Edap Tms SA (EDAP) 2006 Q4 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 fourth quarter and full year 2006.

[OPERATOR INSTRUCTIONS]

On the call today is Philippe Chauveau, Chairman of the Board, Hugues De Bantel, Chief Executive Officer of Edap TMS, Marc Oczachowski, Chief Operating Officer and Eric Soyer, Chief Financial Officer for the company.

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 affecting forward looking statements can be found in the company's SEC filings available at the company's website, www.edap-tms.com and is incorporated by reference for all remarks during the call -- during the course of this call.

With that said, I will now turn over the call to Philippe Chauveau, Chairman of Edap.

Hello, everyone. As Chairman of the Board of Edap for the last 5 years and more, today is a very special day for me. The time is now when I can proudly say Edap is making its breakthrough.

First it's a breakthrough in terms of a business, which we can now describe as a business on its way to return a profit and justify the trust and the patience of its investors. Second, it's a breakthrough in terms of truly changing the lives of many men all over the world suffering from localized prostrate cancer. And third, it's a breakthrough in terms of proving that the "tipping point" between unknown technology and its sudden if late widespread adoption as the standard of care is about to happen.

Let me elaborate. First, Ablatherm-HIFU in Europe is the first part of making this breakthrough. Today in Europe, Edap has a 2% market share of localized prostrate cancer treatments. Within two years, and with a program which is called RPP, revenue per procedure, a program, which is already fully funded, Edap's reachable target is 5% share of total treatments and 25% share of hospitals treating prostate cancer. That's its reachable target of offering Ablatherm-HIFU to patients. In terms of this 25% share, our share of hospitals today is 10%.

I am in guidance territory here and this may all surprise you, but I know this territory well. At the 5% treatment market share level in Europe, Edap, in total, as a group, starts becoming profitable. If you will let yourselves work out what happens to this profitability at the 10% or 15% level in Europe, I will leave this to your able imaginations.

And then, just realize that when Ablatherm-HIFU enters the US market, which Edap now owns again, this is the market where the penetration of new technologies is 5 times faster than in Europe. Think of this potential for Edap.

Let me further elaborate. The second part of Edap making a breakthrough has already happened in terms of changing the lives of the many men who suffer from localized prostrate cancer. This is not saying that other therapies should not have their place here. Ablatherm-HIFU is providing a non-paralleled quality of life for the rest of their life to men who deserve happy lives. Ask their partners, ask their families, they know of today's suffering. Edap owes these men an alternative and better lifestyle and we at Edap have a mission to do this and we cannot, and will not fail them.

Third, and finally, let me elaborate on Edap's third breakthrough. Edap is at the "tipping point" of converting an unknown technology into a true standard of care. As a note, a tipping point is when something of momentous happens as a consequence of something small happening. This tipping point for Edap is the reaffirmation of the potential for change.

First, this tipping point is the concentration of resources in the right place at the right time. Edap took focus on Europe first. We're doing that. Second, this tipping point to Edap is also the power of intelligent action. It's all about RPPs, revenue per procedure and number of treatments.

As my own reminder, I have coined my own acronym, IAATT. Let me repeat that, IAATT. It's all about total treatments. It's all about total treatments. The world of urology may seem unmovable and an implacable place. It is not. With just the right push in just the right place it can be tipped toward the Ablatherm-HIFU.

Finally as a note, our board of directors is now focused and refocused on marketing and innovation, particularly with Professor Jean-Philippe Deschamps who's joined us alongside Hugues De Bantel. Jean-Philippe Deschamps is a professor at IMD in Lausanne, which means International Management Development University. It is the Harvard business school of Europe, along with Insead and I'm eternally calling now our CEO to be, Marc Oczachowski as the CEO that's going to make it happen and who will follow me with his remarks. Thank you, Marc.

Thank you, Philippe. Hello, everybody. Let me outline the headings of topics I want to share with you and then I will elaborate on them and add comments.

There are three topics. 2006, the year of transition. 2007, in Europe, the year of action. 2007, onwards in the USA, owning back HIFU.

