Edap Tms SA (EDAP) 2006 Q3 法說會逐字稿

Hello. On behalf of EDAP TMS I would like to welcome you to the company's conference call to discuss financial results for the third quarter 2006. This call is being recorded and we -- will be available for playback by telephone and online. Details of the playback are available in 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; COO, Marc Oczachowski; Thierry Turbant, Chief Financial Officer.

Before we begin I would like to remind everyone that management's remarks today may be and may contain forward-looking statements. Complete details of factors effecting 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 to you all. Based on the news released earlier, I'm sure you have many questions. We will address as many of them as we can through our prepared remarks as well as what answers we can provide to your questions.

As we indicated in our press release, we are today announcing two very different kinds of news. First, in our existing markets, EDAP is enjoying solid success and growth related to our increased marketing activities. As we told you in the fund raising report and subsequent updates these dedicated funds are deployed in Europe to help increase the number of centers offering EDAP's HIFU therapy, increase the number of patients aware of this unique and innovative procedure as a treatment of choice to help them preserve their quality of life and increase the number of RPP treatments, RPP meaning Revenue Per Procedure, done which directly supports EDAP with recurring and high margin revenues. All these are happening.

Treatments were very strong in this quarter, typically one in which we see a fall back for seasonality. This strength came in spite of a major hospital strike in Germany, the largest hospital market. RPP treatments were up by almost half year over year to 188 in the quarter and our sold sites are doing very well.

We launched six new centers and have launched that many again already in the fourth quarter with more work to come. All in all, this is very good progress and we continue to work at accelerating this growth still further.

Second, at the same time, we are updating you on certain surprising news relating to future markets in the US. As we stated, Healthronics have just informed us they intend to exit the clinical partnership for the US market. This was surprising news to us. Of course we are very confident in the clinical capabilities of the Ablatherm based on nearly 11,000 treatments worldwide. Do be clear, the decision is not related to clinical outcomes as these are successful and continue to show the value of Ablatherm and HIFU. It is important to keep in mind that the US market is years off, so these changes may or may not have a significant impact.

But rest assured we will take this very seriously and have already begun a major initiative to address this program. I will let Hugues address this later on.

Finally, the growth in Europe and the deployment of our dedicated marketing capital is clearly making HIFU a reality in markets where it is already accepted and it is EDAP leading the charge to make this happen. We can clearly see the progress in treatments, centers and RPPs. You can also see the appeal as new markets adopt HIFU because they see it as a great new option for their patients and are so enthusiastic to make HIFU available they are pursuing EDAP to launch new sites. This can give us, and you, confidence that EDAP will continue its mission in Europe and seek success in addressing the US market changes. So with that I'll turn over the call to Hugues

Thank you Philippe and hello to all of you joining us today. As Philippe explained we have two very different pieces of news. On the one hand, the future market entry is undergoing change that may lead to delays but also presents a program we must manage and do so aggressively. On the other hand, our core business is showing signs that the HIFU marketing is working and the little [petit] division remains a healthy unit. Let's begin with the top news and what we are doing to address this issue.

As Philippe explained we are indeed going to change our US program and obtain a new partner. This has been a very surprising decision but we've responded in the best way possible for the information we had at hand. Let me be clear on one point, this is not related to the success of the treatments in the patients. This is a business decision by Healthtronics related to their turnaround and restructuring strategy as they explained in their recent call.

Our distribution agreement gives EDAP a good position on which to manage this transition and we intend to use that to the fullest extent. Our priority is to secure a new US partner to bring HIFU to this important market. We've deterred some of the steps taken so far and others we are beginning now.

We are not yet prepared to comment on this on greater detail, but we intend to leave no stone unturned in seeking what we believe to be the best partnership for our future growth. We take this very seriously as the US is clearly an important market for EDAP.

The steps already underway, detailed in the release, provide a quick launch to address this. We are bringing aboard consulting support to provide a compete assessment of the status and options available to us. We are also already beginning the process to seek a new partner to pick up the trial. When we began this process in 2004, HIFU was a relatively new and unheard of treatment. That is not the case today, and we intend to maximize that change.

Today, HIFU is well known as a promising choice getting greater market adoption. We believe this will be attractive to many attractive partners, especially we have a record of success in Europe. We will retain all data and rights to that protocol as in the agreement between the companies and that agreement incentivized both parties to negotiate a thoughtful and clean transition.

EDAP does have multiple lines of recourse if needed. But our first intention is to secure as rapid and beneficial condition as possible to a new partner. Healthtronics has agreed to support this move. Thus we are insisting that treatment activity progress through the condition phase. Since we will also retain all rights to the data and activity of the trial. We will be able to use that, with a new partner picking up the US program. We have limited comments on this so far as the implementation plan has just started. However, I will say that EDAP has pioneered the path for HIFU in every major market to date. And we intend to do so in the US as well. We are already at work to address this issue and we will report updates as they occur.

