American Shared Hospital Services (AMS) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to the 2010 first quarter conference call for American Shared Hospital Services. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session (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, Hilda, and thank you all for joining us for AMS's first quarter earnings conference call and webcast. 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 in 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 & Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31, 2009, and the definitive proxy statement for the annual meeting of shareholders to be held on June 2, 2010. The Company assumes no obligation to update the information obtained in this conference call.

I am pleased to report solid progress in both our Gamma Knife and proton therapy businesses during the first quarter. The outlook for our Gamma Knife business has improved in just the past month and a half since our last conference call. We have begun to benefit from the new Leksell Gamma Knife Perfexion unit that went into service at Smilow Cancer Hospital at Yale-New Haven in April. Also based on recent discussion with the center's administrators, we expect volume at one of our sites, that had been sharply reduced in recent quarters due to physician turnover, to pick up again beginning this month.

Longer term, another Perfexion device scheduled to go into service this year, and we anticipate placing five additional Perfexion systems in the next two year. Gamma Knife treatments are expected to begin late this year or early next year at our first international site in Lima, Peru, and we are optimistic about ongoing contract negotiations to place additional Gamma Knife systems and related equipment in South America, Europe, and the United States. We continue to believe that international expansion represents a significant new growth opportunity for AMS.

Expansion of our portfolio of Gamma Knife, Perfexion, and related systems is only one aspect of AMS's growth story. We also continue to build on our leadership position in proton beam radiation therapy, the next great growth in radiation oncology. Yesterday we announced our latest PBRT project, a long-term with Kettering Medical Center to develop a proton therapy center in Dayton, Ohio. Dr. Bates and I were pleased to be part of a press conference held in Dayton yesterday to announce this project.

Kettering is renown for bringing the latest technology to Southwest Ohio, including a Perfexion system supplied AMS, so Kettering is the ideal partner to develop this PBRT facility with us. According to Kettering's press release, this is a project is the culmination of three years of study underlying their 2016 master plan. Extensive analysis of potential case load suggests that this proton therapy center will support a region far larger than the Dayton area, so Kettering is working to establish relationships with other hospitals that can benefit from proton therapy. The

Kettering project is in addition to PBRT treatment centers that AMS is developing in San Francisco, New York City, Boston, Orlando and Long Beach, California. We are committed to bringing each of these projects to fruition, and we have additional projects under development. The agreement we announced on our last call with Siebert Brandford Shank & Company, LLC, one of the nation's leading underwriters of public debt, to act as placement agent in connection with the debt financing of these and other projects under development, was an important step forward to AMS.

A critical step before construction can begin on any of these projects of course is FDA clearance. We are working are Varian Medical Systems to provide the equipment for some of our multi-treatment room projects. Varian 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 the Varian's 510(k) application will be submitted to the FDA soon.

As we reported on our last call, Still River Systems, the manufacturer of a compact cost-effective proton beam system, has an order backlog in excess of 200 million and 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 by December 2011. We remain 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. For the three months ended March 31, 2010, revenue decreased 2% to $4.088 million, compared to $4.167 million for the first quarter of 2009, and was essentially flat when compared to revenue of $4.092 million for the fourth quarter of 2009.

The total number of Gamma Knife procedures performed during this year's first quarter increased 2% versus prior year. Reflecting effective cost controls, gross margin for the first quarter of 2010 improved to $1.699 million, or 42% of revenue, compared to $1.597 million, or 38% of revenue, for the first quarter of 2009. As Craig mentioned, volume has been especially low at one of our centers these past few centers due to physician staffing issues. We have assured by the head of the center that Gamma Knife procedures will resume there this month.

Selling and administrative expense for this year's first quarter increased to $1.061 million, compared to $993,000 for the first quarter of 2009, but were essentially flat sequentially. This increase was primarily to support the Company's domestic and international growth initiatives.

Operating income for this year's first quarter increased to $157,000, compared to an operating loss for the first quarter of 2009 of $76,000. Pre-tax income was $188,000, and net income for the first quarter of 2010 was $8,000, or $0.00 per share. This compares to pre-tax loss of $42,000 and a net loss of $94,000, or minus $0.02 per share for the first quarter of 2009.

