Edap Tms SA (EDAP) 2006 Q1 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 the first quarter 2006. This call is being recorded and will be available for playback by telephone and on line. Details of the playback are available on the company’s press release.

On the call today is Philippe Chauveau, Chairman of the Board; Hugues 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 a number of risks and uncertainties that could cause actual results to differ materially from those described therein. Complete details of factors affecting forward-looking statements can be found in the company’s SEC filings, available at the company’s website, www.edap-tms.com. With that said, I will now turn the call over to Philippe Chauveau. Phillippe?

Thank you, and welcome to our first quarter conference call. As always, we would like to encourage you to use this public forum to ask questions of management so as to help develop a better understanding of our business and how it is growing under our current plans. We can’t promise to answer every question, as certain items are not fully disclosable for competitive reasons, but we will certainly try to provide the clearest and most complete information we can.

Let me start today’s call with three major comments. And here are the three major comment headlines. The first is that our revenue-per-procedure strategy is working. The second is that, for Q1, some results are a trend and some results are not. And thirdly, our revenue-per-procedure sales must grow even faster. And growing what we call RPP -- revenue for procedure -- is our major objective, so we are continuing to implement additional strategies to increase this further.

Let me give you a little bit more detail. The strategy of selling treatments, RPP, not just devices, has started and is working.

Secondly, as I’ve said, some Q1 results are a trend and some are not. For instance, we are focusing marketing spending increase in countries where treatments are reimbursed, and this will dramatically and further increase. This is a trend.

Also, cash management in Q1 is not a trend and will depend on increased marketing spending.

And furthermore, device sales are reasonably flat but revenue per procedure is going through a very high growth, and this is truly a trend.

Our commitment, thirdly, is to make revenue per procedure grow even faster. While revenue per procedure is growing -- up 86% -- our goal is that revenue per procedure must grow even faster, and we will address this during this call.

There is a long time lag between new Ablatherm-HIFU installation and the ensuing number of treatments in the ramp-up. This is a reality, and our planing covers this. This slow ramp-up, however, is offset by a very low number of revenue per treatments to reach break-even and then solid profitability on EDAP-owned and installed Ablatherm devices. These are realistic trends, and we are directing, today, several programs to increase RPP utilization, increase RPP penetration, and increase the growth rates in this portion of our business.

With these overall comments, I’ll turn over the call to Thierry for a review of the results we released yesterday. Thierry.

Good day, everyone. Please note that all of the figures that I [unintelligible] here today are in Euros as a constant currency rather than a fluctuating exchange-rate translation.

It should be noted that we have a negative currency impact this quarter. I will now review to talk about the numbers in Euros as follows.

Beginning with revenues. First quarter 2006 revenues were E5.2 million compared with E5.1 million in the same quarter of 2005. Devices revenue was slightly down, offset by growth in Ablatherm revenue per procedure and service signals [ph], but with a better margin. This will [unintelligible] as we return to a more normal level of operation.

Q1 gross margin increased from 40% to 44% in the comparable quarters. Q1 operating expenses increased 16% over 2005, related to our strategy of market education for Ablatherm-HIFU and to enhance our clear global leadership position.

The investments are mainly in marketing and sales development to bring revenue in future quarters.

Net loss for the group was E623,00 compared to a loss of E140,000 [ph] in the same period of 2005. Of the E480,000 shift, E241,000 was due to negative currency effect from stronger Euro versus dollar and yen, impacting receivables, assets, and liability variation.

The company’s cash provision was E7.6 million at quarter end. Cash was essentially used in increased working [unintelligible] requirements. This is not a trend.

I will now turn the call over to Hugues de Bantel to give more specifics on the results and to discuss the company’s business outlook. Hugues?

Thank you, Thierry. Good morning, everyone. We are pleased to be reporting to you substantial growth signals in the first quarter. To be absolutely clear in our objectives, we are investing our resources into growth programs, and are seeing signs of future success to be attained.