So to summarize, yes, this is a tough piece of news for the short term and cause for us to be very aggressive in our action to address this change. At the same time, EDAP is already initiating plans to secure a new partner and making the most of the opportunities that lie beneath the surface. Our intention is very clear to accept this change successfully with a new partner for the US.

Let's now move onto the current HIFU market and operating activity of the company, which are a stark contrast to the US news. HIFU is growing in its markets where it is currently available.

First, the third quarter showed a good example of progress from our marketing program under the direction of our chief operating officer, Marc Oczachowski. Since we closed our capital [race] at the end of the summer, we have developed a number of initiatives and have several still to come. I'm going to ask Mark to discuss a few of our highlights and programs under his direction, which have contributed already to our growth. Mark?

Thanks Hugues. EDAP has been hard at work launching our marketing effort to bring greater HIFU awareness to key markets and use this to drive treatments and EDAP's growth. The marketing funds are working and working well. Treatments were strong in the third quarter at 700, level to then second quarter as opposed to the seasonal dip we would have expected in normal conditions. This is clearly good news. Let me take a few moments to update you on major market activity.

Germany. We believe Germany will clearly be the global leader in HIFU adoption for localized prostrate cancer. Not only does Germany have a solid reimbursement protocol, it also has a dedicated and growing physician base, advancing HIFU as a significant part of the future in treating prostrate cancer.

Sites in Germany continue to launch regularly and we are adding additional resources to meet the growing demand. The most significant of this was a third mobile unit to address the growing news of RPP services in these markets. This follows just more than a year after the addition of our second unit [Therma] 2005, reflecting the acceleration of adoption and total sites used in this key market. EDAP is the only significant presence in this market and continues to accelerate our growth programs, especially in our marketing efforts which are clearly driving patient awareness of HIFU as well as increasing demand for its use.

EDAP's reception at the German National Urology Conference in September 2006 was the strongest it has ever been and generated a tremendous number of inquiries. We used our decade anniversary in Germany to launch additional marketing pushes, which have been well received, including strong media coverage.

German RPP treatments increased 86% year to date as the market continues to expand its adoption of HIFU under the recurrent reimbursement strategy. More sites and greater use as these RPP sites is clearly adding a positive effect. This number of treatments and RPP sessions could and will be even larger with a full quarter from Germany, which has had a hospital strike in August that delayed a number of sessions into September and the fourth quarter.

France. France continues to be a strong market, even prior to reimbursement approval. We continue to take the necessary steps to secure reimbursement under the French health program, but as before, I'm not in a position to comment on timing. The clear results for HIFU as well as a very prestigious and growing user group help us greatly in making the case that HIFU needs to be more broadly available to the French population.

Our strong clinical data and low side effects are clearly an attractive and important part of this consideration. France has the largest base of sold units, but also a significant and growing presence in the RPP business. Even without reimbursement decisions made, the RPP business increased 25% year to date, compared to 2005, we believe reimbursement will al low for a major advance in these treatment numbers once it is secured. Clearly HIFU is a respected and attractive therapy today with reimbursement being the major consideration missing.

Italy. Italy provides reimbursement and is much like Germany. A strong user community and highly respected centers are bringing HIFU along in this major market. Still, it is still a smaller market than Germany, but ultimately will be a major HIFU center as the treatment continues to progress. EDAP's RPP business is very strong in Italy and exhibits excellent growth of 95% year to date compared with last year.

UK. The UK continues to progress and we look forward to updating you on this market in greater detail later. Our centers continue to see success and growth and we are presently launching other initiatives to further support this market. In addition to this progress in the four key European countries, we also recently reported to you launches of service in Portugal, Scandinavia, Spain, among other locations and we continue to prepare and execute plans for launches in still more countries.

In every case we are reporting these launches to you when there is a committed and site opening the country so you can measure real results that add treatments and centers for EDAP. These new markets are led by major centers and highly regarded urologists, exactly the kind of launch EDAP wants to secure every time. We are excited by the enthusiasm and dedication these centers show in making the best possible array of treatments available to their patients and their commitment to including Ablatherm.

I want to note that in spite of the great progress we can report so far, this is just the beginning. We are working every day to increase the growth rates as we address many different opportunities. Our marketing team is hard at work and focused on its main target, which consists in the conversion process of urologists and patients toward other-term HIFU for the treatment of localized prostrate cancer. We are also adding several positions including key sales positions in major markets to further advance our growth. We will report on this as they join the company, but we are already securing commitments from very experienced and proven personnel to help advance EDAP still further.

