Edap Tms SA (EDAP) 2021 Q2 法說會逐字稿

Greetings, and welcome to the EDAP TMS second-quarter 2021 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Glenn Garmont, Investor Relations. Please go ahead, sir.

Thank you, Hector. Good morning and thank you for joining us for the EDAP TMS second-quarter 2021 financial and operating results conference call.

On today's call, we'll hear from Marc Oczachowski, Chief Executive Officer and Chairman of the Board; and Francois Dietsch, Chief Financial Officer.

Before we begin, I'd 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. The 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'd now like to turn the call over to EDAP's Chairman and CEO, Marc Oczachowski. Marc?

Thank you, Glenn, and good morning, everyone. I will start by providing a brief operational update and then turn the call over to Francois Dietsch to review our financial performance. I will recap a few of the highlights that we covered in our pre-announcement press release of August 4.

Total company revenue for the six months ended June 30 was EUR20.7 million or $24.8 million, representing growth of 22.5% over the first six months of 2020. And while our HIFU division continued to be negatively impacted by the ongoing effect of the COVID pandemic on hospital CapEx trends, we were very pleased to see US treatment volumes increased a very healthy 79% over the second quarter of 2020.

This is important for two reasons. First, the growth in US treatment volumes is very noteworthy because it is a leading indicator of growing adoption by urologists of Focal One and HIFU as prostate cancer treatment alternative. Second, we believe, this growth in US treatment volumes reflects the positive impact of HIFU reimbursement routes that went into effect on January 1 of this year.

Recall that CMS is physician fee schedule final rule established for the first time of payment to physicians performing a HIFU procedure in the US. Recapping the rule, CMS has set a total relative value units or RVUs, for a physician performing a HIFU procedure at 29.09. This translates to an average payment of $996 for urologist performing a HIFU procedure on a Medicare patient in a facility setting.

As a reference, a comparable, established, minimally invasive therapy for prostate cancer, cryotherapy, yield at 22.72 RVUs, which translates to $786 for the urologist under the same setting and patient conditions. So HIFU can significantly broaden the revenue base of urologists treating prostate cancer patients, and we believe this new rule could be a meaningful long-term catalyst to accelerate the Focal One adoption.

And on the topic of reimbursement, I would like to share with you a recent update that could very positively impact reimbursement rates in 2022 and beyond. Earlier this week, we requested and were granted an opportunity to present at the summer meeting of the CMS advisory panel on a Hospital Outpatient Payment, or HRP panel. The HRP panel is a mechanism whereby CMS brings together a group of subject matter experts to consider and discuss changes to current reimbursement rates for specific outpatient procedures or technology.

Recall that on the hospital payment side, HIFU is currently reimbursed as a Level 5 urology Ambulatory Payment Classification or APC. This translates into a payment for a hospital performing a HIFU procedure on a Medicare patient of around $4,500 in 2021, as a national average adjusted locally based on the wage index.

However, based on the analysis of the reimbursement paid for other prostate cancer ablation procedures including cryosurgical ablation, we believe there is a strong argument to be made for our Level 6 APC reimbursement for Focal One HIFU. For the sake of comparison, HIFU were reimbursed at Level 6 this year, the average reimbursement would increase from approximately $4,500 currently to approximately $8,500, a huge increase of nearly 88%. This is important because the lower reimbursement processes limits how broadly focal therapy may be offered to the full range of medical patients.

At the meeting, which occurred this past Monday, the HRP panel voted unanimously in favor of the increase. And while the final 2022 rule will not be published until November or December of this year, it is worth noting that CMS has historically given the HRP panel's recommendation, very strong consideration. If we are successful in moving our APC classification to Level 6 from Level 5 next year, we believe this will be a significant driver for many more hospitals to initiate the focal therapy program.

The financial analysis of acquiring a Focal One machine and offering the critical benefits to a broader patient population becomes much stronger. We are very excited and hopeful that this potential change and look forward to progress later this year.