EDAP is today recognized as the leader in HIFU for localized prostate cancer. The Ablatherm is not only considered the best of breed HIFU for treatment by important prostate cancer centers in Europe; it also clearly has the longest, most detailed, and most clinically credible studies done on a broad population to date. While there are companies in this field who have announced their own studies, some of them with good results, nobody has a clinically peer-reviewed and verifiably reproducible base approaching what EDAP has demonstrated. Our clinical outcomes and long-term data position EDAP alone as a clinically verifiable treatment choice against other HIFU therapies for localized prostate cancer, for patients not eligible for surgery, for those not wanting surgery, or for those in need of treatment for recurrence after radiation therapy, Ablatherm-HIFU is now a demonstrated, clinically effective therapeutic choice.

At the European Conference of Urology, Ablatherm-HIFU received the strongest medical response it has ever seen. The six scientific presentations on HIFU were all from users of Ablatherm-HIFU. These medical professionals were attracted to the clinicals trends Ablatherm offers, which no other company can provide. We are aggressively working through the leads and inquiries from that conference and expect to develop them into future revenues for unit sales and revenue per procedure sites.

Today, our clinical creditability gives us an opportunity to start marketing heavily. We had, at quarter end, 106 sites compared to 96 at year end and approximately 70 this time last year, and continue to grow aggressively. These numerous sites allow us to serve patients in broad geographies. As such, we can now educate patients and doctors about the unique benefits offered by Ablatherm-HIFU and, more importantly, fulfill patient desire for treatment at a center in or near their community

This gives us the opportunity to create growing demand for the therapy that will require Ablatherm to be offered as a competitive element in prostate cancer centers in Europe. More centers are starting to emerge from their initial launch base. Since we increased our site count by more than half last year alone, many treated just a few patients last year.

Also, patients are starting to find Ablatherm-HIFU on a regular basis and request more information on treatment. Once patients learn of its benefits, more of them are electing to rigorously look into Ablatherm-HIFU as an option for treating their cancer. Some of our marketing initiatives are already getting very early results, which is a great indication of the potential awaiting us in the future.

More recently, we launched HIFU-Planet. It is a dedicated, informative website for patients as to first, what are the treatment possibilities; second, the HIFU advantages; and third, where can they get Ablatherm-HIFU treatment. We are already getting rapidly increasing traffic generating questions submitted to the medical professionals as well as inquiries of centers by patients who learned about the Ablatherm-HIFU from the site. We are expecting this to convert into treatments in the months to come.

As early results from our marketing efforts and, perhaps more importantly, our treatments increased from approximately 600 in Q4 in 2005 to approximately 725 in this quarter, we intend to continue working on this trend line going forward.

Of course, we are focused on accelerating this growth rate as we move through the year and are already taking steps to achieve more rapid growth in the future. Our revenue per procedure increased by 86% in the first quarter compared to the prior-year quarter, clearly demonstrating that this is the key growth engine for Ablatherm-HIFU and it’s meeting the market needs very well.

In the UK, we now have 13 sites trained on Ablatherm-HIFU, a very strong response considering we launched our main [unintelligible] last December with our second site. We expect the UK nice guidance and the strong reimbursements secured by BUPA, together with our marketing activity, to continue to grow centers and treatments in this market.

We obviously continue to grow in other countries as well, including Germany, where we are adding a new site [unintelligible] and both our mobile Ablatherm units are fully booked through June. Revenue per procedure treatments in Germany were up twice the prior-year Q1 count. We recently hosted a symposium in Frankfurt celebrating 10 years’ experience of Ablatherm-HIFU in Germany. It was not only well attended, but also generated numerous additional leads as doctors see Ablatherm as a competitive advantage in treating their patients.

Growth in revenue per procedure in Italy continues to be very strong. We will install Ablatherm-HIFU in additional countries as we go forward, with many of these efforts already underway. We will report this success to you once treatments are underway in these new locations.

Now, let me spend a few minutes on the business model at this juncture. In spite of one Ablatherm of the two sold at the lower price due to its conversion from lease to permanent sell, HIFU revenues were up 11% for the quarter. This was driven primarily by an increase in services revenues from having more units in the field. This revenue is a recurring stream and very healthy for us.

The key growth driver, though, is our revenue-per-procedure business. This was up 86%, and our total treatments were up 20%. This was due to both increases in centers offering treatment and increased utilization at these centers. As such, revenues were up even with the decreased unit price on the Ablatherm installation in Germany.

