Edap Tms SA (EDAP) 2005 Q3 法說會逐字稿

On behalf of EDAP TMS, I would like to welcome you to the Company's conference call to discuss the financial results for third quarter and first nine months of 2005. This call is being recorded and will be available for playback. Details of the playback are available in the Company's press release. On the call today is Phillippe Chauveau, Chairman of the Board; Hughes de Bantel, Chief Executive Officer of Edap TMS; and Thierry Turbant, Chief Financial Officer of the Company.

Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements regarding the Company's operations, growth and expansion plans. These forward-looking 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 therein. Factors that may cause such differences include, but are not limited to, those described under the risk factors of the Company's filings with the Securities and Exchange Commission. These forward-looking statements speak only as of today's date and the Company expressly disclaims any obligation to provide public updates, revisions or amendments to any forward-looking statements made herein to reflect changes in the Company's expectations or future events. With that said, I would now like to turn the call over to Philippe Chauveau.

Thank you and welcome to our third quarter 2005 financial results conference call. On today's call, Thierry will review our financial results and then Hugues will comment on the operations of the business over the period and then conclude with a discussion of the future course of the business. Following Hugues comments, we'll open the call for a question-and-answer period during which time, Thierry and I will join Hugues in responding to your questions. And we look forward to your questions at the end of this call.

As we have done previously, I would like to begin the call by outlining three key elements of our upcoming remarks. First, the Company's financial results. They were below the levels that we would have liked in absolute dollar terms. However, the Company's performance metrics in terms of margin remain strong. This is clearly an indication of the health and flexibility of our model. On the HIFU side, this is the result of our model which builds a diverse mix of revenue sources which balance each other out. We have a steady base of service contracts and disposable sales related to our existing install base as we continue to sell new Ablatherm units at a steady pace.

Also, we are increasingly building on our mobile and for procedure businesses which have received very strong responses in the market place. In fact, this mix coupled with strong growth in the mobile business has contributed to keeping the HIFU division sales steady versus prior year in which Ablatherm sales were weighted to the front end of the year, whereas this year, they will be clearly weighted at the back end of the year. We are very confident of the HIFU business and have solid expectations as we continue to open new markets such as recently-announced in Australia and the U.K., based on the merits and benefits of this treatment to both patients and physicians.

Still on financial results [ INDISCERNIBLE ] We're able to manage our business effectively through both the ups and downs of the natural business cycle as shown by improvements in operating income even on a down period. Thanks to an energetic and aggressive action plan put in place earlier this year, we're seeing a return to more normal conditions in this market.

Second, our HIFU worldwide leadership. Edap continues to build its position as the world leader in HIFU for localized prostate cancer. We have the most treatment centers, the most treatments and the most comprehensive and long-term clinical data available today. Not only does this help us in attracting leading urologists in each market but it also provides the necessary base for us to continue refining and bettering HIFU application through Ablatherm. With our continuing improvements in the Ablatherm units, and focus on extensive safety and efficacy parameters, HIFU with Ablatherm it is the attractive option for a continuous growing base of patients and physicians.

Third, new market expansions and reimbursement approvals. We continue to focus on new market expansion and reimbursement approvals in order to advance the opportunity for our company. To that end, our recently-announced launch in Australia and the new reimbursement approval in the U.K. creates substantial opportunity in new markets. We outlined the effects already seen in October in the press release to give you an update. We also continue to work on the necessary if not always rapid process of gaining reimbursement approvals in each market. This can occur while our existing market continued to grow based on excellent outcomes achieved by practitioners using HIFU Ablatherm. We're seeing this in the very strong market growth in a number of places such as Germany and Italy. With that, I'll turn the call over to Thierry Turbant for a review of the results that we released yesterday. Thierry?

Good day, everyone. Please note that all of the figures that I discuss here today are in Euros. For your convenience, these numbers are translated into U.S. dollars in the tables attached to the press release. Hugues will review key numbers by division in a moment. I will now review the total company numbers in Euro as follows. Q3, 2005 revenue in Euros was 4.5 million, down 18% versus Q3, '04 revenue of 5.5 million Euros. Year-to-date, sales amount to 14.6 million compared to 16.5 million last year.

