Edap Tms SA (EDAP) 2006 Q2 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 financial results for the first quarter 2006. [OPERATOR INSTRUCTIONS] 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 for the company. Before we begin, I would like to remind everyone that management's remarks today may be - may contain forward-looking statements. 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, Chairman of Edap.

Hello everyone. I'm here today to tell you very clearly that I personally and we at Edap, have never been more enthusiastic about our future and our opportunity. We'll detail some of the reasons for this in our prepared remarks. But this demands [undivided] attention in order to gather the fullest benefit we can. We'll address this more as we progress today, as I am sure it is on you minds as we speak and justifiably so. But let me be clear. The decision to make these moves now is directly related to today's market opportunity. The opportunity is immediate, as we must be aggressive in our response.

Let me highlight some topics I'm sure you want us to speak to, but they're not directly related to our growth outlook and enthusiasm. First in terms of the capital raise, why $7.75? And why now? These are numbers of reasons for this, but it came down to the fact that we offered a discount - about 20% from the average from when the deal was priced and because of French corporate law, avoided certain other terms such as options and warrants that would any way have been more dilutive and less beneficial to our shareholders in the long term.

Yes, the percentage discount could have been smaller with different terms, but the impact to our shareholders over time in dilution would have been much greater. Simply, this made the most sense in preserving the long-term interest of growth and protecting our shareholders' interest to realize a gain in their equity as we execute this plan. Also keeping things into perspective as a long term view, this discount is pretty average looking at pricings with similar terms. Taken in a void, some said this looks very steep. But taken in the complete picture as part of a major growth opportunity and as a reasonable discount that aligns the new investor interests with the existing interest and at the smallest possible dilution, this is decidedly the best strategy for the future, rather than the short-term decision.

Some suggested that we should have done an offering at over $15, and that would have been a very nice idea indeed. But this is a case where the charts and the high-low statistics tell a very incomplete and misleading story. While the stock peaked at just over $20 during a red hot market in Q1, there have been only about a dozen days the stock closed over $15 a share. The real and true average for the past many months is closer to $10 a share, which is a very nice improvement from a year ago. The big spike looks great, but statistics mislead. This one area where our view and the markets align very nicely, we are in this for the long term sustainable growth. Taking a longer view, there is a big upside to be had, even with short moments of disruption like this; and taking a longer view, the terms were tough but fair and allow us to keep the job done. Please keep that point in mind and I'll be back to this at a moment.

Another question was, why more current investors did not participate in the funding? Well, yes some did, and some declined because of unregistered stock issues. Also, it was only available to institutional investors and not broadcast to the market, because it was a pipe, speeding the fundraising process. Some expenses were high because as a French company, special legal issues and financials have to be met. This was not a large fundraising as we did not need a large funding.

We don't take capital raises lightly and this is the only time the company has been in the market for capital since our IPO in 1997. This is not a simple or quick process, especially so for foreign listed companies on NASDAQ, as our commercial code entails some extra steps that require time and cost to meet, but are part of our structure. We and you are absolutely aligned in what we want to see - the company funding its growth from cash flows rather than equity raises.

To another of your questions - yes, these funds are enough to accelerate Edap's growth with more sales staff to support marketing resources to recruit doctors and education initiatives to make patients not only aware of HIFU, but actually seek a consultation with a doctor offering HIFU to learn if it is the right choice for their treatment needs.

Our outlook is for the next 30 months of marketing and growth. This is not to say that there is not opportunity to see growth before then, or that the growth will be done by then. In this time and not necessarily at the end of this time either, the business will be self-sustaining and obviously that makes it much bigger than it is at present. Making sure that there is not doubt, we are running this company for profit. What we believe to be very good profit. But in order to achieve those profits, we are right now making investments for a short period of time that have increased our cash flows dedicated to marketing. Losses are up for a period and as revenues grow from these investments, we will be able to move the cash flows funding the ongoing growth.