Notwithstanding the challenging CapEx environment during the second quarter, we continued to add to a robust pipeline of Focal One and ExactVu pipeline sales opportunities during the quarter, and we believe several will close this year. Over the past few months, we have added here, healthcare institutions who are growing Focal One client roster, including T1 clinic and Mount Sinai in New York among many others. These are notable leading institutions in the treatment of prostate cancer and are increasingly becoming reference centers whose teaching, research, and case observations now available for pipeline accounts.

We look forward to updating you on the growth and development of our centers of excellence for Focal One in coming months. We believe that the eventual return of hospital CapEx to a more normalized trends coupled with continued growth in treatment volumes bodes well for the future of our company, as well as the hundreds of thousands of men around the world who could potentially benefit from this treatment.

Turning now to other highlights from the quarter. In June, we announced the hiring of MedTech industry's veteran, Ryan Rhodes, to be Chief Executive Officer of our US subsidiary. Ryan brings a wealth of highly relevant experience including 14 years at Iterative Surgical, where he played a leading role in the global clinical expansion of robotic surgery in multiple specialties including urology.

The addition of Ryan reflects the continued execution of our US expansion plan. He will be instrumental in helping to drive continued growth and adoption of our technology. Ryan has already started assembling a world-class team around him by adding MedTech leaders that will be instrumental in building HIFU adoption and utilization in the country.

One of them is Mohan Nathan, who has an extensive background in the medical device industry, including many years in global clinical and marketing leadership roles at Intuitive Surgical and Concentrix. Mohan will play a major role at EDAP, developing a clinical and marketing adoption programs. To fund our growth initiatives in the US and elsewhere, in April, we completed a successful financing that raised gross proceeds of approximately $28 million.

Together with cash on hand, we ended the second quarter with a cash of more than $53 million. As we discussed last quarter, this financing was particularly important for several reasons. First, we brought a number of new high-quality institutional healthcare investors into the fall.

These investments occur only after a significant amount of due diligence has been done. And the investors who participated in this offering did so because they share a belief in the potential of HIFU, not just as part of the prostrate cancer continuum, but potentially other indications as well. We believe this validates our mission and our technology. The funds that we raise will support our US expansion plan, specifically our efforts to expand market access and increase the HIFU adoption and utilization.

We previously announced that we are working with the leading US Reimbursement Consultancies MTP and Argenta Advisors to expand market access and coverage. And this reflects our broader commitment to establish ourselves as the leader in the US market, making focal technology as broadly available to patients as possible.

We also have sufficient capital to build out our clinical marketing and sales organizations. I believe that these initiatives, together with the hospital and KOLs who are already champion of technology on the ground, represents a multi-pronged approach design to maximize awareness of and access to our HIFU technology.

Now I will provide a brief update on our endometriosis program. As a reminder, this Phase 2 study will enroll a total of 38 women across 5 major hospitals in France who will be assessed over a six months follow-up period.

Investigators will evaluate the safety and efficacy of HIFU for this facility. Enrollment is tracking fully your internal expectations. And we expect to treat the last patients by the end of this month, which is in two or three days. We also received authorization from the French Health Authority to continue enrolling patients after we achieve our initial enrollment target of 38 patients to further strengthen this Phase 2 study and collect more safety and efficacy data.

We believe the treatment of endometriosis could be greatly improved with the application of late invasive procedures. And the use of HIFU technology could offer an important minimally invasive treatment option for these patients.

And now our CFO, Francois Dietsch, will provide some details of our financial results. Francois?

Thank you, Marc, 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 1.2024 for the second quarter of 2021.

Our total company revenue for the second quarter of 2021 was EUR10.4 million, an increase of 11.8% compared to total revenue of EUR9.3 million for the same period in 2020.

