Edap Tms SA (EDAP) 2021 Q3 法說會逐字稿

Greetings. Welcome to EDAP TMS third-quarter 2021 earnings conference call.

(Operator Instructions) Please note, this conference is being recorded. At this time, I'll turn the conference over to John Fraunces with LifeSci Advisors. John, you may now begin.

Thank you. Good morning and thank you for joining us for the EDAP TMS's third-quarter 2021 financial and operating results conference call. On today's call, we will hear from Marc Oczachowski, Chief Executive Officer and Chairman of the Board; Ryan Rhodes, Chief Executive Officer of EDAP US; and Francois Dietsch, Chief Financial Officer.

Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plans. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to EDAP's Chairman and Chief Executive Officer, Marc Oczachowski. Marc?

Thank you, John, and good morning, everyone. I will start by providing a brief operational update before turning the call over to Ryan Rhodes, our new EDAP US Chief Executive Officer, for a deeper dive into the US business and strategy. And then Francois Dietsch, our CFO, will review our financial performance.

I will start by recapping a few of the highlights. Year-to-date revenue for the nine months ended September 30 was EUR30.1 million or $35.9 million, representing growth of 14.4% over the first ninemonths of 2020. We were able to achieve these year-to-date results, notwithstanding challenging headwinds created by the COVID pandemic. Total company revenue for the third quarter was EUR9.4 million or $11.1 million, essentially flat with the year ago period.

It is worth noting that both revenue and gross margins were impacted by machine placements that for logistical reasons were delayed into the first few days of the first -- of the fourth quarter. This has happened in both our HIFU and ESWL business and in different regions of the world, including US and rest of the world.

Had these deals closed during Q3, as anticipated, we would have shown year-over-year revenue growth in the third quarter. These delays resulted from COVID-related delays and restrictions and were largely outside of the company's control. The good news is that we started the very first days of Q4 by recognizing equipment sales in both our businesses, and we also added a strong pipeline of projects on which our sales teams will focus as the fourth quarter is the most crucial quarter of the fiscal year for EDAP.

Let's talk about recent sales. Still, we are very pleased to announce a few notable Focal One placements since our last quarterly update, one of which occurred subsequent to the end of the third quarter. During the third quarter, we sold the Focal One device to the University of Washington, which is consistently ranked as the best healthcare institution in Washington state.

More recently, in early Q4, we sold a device to the University of California at San Diego. This represents our third UC placement following earlier sales at UC SF and UC Irvine. Later in the call, Ryan will elaborate on these placements as well as the broader progress of our pipeline.

Regarding treatment volumes, a clear highlight continues to be the growth in US treatment volumes. Through the nine months, treatment volumes are up 58% over the same period in 2020.

This is important for two reasons. First, as we have said before, growth in US treatment volumes is a leading indicator of growing adoption by urologist of Focal One HIFU as a prostate cancer treatment alternative. Second, we believe the growth in the US treatment volumes reflects the positive impact of HIFU Category 1 CPT reimbursement code that went into effect on January 1, of this year.

On the topic of reimbursement, CMS recently published the final Medicare hospital outpatient prospective payment system or PPS rule, which is set to go into effect on January 1, 2022. Despite the unanimous vote in favor of having HIFU reimbursement for malignant prostate tissue ablation, upgraded to APC Level 6, we acknowledge that the agency has elected to keep HIFU reimbursement at Level 5 next year. It is worth noting that we have been operating at Level 5 since 2019, and as such, we believe we can minimize the impact of this -- that decision will have on our sales of pipeline activities in 2022.

At the same time, we have developed a comprehensive action plan to help demonstrate to CMS why HIFU technology has clear benefits to Medicare patients and is attracting interest among physicians. With this strategy in place, we remain confident that EDAP can secure increasing facility reimbursement to Level 6 starting in 2023.

Regarding endometriosis, I will now provide a brief update on our endometriosis program. As a reminder, Phase 2 study has so far enrolled a total of 38 women across five major hospitals in France, who will be assessed over a six month's follow-up period. We recently decided to increase total enrollment to 60 from 38 to strengthen the level of evidence brought by the study as the initial enrollments tracked faster and smoother than what we anticipated.