Year-to-date, we've sold 24 Lithotripsy units compared to 28 in 2004. The mix has been more toward the [ INDISCERNIBLE ] our lower price point machine. We have sold six Ablatherms as opposed to seven in the prior year. Margins as a percentage of revenues remain better than last year and is up 3 points from 38% in 2004 to 41% this year. This was caused by an increase in the average product price due to mix for both Lithotripsy and Ablatherm HIFU units as well as improved cost of goods sold. We're investing our proceeds on HIFU vision sales and marketing and also [INDISCERNIBLE] expenses as associated with our compliance with the Sarbanes-Oxley act of 2002. But we continue to carefully control expenses.

For the first nine months of 2005, operating expenses slightly increased by 1% from 7.2 million to 7.3 million Euros. Our Q3 operating expenses decreased 5% to 2.3 million versus 2.5 million Euros in Q3, '04. Our total company net loss for the third quarter was 572,000 Euros as opposed to 259,000 Euros in 2004. The net loss for the first nine months was 1.1 million Euros compared to 0.8 million last year. At September 30, 2005, the Company had 7.5 million Euros in cash, equivalent to $9 million U.S. During the third quarter, we stabilized our working capital requirements and change in the Company cash position were primely driven by an 450,000 Euros used in capitalized equipment.

Overall, I can confirm that our current cash position is working to our internal plans. We continued to be very cost conscious and are strategically investing our cash in operating activity designed to support the long-term financial goal for the Company. I will now turn the call over to Hugues de Bantel to give more specifics on the Q3, 2005 results and to discuss the Company's business prospects for the rest of the year and beyond. Hugues?

Thank you, Thierry. Good morning, everyone. I'm speaking with you today from Weston where I'm attending the International Symposium on [ INDISCERNIBLE ] at Harvard. This is an important symposium on [INDISCERNIBLE] therapies and we're pleased to be one of the key sponsors along with other HIFU and Ablatherm businesses such as InSitech, China Medical, both company linked to G.E. and Philips. We're keeping good company and this is a strong testament to the value of HIFU going forward. We're are also utilizing this opportunity to further develop and publicize our leadership position in HIFU for localized prostate cancer.

On Saturday, four papers will be presented on Ablatherm-HIFU, including data [INDISCERNIBLE] the most extensive data available to date. As Philippe mentioned, we will be discussing our results which Thierry has just provided more detail in the underlying elements as well as our outlook for growth. I will add some detail regarding our divisional operations, especially as they relate to the things Philippe outlined. I will be focusing on the growth opportunity we see ahead as our most recent report represents a substantial step forward for Edap.

Let's start as we have before with the UDS division for Lithotripsy manufacturing as it is relatedly set forward. The UDS division remains steady with 24 Lithotripsy sold so far this year and a backlog of six machines going into the last quarter of the year. UDS revenue as we saw in the second quarter, is down from the prior year, primarily due to the continuation of the trend since the start of the year which has pushed the sales mix in key markets more to the leader of the range. In the previous period, sales tended to be replacements of higher hand units. This is a relatedly normal fluctuation in the market. We anticipate our actions taken already will return us to a more normal market.

The fourth quarter will be strong. And our ability to manage this process effectively is a great demonstration of our leadership and depth in the Asian urology markets. I believe I can say that we are one of the small list of companies able to serve this market with the depth and resources necessary to manage a process such as this. It also indicates the value of the deep and long-term relationship we've built in these markets based on our reputation for service and responsiveness. Most importantly, we continue to manage the unit effectively keeping a gross margin of 30% as in prior periods. We also continue to control manufacturing costs and overhead. The net of this is our operating profits continue to improve even through a down cycle.

Lithotripsys is still a good market for Edap and the sunny days of operation within the urology market worldwide. It also provides a good base of cash flow and technical capability for [INDISCERNIBLE] and production demands. Finally, Lithotripsy has allowed us to develop and refine very high level of service to urology practitioners in ways that benefit their practices and profitability. Types of service programs are proving very useful in the Ablatherm business as well.

Now, I would like to turn my attention to the growth engine of our business. The Company's HIFU division. For the third quarter, the HIFU division posted results that were below levels we would like to see. This outcome is directly related to delays in significant growth events. We're confident that these events such as the UK which we have now announced will accelerate our progress in many ways. So we're actually quite happy to accept a soft quarter as an entering step to better results in the future.

Also, since we know you have high expectation of the business, we are providing some detail on the future expectations including the news of two units already sold in the fourth quarter. We will continue to announce events as they occur going forward to help to validate our confidence. In the third quarter, we did sell two Ablatherm on track with the year so far. We also saw a continuing increase in our [ INDISCERNIBLE ] procedural mobile business. Year-to-date, we've sold six Ablatherm as compared to seven in '04.