Looking at the revenue by the region. Total revenue in the HIFU business for the second quarter of 2021 was EUR2 million, a decline of 21.8% as compared to EUR2.6 million for the second quarter of 2020. The decline was driven primarily by continued weakness in hospital CapEx spending, as Marc alluded to earlier.

Total revenue in the LITHO business for the second quarter of 2021 was EUR2.3 million, a decline of 22.6% from EUR2.9 million for the second quarter of 2020. As for HIFU, the decline was driven by continued weakness in hospital CapEx spending.

Total revenue in the distribution business for the second quarter of 2021 was EUR6.1 million, a 61.6% increase compared to EUR3.8 million for the second quarter of 2020, same to the exact marking and less of sales development. Gross profit for the second quarter of 2021 was EUR4.2 million compared to EUR4.3 million for the year ago period.

Profit margin and net sales was 40.7% in the second quarter of 2021 compared to 46.8% 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.

Our operating expenses were EUR4.6 million for the second quarter of 2021 compared to EUR4 million for the same period in 2020. Operating loss for the second quarter of 2021 was EUR0.4 million compared to an operating profit of EUR0.3 million in the second quarter of 2020. Net loss for the second quarter of 2021 was EUR0.4 million or EUR0.01 per diluted share, as compared to a net loss of EUR0.2 million or EUR0.01 per diluted share in the year ago period.

At the end of June 2021, we held cash and cash equivalent of EUR45 million or USD53.3 million as compared to EUR24.7 million or USD30.2 million as of December 31 of 2020. Including in our June 30 cash balance is net proceeds of approximately USD25.7 million from the secondary offering of ADS that we completed in last quarter. Reflecting the offering, the number of outstanding shares was approximately 33.4 million shares at the end of June 2021.

I will now turn the call back to Marc.

Thank you, Francois. In summary, we are pleased with our second-quarter results against a difficult hospital CapEx environment. Through the first six months of the year, we increased revenue 22.5% over the comparable period in 2020, demonstrating that we are successfully navigating through this crisis.

In addition, we carefully and successfully managed our gross margin and operating expenses to keep the company in year breakeven. At the same time, we continued to build our US pipeline, and we remain optimistic that we will announce additional talent and key placements very soon.

We also anticipate that treatment revenue growth will accelerate as we saw with the positive momentum in utilization during the first half of the year. And this should be strengthened by our new US structure and resources.

The most important leading indicator, US treatment volum, increased 79% year over year, reflecting growing awareness of HIFU as well as the positive impact of the new reimbursement rules that went into effect in January.

Finally, we are very, very excited about the results of this week's meeting of the CMS HRP panel and positive and favorable recommendation towards the upgrade from APC Level 5 to Level 6 of HIFU reimbursement code 55880. Again, a new reimbursement for HIFU is upgraded to Level 6 next year. This will represent a significant increase in dollars to hospitals performing Focal One procedures. And we believe, drive accelerated machine placements in the future.

All in all, I believe we are very well positioned to establish ourselves as the leader in the non-invasive and focal ablation of 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 Markets.

Great. Thanks, for taking my questions. A couple for me this morning.

I wanted to start with the reimbursement change. I was just hoping you could give us a little bit more background in why it was previously categorized into Level 5 and the more specific justification to get it to a Level 6. And then although I am not very excited and I couldn't completely appreciate the jump up here, is there opportunity to increase the reimbursement even more from the Level 6 reimbursement level in the future years?

Hi, Frank, well, thanks for the question. Well, actually, the Level 5 reimbursement was given by Medicare some years ago after it was started with the sequel on level 6. And then after the first claims that were made by users of the HIFU technology, one year or two years after, they decided to put it to Level 5 based on the average amount claimed. So that's why we spoke about that in previous calls.

We also initiated some programs in educating hospitals and users to properly claim the HIFU treatment to Medicare. And we have significantly increased and improved that average amount to be claimed that will also be a certification of upgrading the APC from Level 5 to Level 6. And that's what we've been discussing with CMS as well as the HRP panel at the beginning of the week.