This pattern has been demonstrated by other urological therapies including - lithotripsy; brachytherapy, green light laser and robotic surgery. All of these therapies had naysayers and periods of short-term disruption in the companies that launched them, but all became standards of care by making this kind of investment to secure their market position. It is now time for Ablatherm to make this move for HIFU.

We will discuss growth trends, revenues and some other issues ahead. RPP treatments and centers are growing. The revenues are shifting strongly in directions that are sustainable and profitable in scale. When you look beneath the immediate numbers, you can see a very solid and growing business; one that is managed for the creation of long-term value. With that, I'll turn over the call to Hugues to begin a discussion of the business. We will then return to this theme of changing our growth for the upside and then close with our usual Q&A sessions. Hugues?

Thank you Philippe. Thanks for joining us today. I know that many of you are with us to get a clear understanding of our recent activity and how it changes our outlook. Let me give you a few highlights, then we will discuss several points in more detail.

Treatments are up from last year, running at an estimated of 3,000 for 2006, compared to 2,400 last year. End of June, this includes 517 RPP treatments versus 308 in '05, plus another estimated 1,000 treatments in non-RPP sites. We are not satisfied that these growth rates are addressing the full opportunity available to Ablatherm in the market today. To that end we have raised some additional capital to immediately begin rolling out marketing and sales programs addressing both clinicians and patients to accelerate our growth. Our intent is clearly to not only increase this number of treatments in our existing sites, but to expand the number of centers much faster than we are presently doing.

Our focus today is Europe, which is as large a market for prostate cancer as North America. The localized prostate cancer market is about 170,000 new cases a year in Europe and growing. Edap is presently treating an estimated 3,000 patients a year, or 2% of the opportunity. We are active in taking a leading position in the four largest markets in Europe; Germany and Italy which have full reimbursement; UK has begun limited growing reimbursements; and France where we are at work to secure reimbursements, but already have a large trained base ready to roll out once the approval is given. It should also be noted that Edap is the sole large HIFU player in three of these four markets. We see that each of these markets should have at least 150 clinical centers offering HIFU, a five-fold increase opportunity from today 117 to over 500. In addition, we forecast significant gains in the number of treatments in our existing centers.

We see utilization capable of being 20% of a center's localized prostate cancer cases and some of our top centers are already in this direction. The second quarter was one of significant progress and the market is now much more open to Ablatherm HIFU. The second quarter included both the European and American Urology Conferences, which were very successful for Ablatherm. The medial consensus in Europe is now well established, following the European and the American meetings and Edap's very significant HIFU symposium, which exceeded all expectation for interest.

The medical data and thought leaders say specifically that Ablatherm HIFU is a very good treatment for non-surgical patients with localized prostate cancer. It is also on its way to become a new gold standard for radiation failures patients. In both cases, the high efficacy coupled with some of some of the lowest proven side-effect rates makes Ablatherm HIFU an important tool in the future of prostate cancer care. Our high-growth marketing program will continue to accentuate compelling clinical publications; increase urology's awareness through a stronger clinical presence at major conferences; urologists' converting workshops; and additional marketing and sales people in key countries.

In Q1 and Q2, we began to make some marketing moves and we will be making very substantial moves in the coming months. These include hiring additional sales staff for key markets, so we can more aggressively reach out to doctors and convert them to Ablatherm HIFU users. We will be launching more sites on Ablatherm HIFU service, especially in our revenue-per-procedure business, which directly benefits Edap. We will be surrounding our user centers with marketing support to directly help them recruit patients. And finally, but perhaps more importantly, we will be reaching out directly to patients to educate them about their choices regarding HIFU and directing them to a center near their home offering Ablatherm therapy, so that they can discuss their options with a fully trained urologist.

