Edap Tms SA (EDAP) 2007 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 Financial Results for the First Quarter of 2007. This call is being recorded and will be available for playback by telephone and online. Details of the playback are available in the company's press release.

On today's call is Philippe Chauveau, Chairman of the Board, Marc Oczachowski, Chief Executive 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 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 references for all remarks during the course of this call. With this said, I will now turn the call over to Philippe Chauveau, Chairman of EDAP. Go ahead Philippe.

Hello everyone. I want to provide you with a brief overview on four areas of our business. The first is fulfilling our investors' objectives and expectations. The second is the time it takes to share absolutely all we can with our investors. The third is our speed of execution in terms of innovations and approvals. And fourth the short-term success of our RPP model provides unfortunately sometimes uneven revenue quarters.

So, let me go back and underline the basis of these four overviews. The first is, EDAP is in a strong position to fulfill our investors' objectives, and this is based on the five following facts.

First, Ablatherm-HIFU RPP treatment growth is tracking to EDAP's successful plan in Europe. Second is that EDAP-sponsored current FDA trials are the first step to EDAP going direct into the USA. Then EDAP and China Med's alliance unites the two HIFU global market leaders. Fourth, EDAP's new Directors are focused on worldwide marketing and innovation. And the fifth fact is that our new CEO, over ten years in EDAP, and our new CFO add international management depth to EDAP and have a record of delivering on commitments.

The second overview point I would like to share with you is our commitments to share as fast as possible absolutely all we can in terms of sharing with our investors, and let me elaborate on this. We may appear a little late in announcing strategies and plans, that's because EDAP falls into what I call "Not yet public" delays due to the appropriate SEC clearance required of a French company quoted on NASDAQ. Also, EDAP must respect FDA announcement regulations, as well as communication approval authorizations from participating hospitals in our FDA trials.

The further review point is that we must not set our speed of execution faster than innovation penetration and approval processes. Let me explain, the growth impact on RPP treatments resulting from our European marketing programs, which started in late Q1, is not slower than our plan, but is definitely slower than our enthusiasm. We are on budget for 2007 and 2008.

Second part of this is that the resumption of Ablatherm-HIFU trials with the FDA respected the appropriate regulatory process and excess speed here would have created irrevocable approval refusals. And furthermore, our positioning of HIFU in the USA needs sizeable spending which is depended on funding plans, involves timely EDAP shareholders' approvals, which in turn requires a lengthy process, which I'm glad to say is now well on its way.

Finally my fourth overview point, our successful RPP model shift, short-term, implies uneven revenue quarters. This is based on three factors. In Q1 2007, this current quarter, the business model shift from equipment only to mostly the RPP high-growth revenue model had as predicted, a noticeable short-term flat revenue impact on the business. Also, we have repeatedly stated that switching from a HIFU revenue only business model to an RPP revenue model, plus some equipment sales would sometimes for total HIFU revenue growth take some time to resume. And since on average, it's a 100 to 1, and I repeat that 100 to 1 revenue relationship between one equipment sale and one treatment sale, this is a big shift.

Finally, equally, the quarterly non-linearity of HIFU equipment sales revenue could make some quarter revenues look very good and other quarters not so good. Q1 2007 is the case with no HIFU equipment sales revenue, but going into Q2 and the balance of the year, EDAP has one machine already sold in April and we have a solid HIFU equipment pipeline for 2007.

That concludes my overview and I am now going to hand over to Marc Oczachowski who will now follow me on his remarks. Thank you, Marc?

Hello everybody. I have a lot to say so please bear with me. The first quarter has been busy and interesting. Going straight to what you're likely wanting us to address, we are still on track for our major goals. Strong RPP growth, cash management momentum to profitability, FDA success and yes the business is solid even though we did not record any device sales in the first quarter HIFU results.

As the RPP program takes off equipment sales will not only stop being the primary focus and driver of the division, but also will not necessarily equitably distributed in any given portion of the year.

I want to start with two important messages to share with you then I'll discuss different parts of the business to give you a more complete picture of our success and ongoing efforts.

Message number one, first of all on Wednesday I held one of our regular quarterly management reviews in Lyon with all of your EDAP key managers attending. I want to share with you the good news that we are on schedule or ahead of schedule on all of our target metrics to achieve our goal of profitable operations end of 2008. Revenues are tracking to plan, especially RPP. Gross margins right on plan. Expenses are actually 10% below our expectations and operating income is on track.