Got it. Okay. That's helpful.

I wanted to move over to capital budgets a little bit more. Heard your comments about potentially announcing some key placements very soon. I was curious if you wanted -- if you could help us understand how conversations are going as of recently?

I know there was an expectation for a second half bolus of placement similar to what happened last year. Do you still think that that's something that could be occurring this year? Or do you feel there's maybe a little bit more conservatism, cautiousness, whatever you want to call it in CapEx budgets right now?

Well, I think we're about in the same situation as last year where all the seasonality of this type of business has been even increased because of the current lack of visibility in the COVID context. And we really hope that like last year, a lot of people who will have to spend budget anyway before the end of the cycle, which is the end of the year for the majority of hospitals.

And as far as the discussions are going -- I mean, we are having a very, very regular, frequent discussions with administrations, purchasing department, and legal department in a significant number of leads and hospitals in the US with the goal of finalizing and closing deals before the end of the year. That's why I was telling earlier that we have good hope and confidence that we might be able to announce and close key placement and sales soon and most probably before the end of the year.

Got it. Okay. Last one for me.

I saw distribution had a pretty solid quarter. I'm assuming this was related to ExactVu. One, can you confirm if that's correct? And two, can you give us a little bit more color on the sale of the ExactVu systems, how many you had this quarter as well as rough estimate on the installed base?

Yeah, you're exactly right. As you remember, on the first half of last year of 2020, we didn't have yet the distribution rights for ExactVu. We actually initiated at the end of the second quarter last year. So we only had a few sales last year.

And this year, we were already commercializing it since some months. So we were full speed in commercialization at least in the US and big part of Europe. And we've done nine sales of ExactVu during the quarter this year as opposed to only three last year because, again, we just got started in the month of June.

So that has been tremendously, indeed, helping to grow the global number of our distribution business as well as some good momentum and good deals in lasers in France and Asia. And this is made a bit easier to sell as the capital expenditure is much lower than what could be for Focal One. So that's also why we've been able to navigate a bit easier on that environment.

Got it. Thanks for taking my questions, and congrats on all progress.

Thank you, Frank.

Jason Bednar, Piper Sandler.

A couple of questions from our side. Hi, there. Just a couple of to follow up here. First on those prior questions.

First, Marc, I wanted to start to see if you could expand maybe a bit further on what you're hearing just on the ground, your discussions with hospitals. I know you mentioned kind of the COVID dynamic, but are you getting a sense like that budgets are still tight? Is it the technology education and sales negotiation process that's challenging in the COVID environment where access may still be limited or are there may be some other external factors that have been holding back demand from hospitals?

Well, I think it's a mix of all this, actually. And it's true that it's -- the access is a bit more difficult to focus as well. Expenditure from hospitals are -- is a little bit different than could be usual, priorities are different.

And when you speak about a big amount of money -- and again, like I just said, if it's small capital equipment like stone lasers or even the ExactVu device, the agitation or priority is less difficult to overachieve than if you are speaking about $700,000 or more thousand and $700,000 investment for the hospital. So it's just a little bit more time and also a question of priority, and that's probably why a lot of things will happen towards the end of the year when they don't have any more time to wait. So they have to make the decision like it happened last year.

Okay. That's helpful.

And then moving over to the update from the HOP panel. That is really encouraging news, and congrats on that update. And as you mentioned, this would put HIFU on a more level playing field with cryo and radical prostatectomy, can you elaborate on how influential you believe the payment increase could be on influencing Focal One purchases if it goes into effect?

I mean it seems like it has the potential to be much more impactful than the physician fee schedule update for this year in terms of just driving future system adoption. But I guess, I would love to hear if you agree and whether you have any additional color you can provide on how this might ultimately maybe influence commercial payers down the road?