Investigators will evaluate the safety and efficacy of HIFU for this pathology. We were extremely pleased to have Professor Gil Dubernard from University Hospital in Croix-Rousse, in Austin, Texas this week for the AAGL Congress. Dr. Dubernard was invited by the Congress Management Committee this past Monday to present preliminary results from our endometriosis study.

As a quick note, endometriosis was a major topic of focus during this year's conference due to its rising prevalence and impact on the health of so many women around the world. We believe the treatment of endometriosis could be greatly improved with application of plate invasive procedures, and the use of HIFU technology could offer an important minimally invasive treatment option for these patients.

I will now turn the call over to Ryan, who will give us more details on our US operational strategy. Ryan?

Thanks, Marc. I want to begin by stating why I came to EDAP and my enthusiasm for our ability to meaningfully improve the options for men facing prostate cancer.

I've worked closely with urologists over 18-plus years in my career, both at Intuitive Surgical and before at Johnson & Johnson. Our understanding ability to risk, stratify, and target prostate lesions has radically improved over the last several years. Local therapy with high-intensity focused ultrasound offers a non-invasive ablation treatment with excellent functional outcomes and benefits. Focal One Robotic HIFU is the most advanced platform for precise targeting the prostate tissue, and that's why it's being adopted by many leading centers for urologic oncology in the United States.

Before getting into our sales and market development activities, I want to elaborate further on the reimbursement issue that Marc touched upon. Earlier this month, CMS published its final rule governing hospital outpatient reimbursement rates for calendar year 2022. Recall that Focal One is currently reimbursed under HCPCS code 55880, ablation of malignant prostate tissue transrectal with high-intensity focused ultrasound, including ultrasound guidance, which is currently set at an APC level by reimbursement.

In August, the CMS advisory panel on hospital outpatient payment voted unanimously in favor of increasing reimbursement for HIFU prostate ablation, APC Level 6 for the following year. However, while the panel serves only as an advisory board to CMS, we reviewed the unanimous vote as a sign of increasing recognition of the value of HIFU relative to other prostate cancer procedures.

Due to a variety of factors, most notably, the significant impact of COVID on the US healthcare system in 2020, the agency continued to rely on 2019 claims data when establishing 2022 reimbursement rates. Given the impact from the pandemic, the agency is determined that 2020 claims would not be representative of the utilization or cost that would be observed in a normalized non-COVID environment. Although HIFU will continue to be reimbursed at Level 5, which in 2022, will equate to about $4,527 per procedure, we believe that when more current claims data is analyzed, a higher Level 6 payment will be deemed more appropriate.

It is worth noting that we have successfully operated in Level 5 payments since 2019. Over this time, we have seen Focal One adopted by several highly regarded US urology centers. And we have continued our ongoing focus to place Focal One at many more centers over the next year.

We have seen this momentum over the past several months with additional urology programs adopting Focal One. Recently, University of Washington Medicine purchased a Focal One, becoming the first institution to offer patients robotic focal HIFU in the Pacific Northwest.

Just subsequent to the end of the third quarter, we sold a Focal One device to the University of California at San Diego. Recall that we previously announced Focal One placements at the University of California, San Francisco and the University of California, Irvine. So this latest sale to San Diego represents continued penetration amongst the major academic medical centers in California.

Both the University of Washington and UC San Diego are just two of 35 approved fellowship programs for the Society of Urologic Oncology. These hospitals add to the growing list of renowned medical centers that we count as customers, just as importantly, can act also as reference centers that can champion our HIFU technology.

Another highlight of the quarter was the American Urological Association's annual scientific meeting where several sessions presented growing clinical evidence, supporting focal ablation of prostate tissue utilizing our Focal One technology. Of note, Dr. Baco and his colleagues presented an interim analysis of a randomized controlled trial, evaluating focal ablation versus radical prostatectomy for intermediate risk prostate cancer.

The interim data suggests that one-year post treatment, Focal One achieved good oncologic efficacy and preserved the rectal function and urinary continence better than radical prostatectomy. Another highlight was the HIFI study by Dr. Rischmann and colleagues comparing cancer outcomes at two years for localized prostate cancer in grey group, one in two patients. They concluded favorably of HIFU with Focal One over radical prostatectomy as reflected in intermediate results from data at 42 centers when comparing salvage treatment-free survival rates at 24 months.

