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Here's Where We See An Opportunity In The Neovasc Inc (US) (NASDAQ:NVCN) Situation

Here's Where We See An Opportunity In The Neovasc Inc (US) (NASDAQ:NVCN) Situation
Written by
Chris Sandburg
Published on
November 2, 2016
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Neovasc Inc (US) (NASDAQ:NVCN) just updated markets as to the standing of its litigation with CardiAQ, and the company has taken a massive hit pre-market on the update. Before the news hit wires, however, Neovasc was to up to the tune of nearly 30%. These gains have been wiped out and more, but we see all this action as noise. It is far from cut and dry value loss, and there is potentially an opportunity to pick up an exposure to a near term recovery, as sentiment reevaluates the situation.Here's what we are thinking.First, and by way of a brief introduction to the situation, here's a quick look at what’s going on.Neovasc was hired by CardiAQ back in 2009/2010 to help construct prototypes of the latter’s transcatheter mitral valve implant (TMVI) device.After this construction had taken place, CardiAQ took Neovasc to court claiming that the company had stolen its trade secrets, and used them to design a similar product of its own, Neovasc’s now lead development asset, the Tiara TMVI device.After a two-week trial, a jury found in favor of CardiAQ, and awarded the company $70 million in damages. Following this, and as we have learnt by way of the recent release, the judge in the case awarded an enhancement of a further $21 million, bringing Neovasc’s total payout to $91 million.Now, the way we see it, there are a few key things to take away from this situation that play into what happens next.The first, that Neovasc cannot afford to pay $91 million outright, and if it is to continue as a going concern, the companies are going to have to come to some sort of agreement whereby it spreads the payments over an extended period. We believe, and this is important, that a one-off payment has already been considered unrealistic by everybody involved, and that markets have priced in an extended payment program to Neovasc’s market capitalization already. We think this happened back in April/May, when the announcement first hit press, and when the company collapsed from more than $4 a share to less than $0.05.The extra $21 million is neither here nor there. For the sake of argument, there's no difference between $70 million and $91 million in terms of how it would impact Neovasc near term.Which brings us to our second key point.The judge in the case has allowed Neovasc to continue its development of the device, and there will be no injunctions going forward. This is probably the biggest thing to come out of the ruling. It means that Neovasc maintains a large portion of its value (based on the assumption that the majority of its value was rooted in the potential of the device in question) and that the only real change is the addition of a $91 million liability to its balance sheet.Of course, a $91 million liability isn't desirable, but it’s better than a liability and no asset to carry forward. Long term, Neovasc’s Tiara is worth far more than $91 million (assuming approval) and so we believe the company would have been more than happy to take a big financial hit at the beginning of the trial, in return for the ability to continue developing Tiara towards commercialization.So this brings us to the current situation. Neovasc is likely going to have to end up paying the damages, but over an extended period, and one that almost certainly won't be fatal for the company. Even better, the process of appeals starts now, and this could take years. If the company can pick up a stay on the lion’s share of the payment, or even all of it, it would have an opportunity to carry Tiara through to commercialization, pick up a partnership or two on the way, and recover substantially before having to pay up.It is a risky proposal, but given the information available, the above described situation seems like the most likely outcome. If it plays out this way, then, there is potential to get in ahead of the market returning to basing its valuation of Neovasc on Tiara’s potential, minus a $91 million long term debt obligation, rather than pegging it as a bankruptcy stock.We will be updating our subscribers as soon as we know more. For the latest updates on NVCN, sign up below!Disclosure: We have no position in NVCN and have not been compensated for this article.

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