Our goal is not to take over the market, but clearly HIFU is ready to be a much greater presence in the prostate cancer market right now, and Ablatherm is the only HIFU device to have broad credibility and reach in Europe. Some of you may have seen that the Sonablate device, the only other [inaudible] approved device for localized prostate cancer in the world, announced today that they have a conditional approval for a trial in the U.S. they intend to start in about four months or so. They have not disclosed the full terms of their trial, but we are pleased to see this, as competition only raises the profile of HIFU, especially when the company provides factual and accurate material based on published and peer-reviewed clinical results showing very clearly that HIFU is a successful therapy competitive with all other modalities and with lower side effects. As you all know, Edap is clearly the strongest clinical data body in the world and is the go-to resource for clinical information on HIFU for localized prostate cancer. We've been enrolling patients in our US trial since May of this year, through our partner, HealthTronics, the largest urology services company in the United States.

HIFU is clearly going to be a part of the future in the U.S. as we note the success from EDAP's well documented studies, already published in many of the world's top urology journals. We'll provide more details about the progress of our study in conjunction with HealthTronics at a later date. As we've said, we prefer being conservative with you on these events as we brought them well into the process so that you can see what is truly happening.

Let me now share with you a few comments on lithotripcy business, which is in line with our expectations. The lithotripcy division had a very satisfactory quarter of activity with 11 equipment sold and a very strong Q3 backlog of already nine equipments. For the first six months we reported an operating loss of EUR110,000, which reflected expenses related to an ongoing development project intended to support future opportunities. Competitive confidentiality prevents me from expanding further. The project, and its results, will be announced at a future date.

I'd like to turn this over to Thierry for a few moments to discuss the financials, which are detailed in the release. Thierry?

Thank you, Hugues. I would like to highlight two elements in the financials -- the transition to RPP business in itself as well as our cash flows, which are different than cash burn. First, business transition to RPP. We are seeing very fully growth in the RPP business. Our HIFU machines serve business has some pricing mix in it. And in the first half it was lower by about EUR600,000 compared to last year, making our revenue comparisons misleading.

In terms of treatments and sites, you can clearly see the growth is happening. We are replacing large sales of hundreds of thousands of [euros] with treatment increments of only EUR2,800 each. This has allowed us to gain a sustainable and predictable growth business, which is very healthy for Edap. Secondly cash flows. Our December 2005 to June 2006 cash prediction totaled EUR1.7 million, EUR700,000 in Q1 and EUR1 million in Q2.

Let me break it down. Selling and marketing increased by EUR700,000, and this was burn. Working capital requirements, which is [recordable] at short-term and mid-term and defined as increases in receivables plus inventory less payables totaled EUR700,000, investments in machines or the balance of EUR300,000, which our group pay back.

On cash flows, we do plan to spend more on marketing efforts and we have clearly fitted and now have had a sense indicative to this. But our burn rate is only a portion of cash used in any given period. And I think it is fair to say that with no more than EUR11 million we are well funded for our current plans. Obviously, we expect growth to fund future marketing investments out of cash flows as we expand our core. Hugues?

Let me now sum up our outlook. Our plan is to first grow centers treatments and RPP sides at accelerating rates by rolling out an aggressive marketing strategy addressing both the urologists and patients with a clear focus on accelerating compelling clinical [inaudible], adding sales people increasing site launches, patient marketing to increase utilization. We also plan to make fair use inroads to the European markets including additional reimbursement. After this, the opportunities in North America both Canada in the immediate time and the U.S. in the coming years and we believe we are well positioned to deliver value to our shareholders by executing on these plans.

Philippe was very clear at the beginning of the call today. We see this as a short-term cost to address a very large market opportunity and have done the required testing to have high confidence in what we are working to deliver. The long-term upside here is certainly worth the short-term investment. And we are seeing clear success already with more to come.

We will now open the call for your questions. Operator, can you hear us?

[OPERATOR INSTRUCTIONS] Our first question is from [Kenneth White] with [SKCapital Management]. Please go ahead.

Good evening, gentlemen. How are you today?

Good. Thank you.

I have a series of questions for you. Number one, I'd like to know what your new cash position is with the raise that you completed. Because I want to be clear that the cash burn in the first half was about EUR700,000 and that you see the other 1 million used as mostly receivables driven, like what you reported last year when cash improved in one of the quarters.