Cash flow as measured by earnings before interest, tax, operation, amortization -- EBITDA -- increased to $1.984 million for the first quarter of 2010, compared to $1.909 million for the first quarter of 2009. At March 31, 2010, AMS reported cash, cash equivalents and certificates of deposit of $9.552 million. This compares to cash and cash equivalents of $9.833 million at December 31, 2009.

Shareholders' equity at March 31, 2010, was $22.865 million, or $4.98 per outstanding share. This compares to shareholders' equity at December 31, 2009, of $22.755 million, or $4.95 per outstanding share. Craig?

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

Thank you. We will now begin the question-and-answer session. (Operator instructions). Our first question comes from Lenny Dunn from Freedom Investors.

Good morning, very promising outlook. I can recall we were making $0.12 to $0.15 a share when everything was running properly, and it sounds like we're headed back in that direction. But also I would like to ask you to comment on the Still River announcement today,which I thought was very positive and indicates that we may finally see this come to fruition there in St. Louis, in which case we can start getting some of these things up and running.

Yes, Lenny, I think it is very promising the progress they are making and they continue to make, and we're all very excited about that, and we look forward to that first system being placed at Barnes in the not-too-distant future.

I was preferring to the fact that they put a press release out this morning that they got that production milestone on their proton therapy accelerator.

Yes, the beam extraction that they just announced this morning. That's what I was referring to as well as very promising.

I just wanted to be sure.

Yes.

Lenny, this is Dr. Bates. That is very promising. This is their major milestone, and they have accomplished that, and what we are seeing that the direction that this proton business is go is not in the multiple four- and five-room machines, but the one- and two-room machines. We are very excited about that. And as we go across the country offering hospitals an opportunity to get into protons, that seems to be what they want, a one- or a two-room. And I think our partnership, if I can use that word, with Still River and with a Varian is going to be very successful, using Still River for our one-room project, and Varian for the two- and multiple-room.

We participated in a press conference yesterday in Ohio with the Kettering Health Center, and it was very encouraging. In fact, it is the first time I have been at a press conference, when it ended, that we got an applause. The people in Ohio are just so excited about having this new technology come to that state. It's going to bring things there that were not there before, like the ability to treat children with protons and not cause secondary malignancies. Just very exciting, and finally -- and it's taken some time for all this to happen -- finally we're beginning to see the light at the end of the tunnel for the development of this new technology.

Okay. Well, thank you, I appreciate the ride on it. And again, I'm looking forward to actually getting serious earnings going forward, because we'll have enough of these Gamma Knifes producing revenue.

Let me just add too, I'm really excited about the resurgence of the Gamma Knife business. It is just coming on in leaps and bounds. And maybe Craig or Ernie Bates, our head of Sales and Development, can talk about that, because it really is looking very exciting. And maybe Craig or Ernie can say something about what is going on internationally. But the other thing I want to point out is that two of our accounts that upgraded to the Perfexion have significantly increased their volume. You want to say a word about that Craig or Ernie?

Yes, this is Craig. In terms of -- we noticed two of our accounts over the last year, after they put in the Perfexion, increased on average of about 50%, so that's very promising. And we're big proponents of the Perfexion, and we think that's the right way to go for many of our accounts. And I'll let Ernie talk about some of our other projects that we're working on.

Yes, Lenny, this is Ernie Bates, Jr. As Dr. Bates and Craig have pointed out, we are moving to expand our business internationally. We've announced that we signed a contract in Peru, and we're currently working on developing the construction plans for the Gamma Knife facility in Lima. We have also been in long discussions to get involved with acquiring a Gamma Knife, which is currently in San Paolo, Brazil. And we're also looking to develop a radiation therapy facility there as well. We talked about London. We have actually signed a contract to place a Gamma Knife at the Queen Square Hospital of -- it's the National Hospital for Neurology and Neurosurgery in London. I'm actually going to be flying there next week to continue those discussions. So we're very excited about that and see other opportunities in that country as well.

Okay. Well, thank you.