Turning now to our US infrastructure. We are continuing to build out the US team, including regionally focused business directors and both business and clinical managers who are separately responsible for driving capital sales and utilization within existing accounts. These additions are already having an impact as we continue to grow our pipeline. Additionally, we also are seeing a positive impact on utilization at existing installs as those institutions build momentum with our programs.

Overall, I'm very pleased with the trajectory that our US business is on, and I believe they are well positioned to drive significant growth in 2022. And now our CFO, Francois Dietsch, will provide some details on our financial results. Francois?

Thank you, Ryan, and good morning, everyone. Please note that all figures, except for percentages are in euros. For conversion purposes, our average euro-dollar exchange rate was $1.1747 for the third quarter of 2021. Our total company revenue for the third quarter of 2021 was EUR9.4 million, essentially flat to the same period in 2020.

Looking at revenue by division. Total revenue in the HIFU business for the third quarter of 2021 was EUR1.9 million, a decline of 25.6% as compared to EUR2.6 million for the third quarter of 2020. The decline was driven primarily by continued weakness in hospital CapEx spending.

Total revenue in the LITHO business for the third quarter of 2021 was EUR2.5 million, an increase of about 3% versus the third quarter of 2020. And total revenue in the distribution business for the third quarter of 2021 was EUR5 million, a 13.4% increase compared to EUR4.4 million for the third quarter of 2020, thanks to the Exact Imaging and laser sales development.

Gross profit for the third quarter of 2021 was EUR3.6 million compared to EUR4 million for the year ago period. Gross profit margin on net sales was 38.4% in the third quarter of 2021 compared to 42% in the year ago period. The decrease in gross profit year over year was due to lower sales effect on fixed costs in the HIFU business. Taking into account, only the variable cost, our margin rate on net sales for Q3 remains consistent with our usual level of margin considering the current mix of products.

Our operating expenses were EUR5.5 million for the third quarter of 2021 compared to EUR4.3 million for the same period in 2020. The increase was driven by the ongoing build-out of our US team and commercial infrastructure.

Operating loss for the third quarter of 2021 was EUR1.9 million compared to an operating loss of EUR0.3 million in the third quarter of 2020. Net loss for the third quarter of 2021 was EUR1 million or EUR0.03 per diluted share as compared to a net loss of EUR1 million or EUR0.03 per diluted share in the year ago period.

As of September 30, 2021, we had cash and cash equivalents of EUR45.4 million or USD52.6 million as compared to EUR24.7 million or USD30.2 million at the end of December 2020. The number of outstanding shares was approximately 33.5 million shares at the end of September 2021. And we now turn the call back to Marc.

Thank you, Francois. In summary, through the first nine months of the year, we increased revenues 14.4% over the comparable period in 2020, demonstrating that we are successfully navigating through this difficult hospital CapEx environment. At the same time, we continued to build our US pipeline, and we remain optimistic that we will announce additional sales and key placements in the near term.

We're also very excited that Ryan has joined us. As you heard today, we have already begun to implement actions and plans to support our market access and commercialization strategy in the US.

All in all, I believe we are very well positioned to establish HIFU and our robotic Focal One device as a leading therapeutic tool in ablating prostate tissue. I would like to thank you for your interest and support. We will now open the call to your questions. Operator?

(Operator Instructions)

Frank Takkinen, Lake Street Capital.

Hey, thanks for taking my questions. Wanted to start on the sales funnel a little bit more. I heard your different comments. It feels like it's growing solid.

Can you just bring us a little bit deeper on maybe penetration into the 150 Tier 1 accounts that you've spoken to in the past? How many of those do you have active communications with? And maybe if you could even share with us a little bit on the number of late-stage conversations just to give us a little better feel for what we could see coming down the pipeline in the fourth quarter as well as into 2022.

Yeah. Hello, Frank. That's a great question. And as Ryan elaborated in his part today, we are getting organized. We're increasing the structure, and we have significantly, again, increased our pipeline of projects.