That will definitely influence first, I mean, the -- that will helps, again, hospital getting into the technology faster because when you almost double the level of payment the hospital will get for the same technology, that really changes the pro forma in favor of the technology. So that will definitely help accelerating and boosting the sales and also the use of the technology. So it's on both sides; not only on the CapEx, it's also on the disposable side.

For the private payers, I mean for the insurances, as again, they usually base their reimbursement level on the -- on Medicare reimbursement levels. So that will also influence the private payers. And again, the private payer, the more adoption, the more utilization, the faster you're able to enroll private payers and have the technology and the policies.

Okay. I guess just maybe to follow up just on one point there, just to clarify on maybe how this might drive some better hospital adoption. When you go out and try and sell Focal One, I guess, how much of a -- how much pushback you run into simply because the ROI or the economics aren't as favorable as the hospitals would like them to be?

Not much because already, again, like we said, the ROI or the breakeven point -- and again, remember that the CMS payment is only for Medicare patients. So you have to account as well with private-paid patients that are also contributing to the ROI.

So the pro forma is good already. It will be just excellent if we move into Level 6. So we don't have too much of blockage or whatever today at Level 5. It's just that it would be much better at Level 6.

Okay. All right. Great.

And then just one -- I'll squeeze in one final one for myself. And I appreciate the update on just how Ryan is already building on this team. But sorry, if I missed it, are there any targets we should have in mind with respect to the number of roles that -- a number of folks or roles that Ryan plans to fill and by when he's hoping to have that desired talent in place?

No, actually, I mean, for obvious reasons, we won't disclose the complete plan and strategy and all that. I mean we also have to take care of others in competitions in the environment. But the idea is really to build a global and strong and highly performing team of clinical, marketing, and salespeople to really, again, spread the technology, educate the users in the market as well as the patient community.

So -- and again, Ryan, with his expertise and extremely long term and successful experience in building programs to penetrate the market with disruptive technology, has a very broad network of -- in the medical field and particularly in neurology. And I'm very confident he will continue to bring onboard a number of talents that will help us to really get very aggressively into the market and accelerate the penetration of HIFU, as well as the utilization of our current studies.

Great. Thanks, Marc.

Thank you, Jason.

Andrew D'Silva, B. Riley Securities.

Hey, good morning. Thanks for taking my question.

Just a few quick ones for me. To start, could you let us know just how many Focal Ones and ESWL systems were placed during the quarter? And were there any Ablatherms installed during the quarter?

No, we had no Ablatherm. And we're going to get less and less Ablatherm in the future, of course, as Focal One has really taken over. We've got one Focal One sold during the quarter. And in terms of lithotripsy, if I remember well, we had about three units sold during the quarter.

Okay. Thank you for that.

And then could you just -- I know you touched on this, just a quick recap on what next steps for EDAP from a commercial reimbursement standpoint. Like what should we be monitoring on our side? And then with the move to Level 6 and its alignment with cryoablation, the increase from $4,500 to $8,500, is that just the facility fee or that also include the physician fee as well?

No, that's just the facility fee. The physician fee is separate fee.

Okay. So all in, if you get to level 6, we should be thinking of something around close to $10,000?

Yes. I mean for both fees, yes, because we have one that is close to $1,000 and the other one would be around $8,500.

Okay. Perfect. And just from the next steps as it relates to the commercial reimbursement standpoint, what should we be charging?

Can you repeat that again, sorry?

From obtaining commercial reimbursement, what should we be charging going forward to see how you're progressing?

You mean from private payers or -- is that your question?

Yes. Exactly.

We're working on -- I mean, as I said in the past calls, I mean, we're actively working on that, and we will continue to work on that with the different private payers as well as the insurances. And that's a long process. So again, the idea is to -- as quick as we can start getting some of these companies offering the treatment in their policies.

And again, it's a long process, and we are very actively working and investing in that direction. So we'll keep you posted as far as we have material information on that.

But is it tracking to your expectations right now? Or has there been any delays or things moving actually ahead of schedule?