To summarize, HIFU is happening in Europe and EDAP is the leader in this effort. We have the largest number of sites, treatments, clinicals to advance HIFU in all of these markets. We're also well funded to make this a reality. While we intend to spend these funds aggressively, we are not departing from our fundamental values of good fiscal management. We intend to secure a measurable return for every dollar we are investing. Under the RPP business, we intend to make sure that measurable return comes back not just once as in a mission sell, but many times through the sale of treatments.

I'll now turn the call back to Hugues, to discuss the business further.

Thank you Mark. As you can see from Mark's comments, we are enthusiastic about the opportunity in Europe and already working to provide you a clear indication of the opportunity available in this market as well as our initial success in securing victories for EDAP. One of the key measures of our success is in the growing recurring revenue streams from our services and RPP lines. I'd like to ask Thierry Turbant, our CFO, to review the financials at this point.

Thank you Hugues. I will just highlight three key operating metrics. First, of the year to date loss, EUR559,000 is primarily non-cash related to a potential [8] change loss in currency changes and the difference of EUR647,000 is primarily related to investment in marketing and operations.

Second, year to date, the [unid] division saw gross margin improvement to 32%, as did HIFU reporting 55% under increased contribution not only from higher margin RPP and service road news, but also increased gross margin on machine sales.

Third, the company remained well funded for its planned investment in marketing and growth with cash of EUR10.5 million. Total cash used in operations for the third quarter was only EUR360,000.

Finally, it is too soon to comment on any financial impact on the Healthtronic issue.

Thank you Thierry. Adding to Thierry's highlights is a very important trends in the business and one on which you can now see success. The growth in RPP focus has made up the difference in reduced equipment sales while giving the company increased recurring revenue at these sites. While this has held revenue growth in check during the transition since we were exchanging a multiple hundred thousand revenue equipment sales for treatments up to about US$3,500 each. To see these growths occurring today is a very good sign of progress, especially considering these sites will treat patients every year.

EDAP will continue to sell Ablatherm devices, although we are now becoming less dependant on device sales to make our revenue targets in the reporting periods. This is very good news as the recurring nature of the growing RPP and services base provides greater stability to the company. These results clearly support our plans to increase marketing and education, especially helped at securing greater adoption of the RPP model at more sites.

However to increase site use of the RPP, once launched has seen solid results with most of that opportunity still ahead of the future periods. EDAP is still very well positioned as the HIFU market leader in Europe. More importantly, we are positioned to address the whole continent and already have very strong site operation in the four largest markets where HIFU being used on a regular basis.

Before we open the call to your questions, I'd like to reiterate balance of our comments today. The US market changes are certainly a topic of concern and has moved your management team into very strong action to immediately address this issue. We want to minimize any delays in this mid-year program but at the same time make full use of this opportunity to secure the best partner for EDAP's entry into an important global market.

The decision behind the change was not related to the success of the treatment as the doctors and patients have been very positive. And finally, your company is well capitalized with more than EUR10 million secured from the rollout of HIFU in Europe. Our cash burn remains in control and carefully planned as our revenue and margin changes favor the company allowing us to focus on make HIFU happen in this broad market. We intend to continue this program. We believe EDAP is today the one company well positioned and funded to make this happen in prostrate cancer. And our results clearly show we are making measurable progress throughout this goal in the key markets today while addressing the needs of our future markets.

With that, I'll turn the call over to the operator for instructions on Q&A.

Certainly. [OPERATOR INSTRUCTIONS] Our first question is from [Mark] from GunnAllen Financial.

Hello gentlemen.

Hello Mark.

How are you?

Everything's fine. Thank you Mark.

Congratulations and I think you had yourself a really terrific quarter given all of the things that took place in Germany et cetera. I've got, if I may, a few different questions. The first question is will there be some sort of a long term clinical study published on HIFU showing since you've gotten over 11,000 now. I think that you've published a study with three-to five-year type of results. Are you the process of developing something that's longer than that?

You are absolutely right. I mean we - as you know, we started with the first prototype treating patients in Europe back in '96. So we are starting to get long-term data on significant [chords] of patients and we are currently working with some of our sites to come up with the right clinical paper and to try and publish it in one of the major publication in urology. And I think that this is certainly some that that the market is expecting. This is something that is going to help not only in all the in further discussion with the approval, but in the US, but maybe ore importantly in the short term, in converting urologists on the long term efficacy of Ablatherm HIFU and the benefits of Ablatherm HIFU in Europe.