Now giving too much details in where -- in what discussion and where we are is probably not appropriate on the kind of call like that where -- again, for confidential reasons. But again, everything has been put together to continue increasing discussions with most of those Tier 1 hospitals. And as you've seen, we've already announced two placements among these Tier 1 hospitals. And again, we will have more to come in the near term.

Okay, that's helpful. And then maybe just a little bit more on the investment in commercial organization. Where do we stand right now on a US-based commercial organization as far as sales personnel goes? And where could we see that number expand to over the next, call it, 12 to 18 months?

Yes. So we've added a couple of notable hires as of recent. A couple of folks had actually worked with me back in my tenure at Intuitive Surgical, so we're excited about that.

We've looked deeply at the markets. As you referenced earlier: looking at academic centers, urological oncology programs, NCCN participating hospitals, et cetera. So we feel that we've got the territories well laid out, and we're actively recruiting now on both sides on the capital and clinical side.

So we've added two people, and we're in the process to adding several others. We're looking obviously for highly skilled, highly capable individuals to come join the company. And I think we're excited with some of the momentum we have, and we'll look to be deeply focused, obviously, in growing our sales as we roll into the coming year 2022.

Perfect, that's helpful. And then last one for me. Ryan, I appreciate all the color on the APC Level 6 versus Level 5. Can you share with us a little bit more on what was not seen in the 2019 cases that you expect to see in the 2021 cases that can justify that move up to Level 6 for 2023?

Yeah. So I think a couple of obvious things jump out. One is, obviously, our treatment volumes were higher when you comparably look at the year 2021. But just to understand that CMS uses an average cost of charges as it relates to these treatments.

There's a geometric mean cost, the average cost. They look at these things, they have a methodology of weighting these in their calculations. So we kind of do our own analysis as well. And we, in some cases, have actually worked closely with hospitals at their request to really look at and monitor and educate them on the process of capturing appropriate charges.

So I can't -- it comes back to the charges established. I think the way to look at it is, our analysis and analysis using outside consultants would show that the proper average charge rate would clearly put us into this APC 6 category. So hence, why, if they even looked at the 2020 data as we think they should have, there would have been a notable difference in the average cost of charges.

So that's kind of how it works. They start this process that is CMS in the springtime. And we're working through the process as well.

We're going to be having or request a conversation with CMS, just putting some color on how we believe that -- that they need to look at the appropriate data, and I think we're well positioned to be in a -- at an APC 6 level when we look at year 2023.

Perfect, that's helpful. I'll stop there. Thanks for taking my questions.

Good, [Franky]. Thank you.

Jason Bednar, Piper Sandler.

Hey, everyone. Thanks for taking the questions here.

(inaudible)

Marc or Ryan -- hey, glad to hear the fourth quarter is already off to a good start. You did reference today and, in the release, yesterday, just good lead in indicators of demand. It sounds like the funnel is building.

And can you speak any more directly to what those leading indicators are? Just -- and are there these developments, are they coming by way of some of the early stepped-up commercial investments that have been made this year? Or do you think these commercial investments -- we end up -- we need to wait until '22 or maybe even deeper into '22 before we see them start paying dividends?

Yeah. I look at it in a few ways. Obviously, we're adding headcount. And that would lead you to believe that we'll have more people interacting with future customers, so that helps tremendously.

We also have an installed base of customers, so we support them. And many of them, as noted, are growing the volume of treatments.

There's the marketing effort, too, which I think we're just getting going with. I think our marketing story or at least our story back to patients and physicians as providers is an exciting story.

I think a lot of academic programs. And we mentioned earlier, Tier 1 hospitals see that focal therapy as a category fills a critical gap that may exist for low risk and intermediate risk patients. And so I think we're seeing that the argument for focal therapy -- there really isn't a big argument. It's getting established a strategic direction with the institution that adding focal therapy, if you're not doing it already, is important.

And then if you look categorically how you delivered focal therapy, we believe with robotic focal HIFU, the Focal One system, we have the best offering in the market. And so we believe we have the right technology at the right time for those centers. So we continue to socialize that with these pipeline accounts and are very engaged, and we look to engage further as we build out our sales organization.