As Philippe mentioned, '04 was ready toward the front half of the year while 2005 is weighted certainly weighted toward the back in terms of Ablatherm unit sales. Our cross path procedure business is growing very fast. Regardless of the timing and we will spend more time on that as we have contributions shortly. The quarters HIFU revenues were slightly below the prior year. Largely because one unit sold was a reconditioned unit already in the field. So command either slightly reduced selling price although equitable margin. Even with the differential of one [INDISCERNIBLE] the Edap division remains steady net sales year-to-date.

The growth in mobile operation remains very strong as does the increasing the number of sites using Ablatherm. Accordingly, our cost of goods sold is down and cost efficiencies throughout the division have contributed to a strengthening of our gross margin as they did in the second quarter. For the third quarter, our gross margins ran 51% compared to [ INDISCERNIBLE ] in 2004. Year-to-date gross margins are 49% as compared to 45% for the first nine months of 2004.

While margins are up, we've chosen to continue increasing our spending in a number of categories in advance of expected growth drivers, notably marketing and selling expenses including the education programs which increased our operational expenses in this division, keeping us at a small net loss for now two quarters following five quarters of operating profit from this division. I think it is important to point out this is attractive decision by management and the Board based on growth opportunity rather than any weakness in the division. In fact, our markets indicate that we are most successful than at any time in the HIFU division history. Let me discuss some of these success with you.

Starting with Germany, where we have enjoyed a very strong growth beginning almost immediately after receiving reimbursement approval. We now have 25 Ablatherm sites in Germany as compared to 12 sites last year. We placed our second mobile unit in Germany in June to accommodate the rapidly-increasing demand we forecast and now have more than doubled the sites served with 19 mobile and we continue to grow vigorously. Our opinion leaders in Germany are clearly having a very positive effect in propagating demand for Ablatherm with treatments up 129% in the mobile business.

Finally, our success in our operating base Germany are helping us expand in further German speaking regions most notably Sweden and Austria. In Italy, we have reimbursement approval in Italy and are seeing a four fold increase in treatments at now more than twice the number of sites as last year. The base is growing quickly, due to the enthusiasm among Italian urologists in offering Ablatherm. In both of these countries, the mobile business has been a primary engine in propagating the user Ablatherm-HIFU and a very strong contributor to our revenue lines as we had previously shared with you.

In Canada, we are seeing some acceleration in treatments with our partner [Matalish]HIFU. They're very confident in the treatment and their ability to offer improved outcomes to patients. As such, they are increasing their marketing efforts and seeing an increasing number of respondents even without reimbursement approvals. We continue to be very pleased with the progress of this market.

We entered Australian partnership with one of the best known urologists in the country at one of the best clinics in October. And [INDISCERNIBLE] was able to immediately begin treating patients with success. This is being done on a per procedure basis but we certainly have good expectations of growth in this market. This brings me to the U.K. which has been a focal point for some time. We have pleased to report that BUPA is today covering Ablatherm-HIFU at a competitive rate in the U.K. While BUPA is the largest private insurer in the U.K. and certainly an important addition with regard to reimbursement, some UDS groups in the public hospitals have also followed suit and we anticipate more to do so making the therapy available to British citizens on an ever larger basis. Once again, our opinion leaders and well documented results are driving demand growth.

We are very pleased to report to you for the first time an update on HIFU sales early in the quarter as opposed to our usual practice of announcing these events after the reporting period has ended. [GEIS] in London ordered an Ablatherm unit following reimbursement approval. [GEIS] is widely regarded as one of the most advanced hospitals in the U.K. for new therapies and treating prostate cancer. It was among the first to offer therapies beyond traditional surgery or radiation. And Edap's Ablatherm-HIFU compares to how readily are superior to these options in many ways. [GEIS] is also a highly regarded big chain hospital with affiliation with [Skin cartilage] London which would expose Ablatherm-HIFU to many of the next generation of physicians who will be treating with these device in the future.

We plan to continue updating you as we make progress at [GEIS] in November. The second unit has already been sold for the last quarter of the year to mobile HIFU, a private U.K. company that will begin offering mobile services at centers throughout the U.K. Treatments are beginning this month and we have a good expectation of our ability to make this [INDISCERNIBLE] a meaningful event in terms of our reporting for the last portion of 2005 and well into 2006. Again, more will be announced in detail as we progress.

As we noted in the press release, today we service 80 sites with be Ablatherm compared to 75 a quarter ago and 55 this time last year. We've now treated more than 8400 patients as compared to 7,800 last quarter. We continue to build on our position as the leader in HIFU for localized prostate cancer and I think it is fair to say our progress in the last several months gives you a good indication of the progress we're making.