We intend to continue selling Ablatherm units as necessary, and have averaged about two per quarter. This number could be up or down in any brief period, but we would like to see steady sales and a slight increase in units sold as the market grows.

However, we intend to focus primarily on the revenue-per-procedure element by providing machines, fixed or mobile, in revenue-per-procedure centers when they agree to a minimum number of treatments annually to insure our operation is profitable in doing so. This can be a very attractive option for the center by removing up-front capital expense, giving them a dedicated resource, and providing flexibility to pay as they use the device. It is also attractive to EDAP by assuring a solid return with a minimum of logistics and the option to grow that site beyond its initial commitment through strong marketing support.

We are already well into achieving this at sites in Europe and will report to you our progress in future communications.

I know you are also expecting us to comment on our recently started US trials. We are conducting a comparative trial between Ablatherm-HIFU and cryotherapy with our partner HealthTronics. This is a Phase 2-3 trial, and the only known US trial at this stage for HIFU for prostate cancer in the US. We are currently enrolling both sides of the trial.

Just a few remarks on Lithotripsy, which is tracking to expectations. The unit [ph] division of the steady quarter of activity with 10 Lithotripsy units sold and a backlog of 7 already in the second quarter. Revenues were down slightly on pricing pressure and mix, reflecting ongoing competition in this area. Services fees were up from prior periods as the age of our install base returns to a more normal average.

Let me now share my conclusive comments. We developed HIFU technology. We ran all clinical trials. We are recognized by the scientific community. We’ve got now support from urologists, not only in Europe but in other locations worldwide. We are starting to get reimbursed in three major European countries.

But this is not enough. Now we are seeing good early results, but we are focusing on the marketing to pull in more patients in the future to our centers. We will now open the call for your questions.

[Instructions] Our first question is from Derek Kruger, who is a private investor. Please proceed.

Yes, you are talking about increasing revenues per procedures. I was wondering how much you see this would increase operating costs in the next couple of quarters due to, perhaps, marketing effects of trying to increase the revenue per procedure.

Let me understand the question. Increased operating expense to increase our revenue per procedure -- is that the question?

That’s the question; yes.

Essentially, no, on the equipment side; and essentially, yes, on the marketing side. It is clear to us that putting devices in new prostate cancer sites is affordable and we can do that quite easily. But we must, therefore, surround these installations with good marketing, good support, and, in fact, ourselves bring in the patients. And on that basis, we have costed the per-patient incremental cost of revenue per procedure.

On the good side of that equation is that the number of treatments which are required from this revenue-per-procedure business model is so significantly low -- I can’t give you the number because it’s competitive information. But it is so low that the payback is very quick and the profit, therefore, comes in very nicely, and we are very confident that we can grow the number of installations based on installing the number of machines as well as affording the marketing to go around them.

Thank you.

Our next question is from Steven Balaban [ph] of Smith and Barney. Please proceed.

Yeah, hi. I’d like some information with regards to the breakdown per country. You’re in the United Kingdom, Germany, Italy, and France. In terms of the sites, are those sites-- how is that broken down into whether they’re mobile units at those sites or whether or not those sites actually own the units themselves? Can you give a breakdown on that?

Well, I can give you an approximate breakdown on that. We’ve got currently two mobile units in Germany, one in Italy. We’ve got two in France. And we sold a unit to a mobile provider in the UK who is the one addressing the mobile centers in the UK.

Now, as far as the fixed installations are concerned, we’ve got somewhere around 35 to 38 fixed installations in Europe and this is mainly in France, Germany, Italy, and the UK.

Thank you.

[Instructions] And our next question is from Dale Denson [ph] of World Capital Management. Please proceed.

Yes. I’m kind of curious, as the Euro continues to rally against other currencies, how that’s going to impact your numbers going forward. Because the Europe has strengthened quite a bit since the end of the quarter. I’m wondering how-- if you do any hedging, and how you plan to offset those negative effects, if you can.

Dale, I’ve specifically looked into this repeatedly. What’s happened this quarter is we had a double hit. In the same quarter a year ago, the currency was going in our favor and we had a positive currency fluctuation. This year, it’s going the other way so we had a negative one. It’s not a big swing in each case, but when you put these two cases together, it’s a big swing.