Message two, the other big point is, yes we sold no Ablatherm unit in Q1. We have shared with you, this is not the predictable schedule compared to the RPP business.

We are still fully on target and on plan to keep Ablatherm sales steady to previous levels for the full year. It means, we will just be recognizing those revenues in the next three quarters. But the key to our planned profitability in Europe is simply steady device sales and strong growth in the higher margin and more stable RPP business. This is tracking very well as you can see.

Now let's talk about the business. And we are going to have to trek the globe as EDAP is now truly a global HIFU leader. Let's first start with Europe. The business is developing well, and this is a long-term process over many quarters but the building blocks are coming together.

We are very excited at EDAP about the progress. More importantly, we are all committed to achieving the growth we've shared with you. It's time to deliver and everyone is doing their parts. We launched several initiatives over the past months, which build on each other. We initiated direct-to-patient awareness in major European markets and around our treatment centers old and new.

We increased outreach to the medical community to educate both urologists and GPs about HIFU and its many benefits with EDAP. This is especially evidenced in the HIFU tours, using peer-to-peer urology meetings that work very well.

We doubled our sales staff late last year, and they are now contributing to our success going forward. This is very exciting, since all are very experienced medical and urology sales managers. We announced major clinical results on long-term follow-ups and EDAP is the only HIFU company with this. At 10 years of experience, this is extremely significant and positive long-term follow-ups. The long-term data shows we sustained our five year results on efficacy and you already know Ablatherm has consistent and low side effects.

For urologists, steady, consistent and ongoing success is the key to confidence and EDAP is the HIFU company able to prove effective therapy for the long term, thus providing full confidence with doctors.

We launched a major HIFU tour project for major European countries. We are following through with these contacts in the course of the European Association meeting, regional meetings, direct outreach and many other opportunities.

These urologists are our next HIFU centers and we are welcoming them as new Ablatherm users through this process of conversion. You are already seeing some of the benefits in the 18 centers we already launched in 2007.

We built a complete training and support network for the RPP programs including advancing this model to support large centers with dedicated equipment usage increases. We are now excitedly seeing early returns from these efforts in the RPP growth, with expectations of more efforts and rewards throughout the next two years, as we march steadily to profitability.

A 45% increase in RPP for Q1 and a 64% in April are strong evidence to the hard work at EDAP. But we are not resting on those successes. There is a lot more work for all of us to bring Europe's success [at our shoulders].

In our last call, I reviewed the preparation we've made in readiness for Europe action, and we are now seeing that. It's early, the results are preliminary, but we are seeing a good market returns. This is good indication of the ability we have to achieve success.

EDAP is very well positioned with many assets. We are the clear dominant company in HIFU for Europe, taking 96% of the HIFU for prostate cancer market. Yes, 96% is EDAP's share. We have major centers supporting Ablatherm, the top centers of Europe across many countries, with whom we have a long and successful relationship.

EDAP is the top provider for efficacy, now demonstrated with long-term results. EDAP has shown it can preserve quality of life, but without compromising success of treatment. EDAP is leading the way for making HIFU a reality in medicine.

EDAP has now added a global partnership with China Medical Technologies. It's publishing us as the HIFU Company of Choice in Europe. These partnerships give EDAP not only the largest HIFU prostate cancer system in the world, but now also the largest extracorporeal HIFU system used by hundreds of centers on thousands of patients in China. All of these many actions put together make a compelling force for Ablatherm-HIFU.

A quick update on countries that are key. First in the UK, the UK is moving ahead with four new RPP sites and a lot of work by our new senior sales manager positioning EDAP for even greater success in this market. In the UK, EDAP has a great market position at excellent centers and the support of many medical and patient groups, because we focus on clinical needs and quality of care earning their respect. We have just signed a partnership agreement with a very well known PR company to further accelerate awareness among British patients.

France, France continues to launch new centers and grow HIFU use in spite of the slowness in reimbursement. This is the ultimate proof of Ablatherm's strength of care in France among both patients and doctors. As the originators of the process for HIFU, we continue to work on reimbursement and will be very happy to see the day is arrived. Until then, it's hard work driven by clinical success that adds more pressure to improve their reimbursement making this available to all French men needing HIFU care.

Germany, this is the biggest HIFU market in Europe and EDAP the clear dominant force. As we reported, our mobile RPP units are again hitting full capacity after adding the third Ablatherm on a mobile basis just last fall.