All right. Excellent. Thanks for that, Ryan.

Also, just curious if you could elaborate on some of the challenges that exist out there in the marketplace right now. It's very topical for all companies right now, shipping, freight, labor costs, things like that. How is EDAP navigating some of these dynamics? And then I think related to that point, just talk about your confidence in HIFU gross margins improving off the levels that we're at today.

Well, so far, I would say we're navigating pretty well in the environment. And of course, we're very cautious about all those points. But again, there is such momentum and excitement.

And as Ryan said, the technology really fills an important need and gap that exists today in the treatment of prostate cancer so that we continue to benefit from that momentum. And that will increase as we get more structured and more organized in the US market and as we continue to grow the pipeline.

Okay, got it. And then just one more for me on the reimbursement side. It sounds like CMS still did leave just the way they phrased some of their updates. They left the door open to some future adjustments for HIFU moving up to that Level 6.

I guess, aside from having another year of claim's data for CMS to use, are there any other next steps or areas where we could see reimbursement progress in the near term before we get to that next round of updates from Medicare? And then, I guess, any recent wins or progress you can point to with some of the commercial payers?

Yeah. We're held to really what CMS will release in terms of its final rule, which, as we know, just came out at the beginning of this month. We, as expected, work very closely with our installed base customers and specifically leading surgeons or I should say, doctors, urologists who are actively using our product in technology.

So as noted, when we had met with the HOP panel back in August, we obviously met -- we weren't the only company that met with the HOP panel, but we had physicians with us shoulder to shoulder as providers recommending the increases noted moving to [AP] 6. And so I think there's a strong clinical validation. I mentioned some of the data coming out, and there's more and more data going on, there's more treatments going on.

And so I think at this point, we can't influence the final rule but we can continue the conversations with CMS in preparation for the review we'll do next year. And remember, these rulings come out on an annual basis. So as mentioned, they'll start the process in the springtime, and we'll be involved directly with that process all the way up until they announce the final rule for the forthcoming year.

And I think your -- part to your questions in terms of supply chain or anything like that, I don't -- unless Marc has any comments, I don't see anything that has really disrupted us there. We talked about the San Diego sale, and that sale was made, it shipped in Q3. Unfortunately, we had a -- it wasn't out of our control, an issue with a transportation company and en route to the hospital. That is really what happened on that deal, that would have normally been recognized as a Q3 sale.

So -- but it had nothing to do with COVID. I believe it was just a mix up with the transportation company. But anyway, we're excited for continuing to progress, working with CMS. And we're using all available resources to make sure that we are well positioned for the next review.

All right. Very helpful. Thank so much.

Justin Walsh, B. Riley.

Hi, thanks for taking the questions.

To start off, I know that you guys had the one sale in the Focal One in UW in the third quarter and then you just mentioned UC San Diego in the fourth quarter. Can you confirm there weren't any other Focal One sales in the third quarter? And then, also maybe confirm how many ExactVu sales do you have in ESW systems?

So yeah. I mean, as we just said, as Ryan just mentioned, we had only one selling in Q3 at University of Washington. Though, the second one, University of California, San Diego was sold and shipped in Q3, but will be recognized as a sale in Q4 for transportation and logistic reasons.

In terms of number of ExactVu, I will let Francois answer. Francois?

Yes, we sold the five ExactVu devices over the third quarter. And in lithotripsy, we sold three equipments.

Got it. Perfect, thanks.

All right. So my next question is, the AUA results were really intriguing. I'm wondering if there's any specific feedback you got from physicians? And if your clinical data package has helped with the engagement efforts recently, particularly as you're moving to improve penetration in the US?

Yeah. So just a couple of notes on that.

AUA, unfortunately, this year, became a virtual meeting. We were well prepared to be there physically. And really, at the last minute, they changed it to a virtual format. So that was a real disappointment because we had a lot of activity planned. In fact, we even had some hands-on courses that were set up specific to that meeting.

But back to the conversation on data, I think the data is -- again, it shows strength in a couple of very key areas. One is oncologic control. The data supports that we can deliver safe and efficacious oncologic control when compared -- looking at cancer control outcomes compared to surgery, radical prostatectomy.