Let me start with 2006, the year of transition. This was the year Edap decided to shift to the RPP model as the only profitable growth pathway confirmed by the 60% growth in RPP revenues in 2006, which brings to 936 the RPP treatments performed in year 2006 on a total of 2,800 treatments. Ablatherm-HIFU is now available in more than 130 centers worldwide and particularly in Europe.

2006 accomplishments were threefold. Hiring the marketing and reinforcing the sales and clinical teams, founding and building our aggressive RPP program, and upgrading the Lithotripter product line.

Marketing clinical and sales teams. Starting early 2006, started from existing cash, we hired a new marketing team headed by an experienced marketing communication expert. One of the immediate results was the creation of the HIFU Planet educational website, which recorded an average monthly hit rate of 8000 in March/June '06, 11,000 in July/December '06 and now 13,000 in January/March '07.

Then, funded from the July '06 pipe, we doubled our European sales team with senior and very experienced sales manager in the field of urology in late 2006. We expect contributions from these additions to begin in the first half of 2007.

RPP program funding. In August '06, we raised $7 million through a pipe process specifically and only to fund our new RPP program separately reported. Building this aggressive marketing and educational RPP program, starting in September '06 we invested in designing and building this separately funded program, focusing on converting patients and urologists to HIFU, using the RPP program in key European countries.

Upgrading the lithotripter line as planned and also funded from existing cash, the lithotripter product line was upgraded throughout 2006 in due of a launch of this new development in late 2007 to make a lithotripter product branch more competitive.

Let me address now, 2007 in Europe, the year of action. The 2007 action is focused in two areas, both funded by the July '06 pipe. Converting urologists, converting patients as part of the implementation and rollout of the RPP plan.

Converting urologists action plans. The action started with our first HIFU tour in Germany, now successfully completed and will be followed by other HIFU tours in major European cities throughout 2007. This marketing push strategy also includes strong actions and visibility in major international congresses such as the European Association of Urology meeting in Berlin next week, where Edap is a gold sponsor and at the American Urology Association meeting in Anaheim next May.

Also on track, is our European PR and media [erscay] campaign, our e-learning tool program with a strong presence in major websites focused on urology.

Converting patients action plan. Our marketing pool strategy is well on track with a great increase in traffic on a HIFU patient -- Planet patient dedicated website thanks to our aggressive and constant efforts in developing sponsored weblinks. We are also working more and more actively towards patient advocacy groups and to coordinate large focused European PR campaigns and mass media coverage to widely spread the HIFU story to patients and relatives. Launch of lithotripter new developments to increase our competitiveness.

Finally, let me address 2007 head onwards, the USA. There are two main steps in the USA, first Edap is in the process of regaining the full sponsorship of the FDA trials, which should allow us to resume the trials very soon. Hugues De Bantel is currently in the US working actively with our advisors and investigators to finalize the [foundation].

Second, Edap is finalizing its financial strategy for the US market. I now ask Eric Soyer, our CFO to address some of the key points in our financial tables to provide more depth on key trends. Then we'll open the call to your questions.

Thank you, Marc and hello, everybody. I'm now going to comment on the group results.

The group reported, for the full year, 2006, total revenues of EUR20.2 million which is $25.5 million US and a consolidated operating loss of EUR3.1 million. These results are fully in line with the announced group strategy of a, shift to an alternative business model on the HIFU division with the revenue for procedure model, which would enable the company to achieve high growth rates and gain market share. And b, build a strong and aggressive marketing and sales approach to trigger and consolidate conversion of both urologists and patients to the HIFU standard of care for prostrate cancer.

The increase in clinical marketing and sales expenses, which has been totally funded by last summer's pipe, started in 2006 and as announced, will accelerate in 2007 and 2008.

The 2006 operating loss of EUR3.1 million as compared with EUR1.3 million in 2005, is thus coming from a roughly stable gross profit at EUR8.3 million due to essentially stable total sales in this transition year to RPP, the increase of EUR1.3 million in clinical marketing and sales expenses, the increase by EUR0.2 million in R&D expenses for the UDS market and EUR0.3 million of non-recurring expenses related to the pipe organization and employee change packages.

From this operating loss of EUR3.1 million, the net loss of EUR3.4 million stems mainly for a EUR0.4 million currency exchange loss related to the weakening of the Japanese yen.