We are adding sites and now seeing contribution from our two newly added Sales Managers in Germany, taking into account their very fast warm-up time. This is an exciting market and a very good one for EDAP. The HIFU tour and ongoing support at regional and local levels continue to add new sites.

Italy is advancing and we just completed our HIFU tour there, interest is strong and growing. The RPP model mix care almost immediately accessible to new centers once they go for training. We're glad to say we have great expectation that many more Italian men will go for Ablatherm in the coming years boosting EDAP's success and their quality of life. EDAP already operates in most other European countries and is making steady progress to broaden Ablatherm-HIFU to the entire continent.

We have very active centers in Portugal, Spain, Turkey, Belgium, Norway, Austria, Switzerland and many other countries pioneering those markets for our future growth. For many companies that would already be an exhaustive list, but we are just getting started at EDAP.

Let's shift continents to North America. The attraction of Ablatherm is clearly drawing men seeking high efficacy and high quality of life. We are also seeing men from North America to Europe seeking Ablatherm care. This is a strong endorsement for the quality of care Ablatherm offers and its important place in the broader spectrum fighting prostate cancer.

Our USA strategy is coming together very rapidly, even if not always in the public light. Trials are again underway with centers treating patients and with great success. Just look at the comments made by the doctors in our two recent press releases showing we are confident HIFU will be a great success in America. American doctors are very pleased with the Ablatherm process, its safety protocols and its chemical success.

The business model is also good for the US, rapid treatment, reasonable cost and high success without damaging quality of life. This is a great value for urologists since Ablatherm competes well with all other non-surgical choices giving them a true option for their non-surgical patients.

US patients today report high satisfaction with the procedure which seems pretty reasonable for a non-invasive treatment with low side effects. We are rolling out the HIFU patients to other US centers already established in the trial.

As word of the trial spreads, EDAP is being approached by other leading US centers inquiring about participation. We are evaluating those and we'll have more centers to help speed enrollment and awareness for a future launch as we clearly anticipate success.

EDAP is now in a position to directly run the US trials and intends to do so, keeping the US opportunity for the benefit of our shareholders. We have received strong commitments of the Board for this strategy. This does not preclude future actions as the clear benefit of HIFU becomes evident in the trial process, increasing the value of EDAP's position or in the US market entry for localized prostate cancer HIFU.

This is very exciting news about the US and we'll share more as our actions are finalized. In the interim, we are not waiting and instead moving our trial forward to achieve success. And with an established therapy like Ablatherm, we are very confident of the outcomes, so it is a matter of [allocating] the trials to the FDA's approval rather than anticipating good results.

Continuing with around the globe, let me again move across continents to Asia. And our new alliance with China Medical Technologies, the top HIFU company in China and the most significant company worldwide providing extracorporeal HIFU for multiple applications.

After careful review, China Medical elected EDAP as its partner in bringing its technology to Europe. This resulted in a four-year exclusive agreement for Europe and Russia, where EDAP has a strong sales network already in place for HIFU. We not only get the benefits of levering our expertise, we also are now the HIFU company offering a broader rate of devices in wide use at many centers.

Both EDAP and China Medical share similar goals, such as a commitment to making HIFU a new standard of care worldwide; to investing in the market as leaders but rather than followers; using our core strengths as innovators to create new and better ways to treat patients; and then moving these devices into the marketplace with credible well supported programs.

We look forward to reporting further actions in our relationship, but for now, it is clear that the top two HIFU companies are now working together toward common goals of making a new standard of care in HIFU, which we believe will bring the lion's share of the market to our opportunity rather than competitors.

Let me again repeat these details, EDAP has strong portfolio of HIFU opportunities across many therapies, both with our own technology of the Ablatherm, the distribution of China Med Technology and our ongoing research efforts yielding many new and innovative opportunities, applying HIFU in new and possibly better therapies.

To summarize my review, let me address six simple points. First point, we are on budget and on plan for run rate profitability at the end of 2008. Second point, the RPP growth is great and we are committed to [mission unit] sales, which might just make our next several quarters more interesting for you as our shareholders.

Point number three, Europe is doing well and going strongly to EDAP and Ablatherm due to our excellent clinical work, our strong marketing and dedication to making success happen, and years of committed EDAP sales networks.

Point number four, our USA program is moving ahead and is very strong in creating a tremendous platform for EDAP to more than double its market opportunity.

Fifth point; our new alliance with China Medical Technologies affirms our position as the HIFU company of choice in Europe. It also positions EDAP to lead HIFU launches on many pathologies with top technology.