Well good. I think that's terrific. As it relates to the US, and correct me if I'm incorrect here, but as I recall, the FDA application was applied for Healthtronics. With their no longer being involved, does this mean that the trials will nor will not continue? Or is there some way that you'll be able to transfer the application from Healthtronic's name to EDAP's name for example?

Well Mark, I believe that it's a very good question and I can comment in two ways. I'll tell you first that we're obviously currently working with Healthronics in securing a smooth transition. Now that being said, and that will be the second part of my answer, and as I mentioned in the press release and conference call, EDAP has now a clear US market development action plan, which has already begun, and we look forward to communicating on this and on the progress on this over the next few weeks. I think that we can't comment further at this stage.

Okay. And I guess the last item which would be somewhat affiliated with this FDA application is I've got to believe that Canada is smiling a lot. Are you anticipating any kind of an increase from Canada due to the slow down of trials going on here in the US now?

I appreciate your comment. I do believe that there is at least one company that is extremely happy about the decision in the present stage. Now that being said, could this have an impact on the enrollment of patients in Canada and in other location? Yes, maybe. I think that more - more importantly this could become and opportunity for EDAP to seek the appropriate partner to secure the FDA approval in an appropriate timing.

Okay. Thank you. I think again, great job. I think it was a terrific quarter given everything that transpired and I look forward to seeing what the results will be for the fourth quarter.

Thank you very much Mark.

[OPERATOR INSTRUCTIONS] At this time [Donald Collins] has a question. Donald you may proceed with your question.

Yes, Hugues, I have a question in regard to your relationship with [inserm].

Yes.

I'd like to hear a comment, especially as it relates to any future products with Inserm.

Well thank you for asking this question. We've been working with Inserm, the equivalent of NIH in the US for now more than 20 years. And Inserm is really part of our company I would say. They've been working on research program for EDAP for the same amount of time. They've been working with us on developing laser biopsy in the past, they've been working with us from the beginning on Ablatherm HIFU and it's a group of somewhere around, I would say 20 to 25 PhDs working on research programs around therapeutic ultrasounds.

Obviously that's something we could not afford internally. That's something Inserm can afford on a government payroll, if you wish. And these guys are working on programs that we agree on together and we do sponsor some of their work when we think that their work could be interesting for our long term, or mid term, or short-term development.

Now, with that being said, they are currently working very closely with us on securing our long term leadership on HIFU for localized prostate cancer and beyond that. They are also working together with us and we've got a very clear partnership on that. On applying HIFU beyond prostate cancer. At this stage, I don't want to elaborate further on this, but be confident that your company is looking at all the prospects beyond prostate cancer and we believe that in due time we'll have the right product to address other pathologies beyond prostate cancer.

Can I just comment on that. This is Philippe. And this company under Hugues's leadership with Inserm is clearly as identified as soon as we make a development come through we register the IP and the patents in our name and that is an ongoing process and a number of patents beyond the prostate is increasing considerably.

Very good. Any comments on progress in Australia? You've been kind of quiet on that part of the country.

Yes, and it's a good question too. We are doing some wonderful progress in Australia actually. And our current site is now trading - I mean over the last few months, they've been reaching 10 - five to 10 patients a month, which is a very good number and they are very enthusiastic about it. They are now starting promoting it very aggressively. We have two urologists from this center in Lyon actually two weeks ago and they area very, very committed to the project.

They've got now the right organization to make it a success. They've got the right marketing organization to make it a success as well and we are currently looking at opportunities to set up more centers. So we are extremely active with the progress in Australia and its somehow confirms what we said earlier. When new set up a new center we usually start with some how slow start, where urologists get acquainted to the technology.

You look at the early results and once they are full confident that they can get the same results as the other centers, we'll see a nice increase. And that's exactly what we had in Australia. And I can tell you that they are very enthusiastic about the outcome and we are working, as I mentioned earlier, with the best possible center in Australia as the are accounting for more than 10% of all prostate cancer cases in Australasia.

Okay, thank you, Au Revoir.

Au Revoir. Thank you.

At this time there appear to be no more questions. Mr. De Bantel, I will turn the call back over to you for closing remarks.

Thank you and thanks to all of you for joining us today. I would like to close this call and conclude the call by saying something we don't often reference in this focus on the business. Every day we help men deal with prostrate cancer through a technology that gives them hope of keeping their quality of life high while successfully treating their disease.

This is a very powerful motivation as we bring hope to men around the globe through our success. As shareholders you are part of this and we are grateful for your continued support and confidence in our ability to make HIFU a reality for more men around the world in markets where we serve both today and where we intend to launch in the future.

Operator this will conclude our call. Thanks to all for joining us. We look forward to our next opportunity to update you on our progress.

Thank you. This call has been concluded.