Sorry. Can you accentuate the portion of the question? We didn't pick it up.

I'm sorry. I wanted to know what the new current cash position is with the raise you completed. Because I want to be clear that the cash burn in the first half of the year was about EUR700,000. And you see the other 1 million used as mostly receivables driven, which is what you did in one of the quarters last year.

Absolutely. We reported by the end of June a cash position of EUR6.5 million. If you add to that an estimated, in excess of EUR5 million that we got from the raise, you end up with a cash position of EUR11.5 million.

Okay. And you see the other EUR1 million used in the cash burn as mostly receivable driven?

It's receivable driven plus investment in equipment that we placed in the market for EUR300,000 also.

Okay, okay. And it looks like there was 1,500 treatments in the first half. And they seem to be a bigger piece of the RPP side, while the selling price on the equipment was just lower this half rather than what you mentioned in the same type of trend on a few of the other sales last year. Do you see the RPP growth rates continuing over this 100% year-over-year? And can you get it even faster than that?

Well obviously the whole idea of this raising, of running out this marketing plan is to increase the number of RPPs at a faster pace. And this is clearly our goal. And we envision to increase dramatically the number of RPPs in the quarters to come, yes. That's our goal, very clearly.

Okay, okay. I like that. I also noticed that -- I read a report from one of the medical analyst companies stating that HIFU and Brachytherapy would be the two top non-invasive choices in Europe in the next few years. Do you agree with that assumption? And is it true that EDAP has more sites offering HIFU in Europe than there are sites offering the robotic surgery in Europe?

Well as far as the -- let me answer the second part of your question first. I believe that is true, yes, because I think that they reported 80 site providing access to the da Vinci robot when we've got in excess of 100 sites offering HIFU. So we've more centers. Now with regard to your question on Brachytherapy and HIFU, we clearly market HIFU currently as an option for patients who are not good candidates for surgery. So we are dutifully addressing the same market as Brachytherapy.

We believe that it's going to be a very attractive choice for the urologists as HIFU is truly driven by urologists and they are the ones seeing the patients. So we believe that we have a very good opportunity to become the truly minimally invasive option, an additional option for urologists for the patients who are not good candidate for surgery.

Okay. I think I have a couple more here. I'm just looking over some of the statements in the press release and some other stuff. You guys are actually throwing a lot of resources on the fire suddenly over here. And I'm just curious as to how confident you are that the coming quarters and even rolling out into 2007 are going to show the kind of growth that gets us well paced where we are today.

Well we are already seeing growth in our RPP centers. We are currently running at 25 patients a year on an average RPP center. And we are running at 50 patients a year on a fixed installation. We believe that there is a huge opportunity for us to increase these numbers. And more importantly to add more centers in the near term. And the idea of this rate again and the idea of rolling out this marketing strategy is really to convert at a much faster pace urologists in using Ablatherm-HIFU. And we are very confident that we're going to do that and that we're going to achieve that, yes.

Okay, that's excellent. As far as the French reimbursements go, what are the treatment numbers that you could expect, like an estimate on utilization -- if you were to receive the French reimbursement, how quickly would you be able to treat? And do you have any guidance on the amount of patients you'd be able to treat?

Well, I can't comment on the number of treatments we'll be able to treat. But we'll be able to roll out our strategy very rapidly. Remember that treat gaps somewhere around 30 centers in France that have already been trained on the equipment. And we've got many more ready to go. I mean win all of them. We are very close to them. And many of them are ready. They are just waiting for this reimbursement.

Okay. And I mentioned -- you mentioned a forecast of 500 centers. Do you have any timeframe on that? That's a fivefold increase.

Well to answer this question accurately what we are thinking about is running out a marketing program over the next 30 months. And we believe that we could reach within the next 30 months 200 centers additional on RPPs. And this is our goal. And this is in major markets in Europe.

