American Shared Hospital Services (AMS) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the 2009 fourth quarter conference call for American Shared Hospital Services. At this time, all participants are in a listen-only mode. (Operator Instructions)

I would now like to turn the call over to Dr. Ernest Bates, Chairman and Chief Executive Officer; Craig Tagawa, Chief Operating and Financial Officer; and Norm Houck, Controller of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Christine, and thank you all for joining us for AMS's fourth quarter and 2009 earnings conference call and webcast. We have made a lot of progress in all areas of our business in the past few months. Since our last conference call, we announced our first international radiosurgery contract, a six-year agreement to provide Gamma Knife services at a leading hospital in Lima, Peru.

We also announced our eighth Perfexion upgrade, this time at Methodist Hospital in San Antonio, Texas to replace an existing Gamma Knife that is coming off lease at this hospital. And we entered into an important agreement with one of the nation's leading underwriters of public debt to act as placement agent in connection with the debt financing of proton beam radiation therapy centers we are developing around the country.

In other words, our Gamma Knife business is poised for renewed growth. We are broadening our Gamma Knife business outside of the United States, and we continue to expand our opportunity in proton therapy. While revenue from our core Gamma Knife services business was down for the fourth quarter of 2009 compared to the fourth quarter of 2008, we are encouraged by the sequential uptick in volume versus the third quarter of 2009.

We remain bullish about our Gamma Knife business for the long term. One reason for our optimism is that we have a number of additional devices projected to come on-line later this year and next year. The Gamma Knife in Lima is projected to begin treating patients by late this year or early next year.

Upgrades of our existing Gamma Knife to the Perfexion system at Smilow Cancer Hospital and at Yale-New Haven and Methodist Hospital in San Antonio are scheduled to be completed this year. This obviously bodes well for the future, but there is more. We are developing additional contracts to supply Gamma Knife and related services both domestically and internationally.

The international market is a significant and untapped growth area for AMS. We are currently in negotiations to supply Gamma Knife services in the United Kingdom and Brazil and we have also initiated talks in Mexico and India. This is in addition to discussions we are having with potential clients here in the United States.

Our portfolio of radiosurgical and radiation therapy assets is already the largest in the industry and we expect it to grow steadily over time. This should support improved revenue and earnings performance in this area of our business in the years ahead.

This resurgence of our Gamma Knife business is mainly the result of the introduction of the Perfexion Gamma Knife unit.

In addition to the two new units we are installing this year we have plans to purchase five additional Perfexion systems over the next two years. Treatment expansion should be aided by recently published articles from the University of Texas M.D. Anderson Cancer Center and the Karolinska University Hospital in Sweden that have stated the advantage of the Gamma Knife for treatment of certain metastatic brain tumor patients approximately 180,000 per year over linear accelerator based whole brain radiation treatment.

Even as we work to place additional Gamma Knife, Perfexion and related systems we remain focused on building our position in proton beam radiation therapy, the next great growth opportunity in radiation oncology. In February, we engaged Siebert Brandford Shank & Co. LLC to act as placement agent in connection with the debt financing of single and two-treatment room proton beam radiation therapy centers AMS is developing in San Francisco, New York City, Boston, Orlando, and Long Beach, California.

With offices in 19 cities around the country, Siebert Brandford Shank is a substantial investment bank that specializes in underwriting bonds for large infrastructure projects. In the past 10 years, the firm has raised over $580 billion in more than 2,000 transactions to fund various public capital programs. In 2009 alone, the firm served as managing underwriter on approximately $89.4 billion of long-term financing.

Recently, the firm successfully underwrote a $288.5 million debt transaction for the Bear County University Hospital project which included $246 million of Build America bonds that will allow this teaching hospital to receive 35% direct federal subsidy on all interest payments over the life of the 30-year bond. We have additional PBRT projects in various stages of development, so establishing an agreement with a proven source of financing is a giant step for bringing our ambitious PBRT development program to fruition.

Particularly important is the credibility this agreement brings to our discussions with other institutions seeking to develop a PBRT facility as it directly addresses the key issue of financing. Finally, a quick update on the FDA. Varian Medical Systems who we are working with to provide the equipment for the multi-treatment room projects we are developing has already received CE Mark approval in Europe for its PBRT system.

The first installation of Varian's System is treating patients at a PBRT center in Germany. We believe that Varian's 510(k) application will be submitted to the FDA shortly. Still River Systems, the manufacturer of a compact proton beam system that is a cost effective, disruptive new technology currently has an order backlog of over $200 million.

Joe Jachinowski was recently appointed Chief Executive Officer of Still River Systems. Mr. Jachinowski is one of the most successful entrepreneurs in America and was previously the co-founder and CEO of Impact Medical Systems. Still River now has three sites under construction at Barnes-Jewish Hospital in St. Louis, Missouri, Robert Wood Johnson University Hospital in New Brunswick, New Jersey and Oklahoma University Medical Center in Oklahoma City, Oklahoma.