In the HIFU division now, total sales of EUR7.6 million are slightly behind 2005 by EUR0.3 million, due to lower sales in Ablatherm devices while the RPP revenue reported a sharp increase by 60% in line with the corporate strategy to develop this business model as the growth model for the future.

Gross margin remains stable in value at EUR4 million with a better margin rate of 53%, plus 3 points, as expected with the RPP business model increasing success.

Operating expenses increased by EUR0.6 million with the first building steps of the aggressive and marketing sales campaign to be deployed in 2007 and 2008. And thus leading to an operating loss of EUR0.3 million for the full year 2006.

And then, in the UDS division, total sales of EUR15.6 million in 2006 for the full year report a decrease of EUR0.6 million as compared with 2005. This is mainly due to a, the low sales level in Q4, 2006, where the division reported the sales of 8 units where Q4, 2005, showed a record of 11 units. And b, the product mix in 2006 where the device sales occurred mainly in Europe, a midrange device market for the company, compared with the higher range Asian markets.

Operating expenses increased by EUR0.6 million, mainly due to specific R&D investments and regulatory expenses aimed at launching by the end of 2007, the newly designed high range lithotripter to sustain global UDS market share and revenue.

The UDS division thus reported an operating loss of EUR0.5 million. Again, this is mainly due to the dedicated R&D investments in 2006 to enhance the product range capability in the lithotripter market to sustain revenue and margins.

At the conclusion on financial matters, I would like to insist on four messages. The first message, is again, to emphasize the growth and profitability potential in the HIFU business with the now established RPP model. This is clearly the growth model for the future of Edap with a number of business advantages. The flexibility of the model will help addressing a broader client base and thus achieve our penetration targets. The better margin rate in the model, in addition to increased volumes will definitely help us reach our profitability targets. And the model is also cash effective with much shorter receivables than the device sales model.

The second message, will be to remind that we will still be sensitive in the coming quarters to uneven sales of the device from one quarter to the other. As you know, we are working at shifting our business model to a more regular stream of revenue and the HIFU RPP model is designed to help us achieve that goal.

Third, the cash cushion we have of EUR10.9 million will be sufficient to deploy our European strategy until it reaches profitability. Thanks to the pipe we conducted last year, the company is now very well funded to implement its strong marketing strategy to drive the increase in HIFU adoption and ultimately a much higher market share in the number of total treatments.

Finally, we clearly see that we are deploying two business opportunities, Europe and the USA and we will consistently report separately on those two strategic areas. Europe and the current business scope on one hand, where we clearly aim at achieving a breakeven run rate by the end of 2008, and we will follow and report on core business criteria mainly on the ongoing success of RPP and HIFU as well as the total number of treatments. And the USA, on the other hand, where we will specifically follow the clinical trial activity including the treatment pace and related costs.

With that, I'll turn the cal over to Philippe for the Q&A session.

Thank you for your close attention. I propose that we now open this call to questions and we will all be delighted, Marc, Eric and myself to respond to them. Operator?

[OPERATOR INSTRUCTIONS]. Our first question is from Matt Dolan. Matt you may proceed with your question.

Hi, guys. Good morning.

Good morning, Matt.

How are you? Just a few questions here. On the gross margin line, could you give us some commentary on how the changes year-over-year between HIFU and UDS in terms of system sales, how did that affect your gross margin levels? And based on Q4, how should we look at those levels going forward into '07?

Yes, we have a very positive trend in the HIFU division, with an average full year margin that's an increase by 50% in 2005 to 53% in 2006 and we expect the HIFU division with increasing average gross margin with the RPP business taking off.

The UDS division had a slightly lower margin in Q4, again, this is a non-repeatable event due to exceptionally low number -- level of sales in Q4. The positive aspect of that is it creates a high backlog of unit sales in Q1 2007. On average, we expect the total company average gross margin to be increasing with the RPP growth model taking over from the UDS less sales.

Okay, and can you give us the gross margin for HIFU in Q4?

It was 53%, I guess.

For the year and the quarter?

Yes.

Okay. And then, you outlined some corporate goals here in terms of run rates by the end of '08. Can you help us put a little m ore perspective on these in terms of two questions? We back into about a 7000 procedure run rate, based on the percentages you gave. So is that fair, number one?