All right. And it appears to me that as the treatment numbers rise, that the gross margins seem to rise in tandem with the revenues. And I believe that it's better to attack this market now to secure a much larger revenue base later on. And I think you guys are really doing the proper thing here. And I tip my hat to you. And I thank you.

Thank you very much.

Thank you. And our next question will be from Walter Ramsley of Walrus Partners. Go ahead, please.

Good afternoon. Congratulations. Just have a couple of questions. Just doing the basic math, the RPP, the revenue curve procedure came out to about EUR2,750. I mean is that representative? Or is that a number we can use kind of predicting the future with?

The average at the moment is somewhere around that. Absolutely.

Okay. So that doesn't vary too much from one country to the other?

Well it does a bit, but it's a good average number.

Okay. The consumable revenue on the fixed installations, can you review for us how much that's amounting to currently?

Well it's not privileged information at this stage. But I can tell you that the average selling price for this, for the first six months is somewhere around EUR470.

Okay. Okay, that's good. Now the 500 installations that was referred to that's in addition to the 117, or that's the ultimate objective? I'm not sure I understood.

That's the ultimate objective.

And approximately 30 months to reach that point?

No, that's the ultimate objective. We believe that within the course of the next 30 months we'll be able to add 200 centers.

Okay. Okay. And then just as far as the future share count is concerned, can you give us an idea of what that figure should be?

Could you repeat the word after future?

The share count, the diluted average --

Share count, you mean the stock number of shares you mean?

Well if you want to tell us what the stock price will be, that would be even better. But --

Walter, I could you rephrase your question so I can address it? Sorry, I'm not quite with it.

The share count in the third quarter, can you give us an estimate of what that will be?

The share count?

With the new shares outstanding.

Well we're currently at 7.7 million shares. And we will be adding as of Q3, which is July, August, another 961,000 shares.

So there are no additional options or anything of that nature?

No, none.

Okay. Thanks very much.

Thank you, Walter. Take care.

Thank you.

[OPERATOR INSTRUCTIONS] And our next question is from Donald Collins of MPB Inc. Please proceed.

Good afternoon. Hugues, you reported 720 total procedures in the first quarter. Can we assume that the second quarter is running at around 800 and some odd?

The estimated number is somewhere around 780.

Okay. So that would get us to the 1,500.

Yes.

Okay, the next question I have is you have a clinical site in Toronto. And can you tell us about the progress there and are you close to adding another clinical site in Canada? Several months ago you were talking about Vancouver. Are we closer to another province in Canada?

Yes, well I think that our partner in Canada is very pleased with the progress there. They markedly increased the volume -- they are currently running at 20 patients a month, which is a very good number actually, with one year of operation. They are confident that they can place more machines in North America. Now this is sensitive information, which about the timing of this, which I cannot disclose at this stage.

But we are very confident there. They are very confident with their progress. And they are doing very well. I mean 20 patients a month after one year of operation is excellent and it's a very profitable venture as well.

Again, what about Vancouver and other provinces in Canada? Are we to assume that you have an FDA equivalent in the whole country of Canada? Or is it province by province?

It's province by province. You need to secure the British Columbia approval, the College of Surgeons' approval. And this is something they are still working on.

And again, what about Vancouver?

That is British Columbia.

That is British Columbia.

Okay, all right. Thank you.

You're welcome. Thank you.

Thank you. There are no more questions at this time. I will turn the call back to Mr. de Bantel for closing remarks.

Thank you. Thank you very much for joining us today on this call. As we said, the market has never looked better and EDAP is the only HIFU company in prostate center to have the kind of results, market presence, clinical support, and now marketing resources to fully deliver the HIFU vision to Europe. We look forward to reporting continued success, to affirm our ability to address the opportunities in the market for HIFU.

If you have additional questions, please contact Halliburton Investor Relations, listed in our 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 with you again at our next quarterly update. Thank you very much.

Good-bye.

Good-bye.

Thank you. The call will be available for playback by telephone or online according to the instructions listed in the results press release. At this time, we will disconnect all lines. We appreciate you for joining us today.