American Shared is currently anticipating FDA approval in December of 2011. As we have said repeatedly on prior calls, based on what we are told by many groups with which we are negotiating contracts for both single and multi-treatment room facilities we are confident that the pace of activity in our PBRT business will pick up substantially once FDA clearance has been received.

Our goal is for AMS to be the one-stop shop that hospitals and radiation oncology groups turn to first to meet their PBRT requirements, whether for single treatment room or multi-treatment room facilities, depending on their patient volume. Now I'm going to turn the call over to Norm to review our financial results. Norm?

Thanks, Craig. Please note that various remarks that we may make on this conference call about future expectations, plans and prospects for the Company constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2008, the quarterly report on Form 10-Q for the quarters ended March 31, 2009, June 30, 2009, and September 30, 2009, and the definitive proxy statement for the annual meeting of shareholders held on May 28, 2009.

The Company assumes no obligation to update the information contained in this conference call. For the three months ended December 31, 2009, revenue decreased to $4,092,000 compared to $4,740,000 for the fourth quarter of 2008, however, revenue increased sequentially from $3,926,000 reported for the third quarter of 2009.

Pre-tax income was $159,000 and the net loss attributable to American Shared Hospital Services for the fourth quarter of 2009 was $137,000 or $0.03 per share. This compares to net income attributable to AMS of $83,000 or $0.02 per diluted share for the fourth quarter of 2008 and to net income attributable to AMS of $17,000 or $0.00 per share for the third quarter of 2009.

Income tax expense was $296,000 primarily due to disproportionately high income tax expense related to our profitable operating subsidiary. The total number of Gamma Knife procedures performed during this year's fourth quarter decreased 1% versus prior year but increased 5% sequentially.

The decrease in revenue also reflected a shift in volume toward centers with relatively lower payment rates per procedure compared to the fourth quarter of 2008. As we have reported on the past couple of conference calls, volume has been especially low at one center that in the first quarter added a total body radiosurgery device in addition to the Gamma Knife that had been operating there for a number of years. Also due to physician turnover, no procedures were performed during the quarter at one of our retail sites.

Selling and administrative expenses increased in the quarter versus prior year, primarily to support the Company's international growth initiatives. This effort culminated in the signing in February 2010 of the Company's first international radiosurgery contract, the six-year agreement with the Peruvian Air Force that Craig mentioned to supply a Gamma Knife services at Hospital Central FAP in Lima, Peru.

For the 12 months ended December 31, 2009, revenue decreased to $16,768,000 compared to $19,099,000 for 2008. Pre-tax income was $59,000 and a net loss attributable to AMS for 2009 was $188,000 or $0.04 per share. This compares to net income attributable to AMS for 2008 of $477,000 or $0.10 per diluted share.

As previously disclosed in 2009, the Company engaged in discussions concerning the possible sale of its 81% interest in GKF, the operating subsidiary for the Company's Gamma Knife business. These discussions were terminated on May 28, 2009. Under applicable accounting rules the Company's required to expense the legal accounting, investment banking and other costs incurred for these activities which total $342,000 and are classified separately as transaction costs.

In addition to the transaction costs, our 2009 earnings were also negatively impacted by a $344,000 reduction in other income as a result of our decision to remain in a cash position to protect against principal erosion. Cash flow as measured by earnings before interest, taxes, depreciation and amortization, or EBITDA, was $2,175,000 for the fourth quarter and $8,535,000 for 2009 compared to EBITDA of $2,513,000 for the fourth quarter of 2008 and $9,811,000 for the year as a whole.

At December 31, 2009, AMS reported cash, cash equivalents and certificates of deposit of $9,833,000. This compares to cash and cash equivalents of $10,286,000 at December 31, 2008. Shareholders equity at December 31, 2009, was $22,755,000 or $4.95 per outstanding share. This compares to shareholders equity at December 31, 2008, of $22,938,000 or $4.87 per outstanding share.

The Company repurchased 119,000 of its common shares during 2009 for an average purchase price of $2.28 per share. The number of common shares outstanding at December 31, 2009, was 4,595,070 shares compared to 4,712,183,000 shares at December 31, 2008.

The Company still has about 81,000 shares left on the stock repurchase authorization originally approved by our Board of Directors in 2001 and reaffirmed in 2008.

As I mentioned last quarter, we amended our bank line of credit during the third quarter increasing availability to $9 million from $8 million and extending the term to two years instead of one year, so borrowing against the line are now reported as long-term liabilities instead of short-term. This is the primary reason that current liabilities are down so sharply compared to last December. Craig?