Actually, we're executing our plan as anticipated. So we're on track in terms of delivering the actions, meetings, and plans.

Okay. Just last question for me. How indicative of your future OpEx or the second quarter? Or could you just give us a sense of the second quarter, you know, what should we model in increase in OpEx given the expansion in the US infrastructure?

I'm not sure I'm getting your question, Andy, there. What do you want to know exactly? What -- I'm sorry, I didn't get it.

Using the second quarter as a baseline, what percent do you think your OpEx will need to increase for you to properly establish the US infrastructure that you're trying to do with Ryan?

I mean, I won't be able to give you an exact percentage. But yeah, we have to expect significant increase in our OpEx in the US as, again, we want to build that complete in global marketing, clinical, and sales organization. So -- and we will start seeing the impact of that on the second half of the year as, again, Ryan joined the company in June only.

So I mean, he is working very hard on building that team of talent, again, that will bring the company to the next level. So yeah, we'll see the impact of that in the coming quarters.

Okay, great. Thank you. I'll take everything offline, and best luck going forward.

Thanks, Andy.

(Operator Instructions)

Swayampakula Ramakanth, H.C. Wainwright.

Thank you. Good morning, Marc and Francois. This is RK from H.C. Wainwright.

In the opening remarks, you stated that you've been seeing growth in terms of treatment volumes. Could you give us a little bit more color either in terms of percentage or total number of treatments being done using HIFU?

Yes. Well, the overall percentage that I gave, it's -- I mean compared to last year, we did about 79% to 80% growth. Then it's pretty well spread among most of our sites.

We can really see a momentum in utilization in most of our existing reference sites. So that's a common kind of trend, which is very encouraging. Again, people are getting more and more confident. And more and more the benefits for the patients, so the volume of patients is increasing in most of our key opinion centers.

Perfect. And then also in terms of what Ryan and his team would be working on, do you think they would also not only on trying to meet with additional hospitals and oncology centers, would their efforts be also in terms of messaging more about the utility of HIFU? And in that same line, are you trying to get any additional publications out so that it helps in Ryan's work?

Absolutely. Absolutely, and we're continuing to follow some studies here and there to get more publication on HIFU. And again, the focus of Ryan and his team and the way he's building the teams -- to really push utilization, not only, I mean, to push the sales of equipment, to spread the technology to more key hospitals and key opinion leaders in the country, but it's also to work on programs with the hospitals in terms of clinical utilization and adoption and again, further increase the utilization of the technology in the existing hospitals.

Okay. You probably answered this question earlier, but I just want to make sure I get this correctly.

When you were saying -- when you're talking about how the reimbursement could get approved at the APC Level 6, does -- is that the same level as what cryotherapy and radical prostatectomy is getting reimbursed debt? Or would this be a slightly better than those therapies?

And as I said during the call is that we'll be in the same level as cryosurgery. Radical prostatectomy is in another classification so we can compare. But it will be, yes, in the same level as cryosurgery.

Perfect. And then the last question from me --

And as I said -- just to be complete on that, RK, so that, again, Andy was clarifying, that's for the technical, that's for the hospital fee only. And for the physician fee, we will still have a much higher reimbursement than cryosurgery. So all in all, it would be much more favorable for HIFU than cryo.

Perfect. That would be good.

The last question for me is when we -- when I look across the UDS division, the sales in the second quarter seem to have dipped quite a bit compared to the last six quarters. So what's changing in that commercialization? Is there something in the market? Or is there something that you need to kind of correct within the firm?

I'm not sure, RK, because the -- I mean we don't speak about UDS anymore. I mean, as you remember, since some quarters, we have spread UDS between ESWL and Distribution because it was not making any more sense to have them together. So do you speak about ESWL or Distribution?

I'm just looking at the UDS division revenue, but we can take that offline.

Okay.

Thanks.

Thank you, RK.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.