And on the second note, it reinforces the benefits that we talk about routinely in the area of the functional domains, urinary control and sexual function outcomes, where the treatments as compared are very different. We don't take out the prostate plan. We treat the cancer, or I should say, we ablate the tissue in the prostate gland and -- where surgery, obviously, is removing the gland.

So we just -- again, we're excited because one of the studies, the Baco study, is a randomized controlled trial, level 1 evidence. It is European data. But it's not the only study out there that shows and points to the efficacy of HIFU as a means to ablate prostate tissue.

So we believe, again, more and more data will be coming out. And we're excited, too, now that we have more American centers that have purchased Focal One, robotic focal HIFU. And we'll be tracking their data and likely submitting both abstracts and manuscripts in the future journals. So our data set, I think, continues to build momentum and gain strength.

Got it, thanks. One more question for me. Obviously, there's still a lot of overhanging uncertainty with how the pandemic has evolved. I'm wondering if you can provide any color on what you're seeing from hospitals from a CapEx perspective at this point?

Yeah. I think hospitals have returned in some capacity to a more normalized buying cycle. I won't say it's 100%. It varies by institution by region.

We, as expected, work through those -- their processes in order for us to sell or place a system in their institution. I would say that what may be different for us is, I really, and our teams truly believe -- we are a strategic value-add revenue-enhancing service line to a hospital. And meaning that there is a gap that exists for men diagnosed with localized disease -- early stage and intermediate stage disease -- and focal HIFU would be a suitable option for a subset of these med.

So as you can imagine, there are number of companies out there selling capital equipment. We are one of that, but I think our value-add story is very strategic as compared to maybe other capital purchases that may be going on in a hospital institution. So we're about building out a focal therapy program in the domain of men being treated with prostate cancer.

So the conversation can be different and interpret differently knowing that there's a large number of men every year who are diagnosed with the disease, not including the men who are walking around with the disease today. So anyway, we're excited to continue the momentum as we work through the buying committees, et cetera, in these various institutions.

Got it. Thanks for taking the questions.

(Operator Instructions)

Swayampakula Ramakanth, H.C. Wainwright.

Hi. This is RK from H.C. Wainwright.

So Ryan, in your remarks, you were stating how CMS was looking at the 2019 claims. And so based on that, they had provided for Level 5 again in '22.

Just trying to understand. So when they go into this decision making again next year, would they be looking at the 2021 numbers then? And how are the 2021 numbers currently looking so that we can get into Level 6 come 2023?

So yes, you're correct on that. They look at 2021 data. So that will be happening next year, starting in the springtime.

And we feel, just doing our own analysis -- and again, we use outside consultants to work with us -- that when they use the weighted average cost, et cetera, in terms of all charges, that we look favorable as others in our space likely. We look favorable categorically to move up in the payment structure, the APC 6 payments structure.

So that's all I could say at this point. Again, we believe that if they would have looked at the 2020 data versus 2019, we would be deemed an APC 6 level facility payment. So I don't think anything's changed.

When 2021, we're doing more procedures, which is very good -- which is good because they have more numbers to work with. And I think the hospitals also getting better educated on capturing all the appropriate costs for providing those treatments.

Thank you for that. And then you talked about some of this data being present -- that was presented at AUA. Do you have any idea of when that would be published as publications in terms of paper publications so that you can utilize them for your conversations with the private payers?

RK, these studies, the one from Dr. Baco from Norway, it's not over yet, so that were preliminary results. So we have to wait until the end of the study when it's concluded, so that it could be published.

And it's the same for the HIFI study, which is the French study in the context and frame of reimbursement in France. Same, this was a preliminary result. The end of the forward period will be next year, and then they will, of course, go into the process publishing. So it's going to take some time still until we'll get paper published, but they will continue releasing and presenting results as the follow up moves forward.

Thanks, Marc. Thanks for that.

Thank you. At this time, I will turn the floor back to Marc for closing remarks.

Well, thank you, everyone. Thank you for joining us today. We'll continue updating you, and we'll continue moving forward in our strategy to increase and accelerate our high production plan in the US and rest of the world. You all have a great day.

Thank you, everyone. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.