Thank you, Norm. Now, we would like to open the call to questions. Christine? We are ready for the first question.

Thank you. (Operator Instructions) The first question comes from Lenny Dunn from Freedom Investors.

Good afternoon. My primary concern here is the Still River has been postponed until December now and I really thought we'd have that this summer. Can you give a little light on that as to why it's taking as long as December?

Lenny, this is Dr. Bates. My interpretation, and I'm being conservative, is I think it won't happen until probably December of next year. However, I'm reasonably certain that they're going to start their first clinical treatments in the first quarter of next year, so it could be earlier.

It usually depends on how the FDA reacts and it could be 90 days after they do their first clinical treatment or it could be later. I'm just being a little conservative in my interpretation, but I'm confident that it will happen at that time or earlier.

(Inaudible) So when will the St. Louis facility which would be their first one to be completed be ready?

It will be ready to treat patients in the first quarter of next year, but you know they've already started construction on that facility.

I'm aware of that, but do you think that you do think the FDA will take until December to approve as opposed to getting approval a little sooner?

It could be sooner but I'm being conservative.

Okay, and the other question is related to the [Still River because obviously that's our future.] I thought we had the second unit because you had placed the early deposits, but if they're building three already, none of them seem to be one of ours. Can you explain that a little, please?

Yes, we have the forth and the sixth spot in the order.

Fourth and sixth?

Fourth and sixth.

My error in memory as part of the aging process, that happens.

[We always had the fourth. We moved back to the] sixth on one because one of our customers was not quite ready with the site selection so we chose to move back.

Okay. And I'm very happy with this South America initiative because clearly that gives us an opportunity to get the Gamma Knife, it gives them another life, literally.

You're absolutely right, Lenny.

[We're very excited about the international market. Really, it is a growing market.] I think you'll see that we will have significant growth internationally, particularly in South America.

This gives you an opportunity to take things that you would either have had to upgrade to Perfexion and that you can just take then as is to South America and it's a win-win.

We think this is a win situation for us.

Yes, I can see that, [and with] the new Perfexions that you've sold and with the South American placement, can we look forward to at least profitability while we're waiting with the PBRT systems?

We think that the Perfexion will be a great growth opportunities, especially with some of these new articles that have come out recently with metastatic brain tumors. As you can guess, metastatic brain tumors are the largest [indications that can be treated with the] Gamma Knife, and the Perfexion has several advantages over some of the other systems. One, it's fully automated so it's extremely quick.

It has excellent radiation shielding probably the best in market and it's extremely accurate, so we're looking to expanding the treatment volumes at all our Perfexion customers in the coming years, this year and the ones to follow.

(Inaudible) I'll let other people ask questions then.

Thank you, Lenny.

The next question comes from [Steve Mischin] from Stat Investments. Please go ahead.

Hello, gentlemen. Thanks for taking my questions. Regarding the plans to purchase five additional Perfexion systems, are these expectations for new customers or are they plans for upgrades of continuing customers?

[We think they may be a combination] of both. We have clearly five customers that we could upgrade but we're also looking at new customers that are very interested the Perfexion and looking at the model that we have of risk sharing. They see that as very appealing to them in these times of capital constraints that most hospitals are undergoing right now, so we see with the Perfexion that there are new opportunities as well as just upgrade opportunities.

Okay. [And if you look over the] next couple of years in your SEC filings, there are a number of contracts that are near expiration. What typically happens? Are they renewing? Upgrades or what's the trend there?

The trend is we have upgraded just about all of our customers in the past and when you look at the expiration dates in the 10-K's that you're referring to, we really don't update where [we're at in terms of the contract length] mainly so our competitors don't know when the contracts are exactly up. We look at that as something we want to keep proprietary. So many of those that you see expiring have already been extended for a number of years.

Okay. And moving to Still River, we're now looking at potential delays of two years or more. Do you have any material concerns over the viability of their product?

[No, absolutely not.] We feel very confident that their problems of starting up manufacturing of a new technology is consistent with everybody else that's done this. If you would talk to Varian or IBA, starting up they all had similar problems.

But we had a consultant of ours just recently visit them and he's really confident, he's a well renowned physicist, that the [schedule that we talked about earlier is deliverable.]

And are these, as recently as a few months ago, as the previous caller mentioned, are you expecting some approval in 2010, with these further delays, is it affecting potential new sales or not?

Yes, I think we're still pressing forward [with looking at potential new customers.] There's some that are always going to be hesitant because they require FDA approval. But I think what we're looking at are the early adopters and what we're looking to get are some of the best hospitals, whether they be for single or two-room systems, and we let the customer pick what's appropriate for them as long as they have the volume to support it.

That's it for me but thank you very much for your answers.

Thank you. (Operator Instructions) The next question comes from Tony Kamin from Eastwood Partners. Please go ahead.

