electroCore's principal offering, gammaCore who have covered lives that are highly concentrated in specific targeted geographic regions;

(ii) the Veterans Administration and Department of Defense, covered under the Federal Supply Schedule contract secured by the Company in December 2018, which has a significant patient population that can benefit from gammaCore;

(iii) the United Kingdom, where a recent award from the Innovative Technology Program of the National Health Service and potential guidance from the National Institute for Health and Care Excellence offers the potential to generate revenue from the treatment of cluster headache; and

(iv) other potential revenue opportunities, such as in workers compensation and personal automobile injury protection claims through our distribution agreement with Doctor's Medical, LLC announced in August 2019.

The Company has also postponed certain clinical trials in indications that are more exploratory in nature and is concentrating its resources on opportunities to broaden the gammaCore label to include migraine prevention. The Company has also reduced its medical affairs activities consistent with its current focus.

On May 31, 2019, we entered into a separation and release agreement with Joseph P. Errico (the "Errico Agreement"), our former Chief Science & Strategy Officer. The Errico Agreement became effective on June 8, 2019. Mr. Errico continues to serve on our board of directors, and has agreed to provide, upon request, up to 10 hours per month of reasonable transition services until August 31, 2019 for no additional compensation.

On June 10, 2019, Frank Amato, our Chief Executive Officer, offered his resignation to the Board. We entered into a Separation Agreement with Mr. Amato, pursuant to which he will remain as Chief Executive Officer and a member of the Board until the earlier of such time as a new chief executive officer is hired and September 30, 2019, subject to extension by mutual agreement. (See Note 20. Restructuring Charges and Other-Related Charges)

In July and August of 2018, purported stockholders of the Company filed separate class action lawsuits against the Company and its directors in the Superior Court of New Jersey. The plaintiffs allege certain violations of the securities laws in connection with the Company's initial public offering that occurred in June 2018. For more information about the pending litigation, see below in Part II, Item 1: Legal Proceedings.



Components of Our Results of Operations

Net Sales

US Commercial Payer Sales

We expect to generate the majority of our net sales in the United States. In April 2017, we received FDA clearance for gammaCore for the acute treatment of pain associated with episodic cluster headache in adults. In July 2017, we began a product registry for episodic cluster headache in the United States and as a result generated our first U.S. revenue relative to this FDA clearance. Through this registry, we sought to establish a base of advocacy among key opinion leaders in the headache field and to generate patient demand through prescriptions submitted to the payors. We believed that choosing to enter the market with a targeted product registry that prioritized early development of advocacy and reimbursement best positioned us for the full commercial launch of gammaCore and gammaCore Sapphire, which was initiated in the third quarter of 2018. In January 2018, we received FDA clearance for gammaCore for the acute treatment of pain associated with migraine headaches in adults.

We have implemented physician education and promotional programs with three goals: to provide patients therapy at no charge; to demonstrate to physicians the benefits of gammaCore therapy; and to prompt U.S. commercial payers to provide pharmacy benefit coverage for the product as a result of their observation of patient demand for the therapy.

Our current promotional program, Partners for Coverage allows eligible commercial insurance patients uninterrupted access to gammaCore for up to 12 months while insurance coverage is being pursued.

These programs have resulted in significant increases in prescriptions for gammaCore and has prompted negotiations with commercial payers, resulting in non-preferred medical and pharmacy reimbursement in approximately 10 million lives and medical exception coverage for an additional 30 million pharmacy benefit lives in the first quarter of 2019. Most of these prescriptions, however, have been for free goods, and the initiation of reimbursement by some of these organizations has been complex and slow to ramp up, thereby resulting in modest revenue growth. In May 2019, we therefore, reduced our field sales force until greater progress can be made with commercial payers.

We still believe we can grow the number of commercial covered lives in 2019 and beyond and our managed care team remains engaged with the goal to continue to obtain addition commercial payer coverage for gammaCore. Our goal is to achieve a target of 100 million total covered lives by the end of the first quarter of 2020. However, there can be no guarantee that covered lives will translate into revenue or profitability for the Company.

We primarily sell to one specialty pharmaceutical distributor for our U.S. commercial payor sales.