And number two can you characterize of that -- of that revenue -- of that procedural run rate, what should we expect from RPP as a percentage of the total HIFU procedures?

So, to answer your first question, actually the target of 5% of the number of treatments is indeed representing approximately 7000 total number of treatments performed with Ablatherm-HIFU, by the end of 2008, on a run rate. Out of that, and as explained, we are expecting the RPP treatment to grow much faster compared with the fixed machine number of treatments. So we are expecting at this point, at the end of 2008, to have a majority of treatments performed under the RPP program.

Okay. Very good. That helps. And then finally, on the UDS division, talking about the new product launch and the upgrade in '07. How do you characterize the growth outlook for that business? Generally, I think we've talked about it being more of a single digit to flat grow, or could that be enhanced longer term with this new product upgrade?

Yes, actually, the new developments we are working on and we are expect to launch late in 2007, will indeed give more competitiveness to our range of products so we can sustain and probably expect a very small growth in this business, which is, again a very mature business and extremely competitive business. So we need to refresh the range of product and give more dynamism of our products.

Okay, very good. Thanks guys.

Thank you, Matt.

Our next question is from [Donald Collins]. Donald you may proceed with your question.

I have two questions. The first one involves the French approval. When do you expect French reinsurance approval and is that factored into your business model? That's the first question.

Definitely, we have not factored in the French reimbursement in our business model because it's -- we will not --

Actually on -- sorry, just one thing, first of all, we are approved in Europe and then in France by being C marked. Then we are talking here about reimbursement by social security. So we currently are reimbursed in Germany and Italy and privately in UK and we are constantly pushing and making a lot of efforts to improve our reimbursement and to make our therapy to be reimbursed in other countries, but we cannot today give any dates or any commitment on timing on that.

What seems to be the problem so far, since you are obviously located in France, you would think that they would be more friendly toward a French company, what seems to be the barrier of entry there for reimbursement?

First of all -- I mean the social security and reimbursement process is from in France, is in complete mutation since a bit more than one year. And secondly, this is only an administrative issue, I would say, which is not specifically and not special to us, but this is the normal way for any kind of new technology and new therapy to be reimbursed by the social security in France.

Okay, the next question is INSERM, you talked about that in the past. It seems to me that this is going on to be a perennial type of think tank organization. Is there any new products coming out in the near term future from INSERM or would you like to comment on that?

The question -- there was one word that was missing, what was your word before the think tank?

Perennial.

Perennial.

In other words, it' something that you've been talking about for a long time, I'm wondering if that can be maybe narrowed down to a timeframe that would make sense?

INSERM is a laboratory for fundamental research and the unit of INSERM we are talking about is the unit 556, which is specialized and dedicated on therapeutic ultrasounds. So, obviously there are a lot of projects being worked on fundamental research.

When might we expect a product though?

This is again something we cannot disclose today and that it's not public information yet.

Okay, thank you.

Our next question is from Matt Dolan. Matt, you may proceed with your question.

Hey, guys, question for Eric on the SG&A line, Q4 was fairly similar to Q3 in terms of dollars and you've talked about the sales and marketing strategy going forward. Have we seen a bit of that bump in the second half of '06, or should we expect an incremental step up here into '07, taking into consider new hires as well as clinical conferences, EUA in Q1 and AUA in Q2? Thanks.

Yes, we will see some incremental increase on SG&A -- well, definitely between sales and marketing expenses accelerating in 2006 and 2007 and for 2008 as well. There has been some initiation of marketing and sales expenses in 2006 to sort of prepare for the broad and marketing communication campaign to start -- that started in 2007. But definitely we will have most of our marketing and sales expenses in 2007 and 2008.

Okay, very good. And then, on the US initiative, can you -- I know you mentioned final stages, can you give us any indication of your expectations for timing in terms of a final decision there? And secondly, could there be a need for capital, depending on the various options you have in front of you for that US initiative?

Well, as Marc was saying, we are finalizing our decision on the funding strategy on the US. We are -- finalizing our decision on the funding strategy on the US, we are -- we fully bear in mind that -- well we have number of options, that's one thing. The other thing is that we know that dilution is a sensitive issue to us and we will address that in a proper manner and definitely we will work at maximizing the company value and we will report publicly in our final decision in due course, when it is finalized.