Hi, gentlemen. Following up on the last caller's question, and I know you do like to be somewhat vague on this, but when you note the eight Perfexion systems now and five more that you're ordering, one of the concerns around the Company I think a year and a half [or two years ago was] sort of the average length of contract in your portfolio.

I assume since you're signing new, and putting new Perfexion in that the average length in the portfolio has increased quite a bit which is really kind of an important point. Is that an accurate perception?

Absolutely. Some of the, I would say the couple that we've announced fairly recently, the Kettering, the [Smillow Cancer Center at Yale-New Haven] and the one at Methodist Hospital in San Antonio, those are all customers that have been with us 10 years or longer, and they will be with us for at least seven to 10 more years on top of that.

So we're looking at customers that have faith in us, that they've seen that we've done, what we said we were going to do, and we've helped them build the business. And I think that [says a lot about how we do business] and I think that bodes well for how we will be perceived in the proton beam radiation therapy front.

And given the higher level of interest in the Perfexion, is your relation with Electa kind of static or I assume they're pleased by the interest you're seeing?

Well, they were delighted when we told them we would accept five more in the next two years [so they are very pleased with us.]

I notice today that a brokerage firm downgraded Accuray because they said there was a new Varian product that was going to compete with their CyberKnife. Given your relationship with Varian, I just wondered if you could comment on that in general?

Well, that took us by surprise because we just talked with Varian last Friday and they didn't mention any such thing so we have no knowledge of that.

Okay. Also on Varian, [do you anticipate] or can you tell us or give us any more color in terms of the San Francisco and New York partnerships or when you'd be able to give us a little more news on them because I think that my sense is the potential for these is so large for the Company and it's really not appreciated by the market yet, so where are you at on those projects?

Well, I think these are complex projects. We're looking at doing consortium-type [of transactions where you're having many] very large hospitals going in a cooperative format. And so I think that's one of the issues that you always have to overcome. I think we're getting closer in our negotiations.

We look forward to hopefully being able to announce something in the not too distant future, but they are more difficult transactions than the single-room Still River system where you're dealing with one hospital to provide a single-room treatment solution.

[And as you have] probably alluded to, Tony, that both of those sites which are going to be very successful in order to complete our financing will need FDA approval, and that's why we're expecting to see FDA approval in Varian within the foreseeable nearby future. And that needs to be accomplished before we can complete the financing.

Okay, no, I get the steps, but in general, would you say [that those projects are proceeding] along given that you still have to wait, obviously, for FDA and financing, the interim steps that you're having to take here to solidify these, do you feel those are moving forward?

I think they are moving forward. If we had FDA approval today we would probably sign them all up tomorrow.

Terrific, and two final questions, both really for Dr. Bates, I guess. On one of the last calls you talked about some studies that were coming out about the [proton beams effectiveness I believe out of Japan,] so part A) was can you comment on any new studies that are coming out on proton, and, B) just with the healthcare bill that was just signed, do you see any impacts on that that might impact AMS?

I don't know of any new studies since we talked last, but when we go to the meetings it's very clear that protons are getting some spectacular results with prostate and with [non-small cell lung cancer, with head and neck cancers.] Everybody is encouraged with what the preliminary results are showing for tumor control. It's very exciting.

Now, I personally think that the new healthcare bill is just a bonanza for us because we're looking at insuring 32 million people that didn't have insurance before. And that for us is just a larger market and I think most of those are going to go into Medicare and we're not anticipating any significant cuts in Medicare rates for protons.

Great. Thank you very much.

Mr. Tagawa, at this time, there are no further questions. Please go ahead with any concluding comments.

I'd just like to thank everybody for joining us this afternoon and we look forward to speaking with you on our 2010 first quarter conference call in a couple of months, and I'd like to turn it over to [Dr. Bates to see if he has any closing remarks.]

Well, the only remarks I want to say is that we're encouraged by the resurgence of the Gamma Knife business. It really looks very encouraging for the next few years. And also I'm very excited still about what's going on with protons and with our two, hopefully, future partners, Varian and Still River.

Having had conversations with both of the heads of these organizations [recently, they both believe] they are on track and are very excited on what they see the business potential. I might say that the Still River new CEO, Joe Jachinowski, is sort of a legend in the business. This guy never fails at anything. So I'm very excited he stepped in and he will deliver what he has promised and those numbers I'm quoting are pretty consistent with what he believes is going to happen.

(Inaudible) This call will be available on digital replay following today's conference. To access the system, please dial 888-843-8996 and enter the passcode of 26627810 followed by the pound sign to access the replay.

The Webcast of this call will be available [at www.ASHS.com and www.earnings.com.] This concludes today's conference. Thank you for your participating. You may now disconnect.