Veterans Administration and Department of Defense

In January 2019, we announced that we had been awarded a five-year Federal Supply Schedule Medical Equipment and Supply contract, which makes gammaCore available to over 21 million patients whose care is administered by the Department of Veterans Affairs and the Department of Defense.

United Kingdom

On May 6, 2019, we announced that gammaCore was selected as one of eight innovative technologies by the National Health Service's Innovative Technology Program. The award provides for additional reimbursement of gammaCore by the National Health Service.

On July 9, 2019, we announced that the United Kingdom'sNational Institute for Health and Care Excellence ("NICE") recently issued draft guidance regarding the use of gammaCore for cluster headache. The draft guidance highlights the potential economic savings of gammaCore and its potential to effectively treat cluster headache for approximately 25,000 people in the United Kingdom. NICE will solicit comments from stakeholders before issuing final guidance, which is expected to be published on or about November 22, 2019.

We believe these developments offer the potential for revenue growth in the United Kingdom.

Other Potential Revenue Opportunities

We are currently pursuing other potential revenue opportunities in the pain management field. In addition, we may consider partnerships, license, or distributor agreements with external parties to expand our sales and marketing capabilities.



Cost of Goods Sold

Cost of goods sold consists primarily of direct material, direct labor and overhead costs. A significant portion of our cost of goods sold consists of overhead costs such as quality assurance, warehousing and shipment, facilities, depreciation on equipment and operations supervision and management. Due to our relatively low production volumes compared to our available assembling capacity, a large portion of our costs for our gammaCore therapy consists of overhead expense. If our production volumes increase as expected in the future, we anticipate that our per unit production costs will decrease.

Research and Development

Since our inception, we have focused significant resources on our research and development activities, including preclinical studies and clinical trials, activities related to regulatory filings, and manufacturing development efforts. Significant expenses also included in research and development are personnel costs, which includes compensation, benefits and stock-based compensation. We expense research and development costs as they are incurred.

Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of personnel related costs (including compensation, benefits, and stock-based compensation) for executive, finance, administrative and field-based personnel, costs for commercial related infrastructure, and market development. As a result of clearance from the FDA and commencement of commercial sales in the United States, we incurred a significant increase in compensation costs as additional personnel were hired to oversee the execution of the commercial plan in the United States and Europe. Significant expenses include costs associated with marketing and advertising, salesforce, professional fees for legal services, including legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products, rent, compliance, payor reimbursement development, accounting services, and consulting fees.

As mentioned above, on May 29, 2019, we announced significant adjustments to the deployment of personnel and resources across the organization, including our sales and marketing functions. For the foreseeable future, we expect general and administrative costs to be significantly less than costs prior to the cost reduction plan. The timing of possible future increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of gammaCore. In addition, we expect to continue to incur general and administrative expenses in connection with being a public company, which may further increase when we are no longer able to rely on certain "emerging growth company" exemptions we are afforded under the JOBS Act.

Change in Fair Value of Warrant Liability related to Convertible Bridge Notes

The change in fair value of the warrant liability is based on revaluation of the liability during the five months and 20 days ended June 20, 2018. There were no warrant liabilities subsequent to June 20, 2018.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred taxes are recognized based on the differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. We provide a full valuation allowance on substantially all deferred tax assets. The provision for income taxes represents the current tax payable for the period and the change during the period in deferred tax assets and liabilities. We anticipate an immaterial provision given we are reporting losses in all our taxable jurisdictions and are recording a full valuation allowance on the net deferred tax asset. We recognize the effect of an income tax position only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as income tax expense.

Net Income Attributable to Non-Controlling Interest

From our inception through June 30, 2019, we consolidated the financial results of our affiliate, electroCore (Aust) Pty Limited. Although we did not have a controlling ownership interest in electroCore (Aust) Pty Limited during that period, we determined that electroCore (Aust) Pty Limited was a variable interest entity, of which we were the primary beneficiary.



Results of Operations

Comparison of the three months ended June 30, 2019 to the three months ended June 30, 2018

The following table sets forth amounts from our consolidated statements of operations for the three months ended June 30, 2019 and 2018 with the changes in those items in dollars.

© Edgar Online, source Glimpses

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