Our next question comes from [Tony Kamin] from Eastwood Partners.

Hi, gentlemen. Congratulations on Kettering. I think that's a really tremendous accomplishment. And there was -- I have been going through the press accounts, of which there's quite a few. And it seems, just to try to draw a distinction here, that there's a real commitment from your partner here that is in a way that maybe we haven't seen yet on your other proton projects. Some of the press accounts talk about the land that this could be on that Kettering owns. They talk about an $80 million -- I don't know if I would use the word commitment, but at least $80 million figure that everyone seems comfortable with. So this seems to me it's a stage where this is going to happen. This is your first project that you can really say this is going to happen. Am I reading that correctly or --

You are absolutely right. And Craig, you might say a word about our other partnerships we are developing with these companies to do the construction and land acquisition.

Yes, we have been talking to developer contractors to really assist in some of these -- the building component of the proton beam projects. As you can imagine, they are very quite sizable, so we have some contractors and developers that we're in advanced talks with to provide that component of these proton projects with, to help really leapfrog them going forward.

So that would be start of the service you deliver to your partners, in some respects acting like a general partner, bringing the different pieces together. And that's a big part of the puzzle, I guess?

Yes, exactly, as you know, these are fairly extensive from a capital expenditure standpoint. So I think the more options we give our partners, the better.

The other thing we're seeing, and you might comment on this, Craig, is that reimbursement is being stable or increasing for protons.

Yes, we saw a very dramatic jump this year from protons -- for protons, and it's up to for a complex treatment roughly $1,350 a fraction from Medicare. So I think that portends well for us.

And I just want to make a comment on the recent meeting, the Radium Society meeting in Cancun, Mexico, where they are showing preliminary results on protons, particularly from MD Anderson, with some tumors that have not been responsive to radiation in the past. Looking very promising. Very promising.

That's great. You actually anticipated a question I had on recent research. The core business, it's also really heartening to see the core business back where it's in growth mode. Can you kind of -- but I'm a little curious, what do you think the driver of that was? It is that the marketplace is demanding more of the services? Or is that it you guys have been more aggressive in seeking these international programs, and it's more your efforts? Or it is both, or --

I think it's the time and effort that Ernie has put in to really developing the contacts and the international market, and pursuing those. And I think there are many opportunities there that he is still pursuing. So I think that will continue to be a big growth driver for us going forward. Not just for Gamma Knife but for other radiation therapy projects.

I think the other thing we are seeing is there has been an opening up of financing for these international projects, and Ernie may want to comment on that. But we are finding there is less difficulty getting these things to financed abroad, and that has not been the case in the past. The other things we're seeing is there's a loosening up of credit, and we're having much less difficulty even getting these Gamma Knifes financed here domestically.

Yes, are there any other technologies in the pipeline that you might add to your core business? I'm thinking of some of the new things that Varian introduced, or -- I guess the question I'm asking, are hospitals coming to you seeking solutions on other things than maybe you have done, exactly, in the past?

We're continuing to pursue those as some of our hospital partners request that. We're also looking with opportunities with some of the vendors to pursue where people want alternative financing, such that we present for them.

Yes, some of the new technology is really very exciting, as you probably know. Varian just recently announced their True Beam. We don't totally understand all that it does, but it sounds like it may be the magic bullet for all radiation therapy. And hopefully that will be adaptable to the proton business going forward. We're just seeing just a resurgence of innovation in this area.

Great. And do you think that sometime by the end of the year we'll hear more concrete details in terms of either San Francisco or New York of your proton project?

Well, what we're -- what is happening in New York, and remember, we're not clear on this, is that it seems like the health commission has decided in New York that they are going to do two demonstration projects, and the criteria for those projects are not clear. But we're certainly going to hopefully apply to be the participants in one of those projects. San Francisco is moving right along and we're hoping that we might announce in the next month or so who our partners are. As you might appreciate, that when you ask a group of major medical centers of shared technology, there are a lot of issues, and to my mind are trivial issues, that need to be worked out. But we think we're there getting those worked out. Nevertheless this we believe, once it's up and running, will be a very successful machine, and clearly will rival any numbers that are being done elsewhere.