Okay, thanks.

[OPERATOR INSTRUCTIONS].

Our next question is from [Mark Wyling]. Mark, you may proceed with your question.

Good afternoon, gentlemen.

How are you?

Well, I'm fine, thank you. I have a few questions and unfortunately I had a power surge earlier so please tell me if I'm repeating any previous questions because I missed a little bit of the call.

Concerning the closure with HealthTronics and FDA trials, are those two linked together. Are you unable to do anything as it relates to the FDA until you have final resolution with HealthTronics?

No, they are totally separated matters. We are definitely the sponsor now of the FDA trial and we are waiting for FDA clearance. But this process is totally separated from the termination agreements that we are finalizing with HealthTronics.

Could you tell me that with the trials that will be coming up, what centers are going to be -- where the trials will be held.

Actually, Hugues is actually in the US to visit all the centers and prepare all the centers to resume the trials in a very short period of time.

Will it be the same centers that were used by HealthTronics during their trials?

Well, there may be some changes and Hugues is reviewing that currently in the US. Yes.

Some of the centers will remain the same and some other will be changed. And that's exactly what Hugues is working on these days in the US.

So, presumably we may not see the existing med schools as an example? Or there will be other med schools that may be involved?

Well, that's definitely something we're -- we're going to report precisely when it's finalized by Hugues in the coming weeks.

Could you address, if possible, the rationale for why the board member from Seimens left? Was --?

Well, very simply that, Holger Schmidt had been with us for more than five years and he decided that he want to move on and we took the opportunity to replace him with a very upfront innovation in marketing individual who is a professor at IMD, which is the Institute of Management Development in Lausanne, who in fact has worked on a lot of new therapies being accepted as the standard of care. And since we were shifting our company focus from not just a scientific and manufacturing company, but also a marketing and innovation company, that was on the cards.

Now, the next change, as you know, is Hugues will join the board officially as of -- in the next two weeks. And on that basis, we now have a working board which will be addressing much more in terms of aggressive marketing the new pathway of Edap TMS.

Okay. And then finally, if you addressed this again, I apologize as I was unable to hear some of the call, did you address, and if not, can you address what your prospects have been with the use of the Ablatherm, specifically in the UK, Italy and then the remainder of Europe? As far as number of treatments, growth, of centers, etc?

Mark, could you ask your question in a different way so Marc, our Marc, could answer it?

Sure. Could you give me a run down of what the growth has been specifically and in those existing countries of approval on what your growth of the Ablatherm usage and number of centers has been and what your prospects are?

Okay. If we take into consideration, if I understood well your question, Germany, Italy and UK, number of treatments in Germany increased dramatically last year and the increase was about 60 to 70% in Germany. It was about 80% in Italy and it was very high in the UK, considering that our business activity and treatment was almost not existing in 2005 and most of it was -- most of the treatments were performed in 2006 in the UK.

As it relates to the UK and reimbursement, my understanding is that the private insurers in the UK are reimbursing at a much higher rate than the rest of Europe. Has there been nice acceptance by the urologists in the UK? And how does your penetration compare with -- well, [Masonix] as an example, who have been trumpeting their penetration in the UK.

So, we have had a nice guidance in 2005, we ended with reimbursement, which is much higher compared with Germany and Italy but that's due to the fact that this is a reimbursement for -- from a private insurance company, when in Germany and Italy, we are talking about public health care reimbursement. Which is not yet the case in the UK and we are actively working to get some reimbursement from prostrate cancer network and from PCTs, primary care trusts, to get wider reimbursement on the public sector.

Will the reimbursement in the UK be similar to the amount of reimbursement that Europe is experiencing, presently?

We actually don't know yet this information and we are working on it to make it as high as possible so that it makes the Ablatherm HIFU accessible to the wider population.

Okay. Thanks, gentlemen.

Thanks.

Thanks, Bob.

Thank you, we have no more questions at this time. I will now turn the call back over to Mr. Chauveau.

Well, I want to thank you all for participating once again and we look forward to responding to your questions individually. You may call us on our usual numbers and until we talk again, I say goodbye and thank you.

Thank you. This call has been concluded.