Over all, on a gross operating basis, each time the Euro swings by about 1 cent versus the dollar and the yen, it costs us, in operating expense, equivalent of about E100,000. We are currently doing hedging. We are currently always backing up our assets in the Euro currencies as soon as we can. So we’re concentrating on minimizing this impact. But this was a double hit this particular quarter.

Also, when you-- I know you’ve got installations in Canada now. How is-- I’ve looked at a couple of the recent announcements you’ve made. What’s the Canadian market look like and how many units are there at the moment? Are they mobile or fixed?

We’ve got currently one fixed installation in Toronto, Canada, and they are progressing well. I think that they are expecting to treat anywhere between 15 to 20 patients in May. And they are very optimistic about the prospect of their center in Canada. They are promoting their center in North America to get more and more visitors -- not only patients inquiring about the treatment, but also North American urologists connecting with them to see how they can work together and provide the treatment to North American patients. But for the time being, they’ve got one center in Toronto, Canada.

How many have been enrolled with the HealthTronics clinicals at this point in the US? Is it next week, or two weeks from now, you’re going to be in Atlanta?

I’m going to be in Atlanta together with Phillippe next week; actually, by the end of next week, for the American conference. We’ll have an investigator meeting there with all the investigators that are part of the ABA [ph] study with HealthTronics. We treated our first patient last week and we are anticipating to treat more in the weeks and months to come.

How many do you plan to recruit for the-- I mean, does the FDA require a limit-- a certain number for an adequate sample?

We are anticipating to recruit 203 patients in the HIFU arm and 203 in the cryotherapy arm. Approximately 400 in total.

Okay. And you expect to be completed with that by when?

I think that is going to take anywhere between 12 to 15 months to enroll the patients and to treat them all, and then two years follow-up. So we’ll expect an approval in the US in early 2010.

Okay. And HealthTronics is going to be funding most of that?

Absolutely.

Okay; thank you.

Thanks, Dale.

Our next question is with Walter Ramsley, Walrus Partners. Please go ahead.

Thank you. Congratulations. I had just a couple of questions. The number of HIFU machines -- could you tell us how many are in fixed locations now and how many are mobile?

Well, as I said earlier, we’ve got currently two mobile units in Germany, one in Italy, two in France. We sold one unit to our UK partner, who is going to run mobile services in the UK on our behalf. And then we’ve got somewhere around 37 fixed installations.

When I say fixed installation, they are equipment that we actually sold. Some of them are actually shared between different hospitals, but they are the one sharing the equipment between them. But we actually sold them to them and we got, obviously, the revenue from the sale and we now get the revenue from the service on the equipment and the revenue from the disposable for each of the treatments performed.

Okay. Of the fixed machines that have been installed, say for a year or longer, what’s the run rate as far as the number of procedures now?

It’s approximately 50 to 75 patients, on average.

Per year?

Per year.

Okay. And is that number likely to increase, or is that kind of the average--?

That’s a very good question, and that’s something we are working on. As we mentioned in the conference call, the idea is really now to ramp up the number of treatments. And that’s what we’ve got to work on.

Obviously, we increased our revenue per procedure by 86% over the course of the first quarter. And this was done without the full impact of our marketing activity that we really started by the end of the first quarter.

All our web marketing media coverage, work on promoting the technology to patients directly -- because patients need to be aware of the benefits of this -- will certainly have an impact. And that’s what we are aiming at is the enrollment of patients in our fixed installation, but also in our revenue-per-procedure installation and our mobile installation.

And what we think, and this is based on the discussion we had with our marketing team and the time frame we are aiming at, we think-- In April, for instance, we had 10,000 hits on our HIFU-Planet web site. We think that this-- a good portion of this, people were inquiring about the treatment, are going to speak with their urologist and share more with their urologist about Ablatherm-HIFU, and this is certainly going to help in increasing the number of treatments per site.

So all our marketing efforts, education efforts, towards patients and urologists, are actually aiming at increasing the recruitment in our existing sites and, obviously, increasing the sites using HIFU.