Also, we did mention in the press release that we're prepared and expecting to begin treating patients in the U.S. before the end of the year as part of our clinical trials with our U.S. partner HealthTronics. We're delivering Ablatherm unit to them as part of our initial agreement. They will be sponsoring these files and are a very strong partner with significant reach and credibility within the U.S. urology market. They are selected with [INDISCERNIBLE] centers for the study and more details will be released on this at a later date. However, I think any of you familiar HealthTronics as an organization understand how meaningful it is in terms of credibility that they have selected Ablatherm as the IC technology to support. At this time, that is all I can really say about the U.S. element to our future plans. But we will update you as this progresses.

To close my remarks, I would like to reiterate a number of points. Ablatherm-HIFU is growing at accelerating rates in both sites and treatments as we enter new markets and gain new reimbursements. While these events are unpredictable, we do know, as a whole, that we will continue to see difficulties for sure for some time to come. We are executing well on our model which is to be very healthy and benefiting from our new market entries. While the third quarter was a bit below expectations, the further results of timing in the U.K. which is already yielding very positive results as we have shared with you.

Our markets are growing in many places worldwide as Ablatherm takes a leading role in making HIFU available on a broad basis. Our model is built to benefit from both small entries and large events such as reimbursement approvals. We're confident we will continue to see the opportunities. Finally, with still two months left in the quarter and we will be working very hard as always to fully utilize this time to deliver the best performance possible to you, our shareholders. We believe there are a number of positive opportunities ahead still and we'll bring them to you as they develop.

I will close with one final remark on marketing. We have hired a new marketing director and he's already making substantial progress in advancing our exports to clearly tell the story to the patient community and physician community. We have the interest and resources to make important strides forward in marketing. Which is about to take substantial steps forward. I am pleased with the progress we're making and these efforts will further grow the opportunities we see in both current and future markets. We'll now open the call for your questions.

Thank you. [OPERATOR INSTRUCTIONS] At this time, there appears to be no more questions. Mr. Chauveau, I'll turn the call back over to you for closing remarks. I beg your pardon. A correction to that. We do have a question from the line of Dale Vincent. With Wells Capital Financial. Please proceed with your question.

Thank you. I was waiting to see if somebody else picked up. Would you go briefly over what you're doing in the U.S. You're going to deliver one unit to -- and where is the study going to be conducted? I didn't quite get that.

Thank you for your question. I actually mentioned with regards to the U.S. that we were in the process of delivering units to our partner HealthTronics. We'll deliver our Q2 units before the end of the year.

Two units or one?

Two.

Two units, ok.

Yes. And I believe that we will have more by the end of the year. We'll have -- I think a minimum of ten centers for HIFU that will be part of our study. We plan to report on that later on in the year. I think that we've got a press release scheduled with HealthTronics during the course of November, December. At this stage, I can't give you much more information on that but the fact that everything is running pretty smoothly, we've got very good contact with the FDA and we expect to treat our first patient before the end of the year.

Now, on the approval, for reimbursement, it's in Germany, Italy, and the U.K. right now, is that all?

Exactly. We've got reimbursement in Germany and Italy, we had reimbursement last year for these two countries and BUPA, which is the largest private insurance company in the U.K., approved Ablatherm-HIFU for reimbursement earlier this year.

What's the name of that insurance company?

BUPA. B-U-P-A, it's really the largest private insurance in the U.K. This is a very strong signal to the other private insurance obviously. And we know, as well, that the CPT which are -- the patient trust which are in charge of reimbursing for the public, some of them start to reimburse their Ablatherm-HIFU for the public patients as well. We're very confident that this will help us progress in the U.K. at the much faster pace from now on.

You also have approval in France, too?

Well, we've got approval to sell in France obviously but we don't have reimbursement in France yet.

Okay. And then Canada you don't have approval yet.

We're approved in Canada but we're not reimbursed.

Okay. And now, on these mobile units, are these units -- they're not sold, are they? Or are they just a joint venture? Is it your own operation?

Well, it depends on the countries but for Italy, France. and Germany, they are our own equipment, yes. We own the track and we own the equipment.

So how many procedures per unit are -- you might expect just say in a month? Is there any way to determine that?

Well, the way to determine that is just to do the mathematics. We know that we can open up to 20 days a month and this is the maximum you can achieve. And in one day, you can treat up to 2 or 3 patients so the maximum you can treat with one unit a month would be somewhere around 40 to 60 patients.