Great. One final question, sort of comment. And with the core business, hopefully -- I mean, clearly, improving and hopefully getting back to its historical levels, and with the announcement you made yesterday on Kettering and actually having a real project going forward on proton beam, it seems as if the market capitalization of the Company really doesn't reflect anything other than the core business. Is -- do you think it's just that -- it's an awareness problem still, or that this stuff is pretty new and people really haven't caught on to what you are doing yet?

I think it's that, but I also think most people who are aware are waiting for FDA approval for both the Still River machine and the Varian machine. And we think Varian will be closer to FDA approval than Still River. Hopefully they'll have approval this year. We're not clear when on Still River will get their FDA approval, and I think we -- on the last conference call we said around 2011. But now that may be happening sooner in view of the break through that they just announced today. And I believe once both of these machines are FDA approved, whatever reluctance people had in the technology will be pretty much done away with, and I think you're just going to see an explosion of this technology.

I think one of the exciting things of those who look at the literature, and you look at what gets the best results for cancer care, it's usually a combination of radiation therapy, chemo therapy, and gene therapy, and in the past has been conventional radiotherapy. And we know with proton there's going to be a marked improvement because of the physics. You are just going to get better results. You are going to get less radiation of normal tissue,less secondary malignancies. And you got to remember that when this machine targets a cancer, all of the dose goes into the tumor. There's no exit dose. So this is very exciting.

Well, terrific, and congratulations again on Kettering. I think that's a tremendous accomplishment.

Yes, it is. Kettering, by the way, is just a remarkable institution. And this clearly will be our first machine that we install. And they are good partners. This is a real solid, solid Midwest hospital. And we're very excited. We just toured the grounds yesterday. They're very excited. And this will be, hopefully, the first machine in Ohio. Is that correct, Craig?

Yes.

Great. Thank you very much.

Our next question comes from [Stephen Mischin] from [Stat Investments].

Yes, great quarter. Nice to hear the improving news. If it's possible, can you quantify the difference between what a Gamma Knife system does to the -- both the top and bottom line for the Company versus what a PBRT system will do for the top and bottom line for the Company?

Yes, I think if you look at the magnitude of what they can do, the Gamma Knife -- if you look at historically, they do about on average a little over $1 million in revenue per unit. And I think if you look at what a proton beam can do, is it's clearly, due to the CapEx, significantly more. And it's going to depend on, really, how many rooms you do as to what it can produce. But it's probably can produce anywhere from $6 million to $10 million per room, depending on the types of contracts we sign.

I might add to that that there are at least three units of -- all together eight protons working right now in this country, and we know of at least three that are doing over a hundred patients a day at a reimbursement of roughly $1,200 to $1,300 a treatment. And these patients are getting on the average 30 treatments. And I expect that our numbers, particularly for the two-room machines will get very close to that.

What -- it seems like -- you are talking about a 5- to 10-fold increase in revenue per center. Does that kind of flow directly to AMS in terms of a 5 to 10 increase for our Company?

Yes, much of it would. And again, it is going to be depend on the exact type of contracts that we do enter into with our partners -- hospital partners.

Okay. Thank you.

You are welcome.

Mr. Tagawa, there are no further questions. Would you like to make your closing remarks?

Yes. Just would like to thank everyone for joining us, and I'll turn it over, really, to Dr. Bates to see if he has any closing works.

Well, I think I've said what I wanted to say. That, again, we're very excited about what is happening with the resurgence of the Gamma Knife with the new Perfexion, which really is a remarkable machine. Our surgeons and radiation oncologists are really excited about it. It has really come into its own. But I'm very excited about what is happening with the protons, and the kinds of data that is coming out of the research centers with the protons. I think this is clearly going to be a major, major breakthroughin the treatment of cancer.

Hilda, I think that's it from our end.

Thank you very much. This call will be available in digital replay immediately following today's conference. To access the system, dial 888-471-6718 and enter the pass code 27014843 followed by the pound sign to access the replay. The webcast of this call will be available at www.ashs.com and at www.earnings.com. This concludes today's conference. Thank you for participating. You may now disconnect.