Okay, well, that sounds good. Now, assuming all that works and you’ve got all the patients that you need, what’s the capacity that you can put through a machine at a fixed location? Can you just do one of these procedures per day, or every other day, or five a day, or what’s realistically the potential for each machine?

Well, we’ve got machines that are treating 250 to 300 patients a year. And we had that in the past, even though we’ve got lots of this type of installation now that we’ve got more sites, obviously. But you could treat up to 400 patients on a machine a year.

Now, what is more realistic is really for the largest uro-oncology centers to address anywhere between 50 to 70 patients a year on their unit and for the other, smaller-scale centers to treat anywhere between 20 to 40 patients a year.

If you look at it, we are not looking at building up huge HIFU centers. At least in Europe, it’s not the way it’s going to go. In Europe, you’ll have 10 to 15% of the patients that will be treated by HIFU. Others will be treated by surgery or by radiation. And uro-oncology centers will have to provide the full array of treatment modalities to their patients. So I don’t think we’ll be aiming at treating 200 patients in every single center; we’ll be aiming at treating anywhere between 20 to 70 patients per center.

And this will be addressed, depending on the recruitment, either through our mobile services, placing fixed installation and getting a commitment from the hospital on a certain number of procedures a year, or by selling equipment to the centers that can treat anywhere between 50 to 70 patients a year.

So the idea there would be to get a mobile machine that would show up at each location one day a week? Is that what you’re--?

One day a week or two or three days a week, and then they’ll line up two to three patients over the course of a day and we’ll treat six patients and go to the next location.

Okay, good. All right, thanks very much.

Thank you very much for your question.

Our next question is from Donald Collins of MTB [ph], Incorporated. Please proceed.

Hello. I’d like a comment on your opinion on the timing of the potential reimbursement insurance procedure in France. And also I’d like your comment on the status of Vancouver as far as an approval and marketing there.

Well, as far as the French reimbursement is concerned, there is no progress on this so far to be reported because of lack of government funding. We are still working on that, but I think that I can’t comment much more on this, and I really don’t know when we’re going to get the reimbursement on this.

Now, as far as establishing more centers in Canada is concerned, our partner in Canada is still working with the British Columbia College of Surgeons to secure an approval to get an Ablatherm-HIFU there. I think that, at this stage, there is no clear progress on this to be reported, either.

Okay, thank you.

You’re welcome.

Our next question is from John Campbell of Campbell Research Associates.

Good morning. Can you give us some detail on your advertising plans in Europe for Ablatherm? On TV? Are you doing that? Radio? Newspaper?

Absolutely. The idea is to work more-- the first vehicle is, obviously, going to be Web marketing. And we started that. As I said, we’ve got now our website in English and in French. We are finalizing our website for the other countries as well. The initial response is absolutely outstanding. We get many referrals from that.

We receive a very good response from urologists, as well, from all the countries where we started on our Web marketing activity. And we plan to keep on working on this.

And this is extremely important, because you get not only-- you are not only educating patients through your website, but you do receive a lot of inquiries from them, and questions from them, that you need to answer. And we’ve got now-- we are getting started on all that and we receive more and more inquiries and questions from patients and we think that this is going to help tremendously in promoting the technology and the benefits of Ablatherm-HIFU in Europe.

That being said, this is not the only means. The second means is, obviously, to use the media. Whenever we start a new Ablatherm-HIFU center, we work with PR agencies to get some article in the media to explain again and advertise and promote the benefits of Ablatherm-HIFU as compared to the existing treatment modalities.

The third point is, obviously, to work on all the patient groups, cancer foundations, to make sure that all the people there are aware of the benefits of Ablatherm-HIFU and that they are ready to share that and that they’ve got the right supporting tools, the right supporting marketing tools and education tools, to be shared with their patients. You’ve got large patient groups in Germany and Italy and France and the UK. You’ve got great prostate cancer foundations in all these countries. And getting them to get up to date, up to speed, on Ablatherm-HIFU is extremely important. And that’s something we are working on.

Let me add another comment here. For these obviously patients whose psa one day gives them some bad news, the access to a website which is personal and private is of extreme usefulness, and our research shows that this is one of the best ways of communicating.