You said you had 8,000 so far year-to-date? Or was that just in the quarter?

No, this was year-to-date.

Pardon? I didn't hear that. What did you say? I'm sorry.

8,400, Dale.

Okay. And so that -- the unit growth there is going to be the key to determining revenues rather than the outright sale of HIFU units, I would guess.

Absolutely. For instance, if we -- if we go into the details of the German market, we went from 98 treatment performed on a mobile basis last year to 224 at September end this year. So it is a 129% increase year-to-date. And this is a 78% increase in term of revenue. And we see a very good opportunity for us with our mobile services, in these key countries, in the key European countries and we believe that we have a very nice opportunity for growth with our CPP business as well. Which means that we plan to leave machine directly in the centers whenever the centers can provide a commitment for a certain number of procedure a year. Without initial investment from them.

So you have -- what did I see. You have 25 sites -- no, that's just in Germany. You have a total of 80 sites all -- overall.

Exactly.

And so 40 to 50 a month so. I'm just trying to figure out what your annualized rate would be right now. But it's much--.

We've got -- on average the business -- I mean if you try to make the math based on 80 centers, if you get somewhere around 2,400 to 2,500 patients over the year, you'll end up with 30 patients a center. I think that we can go beyond that. I think that we can go significantly beyond that. Once all of the centers average their full speed.

Well, now, you say you have 8,000 treatments in the quarter. Or was that--.

No, no, no, no, no. We had 600 in the quarter.

Okay. So, the 8,000, that's the total number that's been treated cumulatively. I see.

Exactly.

Okay. All right. And of those 8,000 people, what's been the post-experience circumstance with regard to prostate? Cancer?

What do you mean by that? In terms of efficacy?

What kind of -- what's the efficacy? How many of them were -- had a successful treatment and how many did not have a successful treatment and what did it do with the level of advancement of the disease?

Yes. So what we can report with regards to that is the published results at five years. We'll have tomorrow's presentation in Weston with the seven years results and they showed with a set of patients with localized prostate cancer, a success rate based on negative biopsies which is somewhere around 92%. So this is the success rate based on negative biopsies and based on a PSA level back to normal, the success rate is somewhere around 85%. So, we are comparing very well towards the other established therapies. At seven years now.

In terms of side effect, preserving quality of life, I think that we've got a fantastic technology compared to the established treatment. Especially in term of preserving the continents of the patients, preserving the countenance of the patients, we have almost no incontinence with HIFU with the Ablatherm. And this is a significant advantage compared to any other established therapy. So I think that really, we've been doing a pretty good job in establishing Ablatherm-HIFU as the minimally invasive i therapy for the urologist in Europe. We've got to keep on promoting that and we've got to be more and more aggressive in our marketing and that's what we're planning to do. We recently hired a new marketing manager and I can tell you that his main job is going to be to obstruct the gas pedal, I want him to be a real HIFU evangelist. and I think that's the reason why he joined us.

Let's see. I guess I have no further questions except that I'm certainly eager to see continued approval ratings and I guess in the U.S., it is going to take the clinicals will take some time. Or are you on a fast track with the FDA? Do you know that?

I've got some ideas about that but we report on that in November or December with our partner HealthTronics.

Well, that's good. Thank you. Keep up the good work and let's hope that it all works out to everybody's wonderful expectations. Mine included.

Thank you very much, Dale.

Thank you, Dale.

At this time, there appear to be no more questions. Mr. Chauveau, I'll turn the call back over to you for closing remarks.

Thank you very much for joining us today at this update. As an additional reminder, we'll be conducting investor meetings in Europe in November, primarily in the U.K. and Germany. And have plans already in place to be in the U.S. in early December. Including the West Coast. We are also making plans for additional investor meetings in the U.S. in early 2006 as we continue to believe the opportunities ahead are very strong and we'll benefit from the broadest market exposure possible. We look forward to reporting continuous success in our financial position, the building of our company through the continuous demonstration of excellent results in the clinic and overcoming the next series of hurdles that will allow us to grow the value of our enterprise.

In the interim, we're happy to provide information, answer questions as we're able. Please contact Halliburton Investor Relations listed on the press release and they'll be happy to arrange to meet your requests. Once again, thanks for joining us today. And we look forward to speaking to you again at our next quarterly update. Thank you and good-bye.

This concludes today's EDAP TMS conference call. Thank you for your participation. At this time, I will disconnect all lines from the conference. Have a pleasant day.