Secondly, working with prostate cancer foundations, we’ve also found that there is another audience which we are talking to who are very convincing and are able to talk to future patients, and that is hospital nurses. Because urologists do not have the time to spend too much time explaining to each of their patients, but the nurses are actually on a face to face with all these potential prostate cancer patients, and we’re addressing them as well.

Earlier, from what your comments are about getting more growth in the RPP area. In an ideal world, how many locations in Europe would you like to be able to serve with these mobile units?

I think if you look at-- ideally, we think that Ablatherm-HIFU could be used ideally for all localized prostate cancer patients. Now, let’s be realistic. I think that we’ve promoted correctly based on the scientific consensus as a good option for patients who are not good candidates for surgery and for patients who actually failed external beam radiation therapy. If we can get-- within the next five years, if we can go up to 10 to 15% of the patient population in Europe and if we could address all these populations through our fixed installation, mobile installation, and revenue-per-procedure installation, we’ll be extremely satisfied.

How many locations do you think what would take? Are we talking-- you’ve got 106 now, right?

Could you repeat your question? Because the line is not that good. [cross-talk]

You said you have 106 locations being served by Ablatherm now, right?

Yes.

Well, how many total would you like to have? How many sites would you like to see with Ablatherm treatment? Would it be 200, 400?

Well ideally, the market in Europe is closer to 500. We’d like to address 500 centers in Europe. Now, if we could get the best 100 centers in every single country in Europe, we’ll be extremely happy.

Okay, thank you.

[Instructions] Our next question is from Bill Jordan of Maple Leaf HIFU. Please proceed.

Yeah. I don’t really have much of a question; it’s just that I need to make a comment, I think, in regards to Canada, since there have been several questions about it.

We started in Canada, in Toronto, one year ago -- actually, April. And the first year, we only did 59 patients, and I think 8 Americans. A couple of those were actually training cases, for which we received no reimbursement.

However, we made a change in April that has tremendously helped us, and that is, we changed our call center and used a different strategy in our marketing. Our web page has been very, very good for us. And in May, we now, as of yesterday, have 19 patients scheduled who have actually paid in advance, and 8 of those patients are Americans. And in June, we already have 8 patients scheduled, 4 Americans. And also, we have around 20, 25 patients that we’re juggling getting prostate volumes, MRIs, CTEs, bone scans, whatever. So we have markedly increased our volume.

And in reference to the gentleman who asked about Vancouver, we are trying very hard to get permission from the College of Surgeons there. They have seen fit not to allow the machine to be placed in a private surgery center. We think there may well be some conflict of interest on some of the people’s parts who are giving opinions.

But if we don’t go to Vancouver within the next 12 months, we will certainly put a machine either in Edmonton or Calgary. But for sure, we will put more machines in North America treating patients within the next 12 months. We are very happy with our progress and we think that we will certainly treat well over 200 patients this year -- the next 12 months.

Thank you very much, Bill, for this clarification.

And our next question is from Walter Ramsley of Walrus Partners. Please proceed.

Thank you. I just had a follow-up about the hedging activities the company has been engaged in. My understanding is that virtually all the revenues and expenses are denominated in Euros. So what’s with the hedging?

Well, we’ve got operation in Asia. And obviously, the Asian currencies are getting weaker against the Euro as well. And we’ve got some operation in US-denominated currencies. So we’ve got-- part of our revenue is actually stemming from countries that are-- which we bill either in US currencies or in yen or in Asian currencies. So we do have a hedging policy as far as these countries are concerned.

So the idea is to neutralize the currency effect on the Euro? I mean, the Euro is the base currency?

Exactly.

Okay, thank you.

Thank you. There are no more questions at this time.

Thank you very much for joining us today on this update. We will be at the AUA conference in Atlanta on May 22 and May 23 with Hugues and the team, presenting to the audiences in North America our HIFU.

In the interim, we’re happy to provide further information and answer questions as we are able. Please contact Halliburton Investor Relations listed in out a press release and they will be happy to arrange to meet your requests. Once again, thanks for joining us today, and we look forward to speaking with you again at our next quarterly update. Thank you very much.

Thank you. This call has been concluded.