Last and sixth point, we have other opportunities ahead, and we'll execute them for the best decisions to build long-term value and growth for EDAP.

I will 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 will open the call to your questions. Eric.

Hello everybody, I am now going to comment on Q1 financial results starting with the group results. The group reported for the first quarter of 2007, total revenues of EUR4.7 million, which is $6.2 million, and it comes to the basic operating loss of EUR1.1 million.

Group results again are in line with the group's strategy of pursuing the shift to an alternative business model on the HIFU division, with a revenue for the procedure model which will enable the company to achieve a high growth rate and gain market share.

Specifically, focusing on sales, the total combined sales of EUR4.6 million show a decrease by 10.7% from Q1 2006. The decrease is clearly a consequence of the lack of machine sales, a difference of approximately EUR900,000 compared to Q1, 2006, due to the lack of two other consulting HIFU divisions as one [litho] unit while other sources of sales showed an aggregate increase of EUR0.4 million essentially driven by the increase in RPP production, in line with the growth plan we previously shared.

The Q1 operating loss of EUR1.1 million as compared to EUR0.5 million in Q1 2006, is coming from, A; a gross profit of EUR2 million. A decrease in value of EUR0.3 million from last year's Q1 is essentially due to the deferred sales of devices during this quarter.

The group's growth margin rate of 43% in Q1, 2007 is showing global improvement by one point, due to a positive activity mix impact of HIFU RPP sales take a growing portion in total revenue.

And B; total operating expenses reached EUR3.1 million in the quarter, a EUR0.4 million increase from last year, mostly driven by the acceleration in marketing and sales expenses in line with our HIFU RPP European promotional campaign. This is an additional cost of EUR240,000.

Q1 expenses also show an exceptional EUR0.2 million increase related to the resumption of the FDA study, as the cost of transitioning the study sponsorship of [Mutlima 50S] by the compensation amount provided by the termination agreement of HealthTronics. The compensation amounts will be recognized ahead.

In the HIFU division now, HIFU sales of EUR1.6 million decreased by EUR0.3 million with no Ablatherm sales in Q1, a lack of at least EUR0.7 million as compared with Q1 2006.

But excluding medical device sales, known as unpredictable by nature, to retain in the revenues to the recurring activities, this revenue increases by 32% including again a very significant growth in operating revenue, plus 45%.

Despite the weaker sales in Q1, the HIFU contribution gross margin rate reached 57%, boosted by the increasing success of RPP sales and that margin rate, as expected in EDAP's business model projections, helps achieve an improvement in the combined consolidating margin rate.

Global operating expenses for HIFU increased by EUR0.1 million, including a EUR0.2 million rise in marketing and sales expenses and that's leading to the HIFU operating loss of EUR0.3 million for Q1 2007.

In the UDS division now, the UDS total net sales amount to EUR3 million. Excluding uneven machine sales the UDS revenue is roughly flat. Machine sales show a decrease by EUR0.2 million, nine devices were sold in Q1 2007 versus ten in Q1 2006, nine in Q1 2005, and seven in Q4 2006.

The missing machine accounts for half of the revenue decrease from last year and the other half came from a decrease in the average selling price due to country mix. The UDS contributed gross profit is roughly stable compared with Q1 last year at EUR1.1 million, with an improving margin rate of 36% which is an improvement by 1.5.

Operating expenses were unchanged at EUR1.2 million and the UDS division thus reported an operating loss of EUR0.1 million.

A last word on cash now, the total cash in the first quarter was EUR1.6 million, half of that amount due partly to machine inventory ahead of sales to be recoupled in the next quarter and of one time only FDA study costs to be offset in Q2 and Q3 by the execution of the transition package in cash and equipment, a [great result from it].

This being neutralized, the normal cash use is back on track on the expected EUR0.8 million quarterly average for 2007 just setting 2007 full year cash use at less than EUR4 million. This is in line with our expectation of self planning that 2007, 2008 growth plan in Europe to reach profitability and positive cash generation.

I would like to conclude on the comments connecting the financial results and the business outlook. Beyond this Q1 result showing already a strong progress in the implementation of the multi-annual HIFU strategy, I want to emphasize the fundamental, underlying trends on which we base our confidence that HIFU is further achieving its breakthrough as a standard of care therapy.

First and foremost, clinical results repeatedly show undisputed clinical advantage, which builds a strong belief we all share that HIFU is intended to be a golden therapy for prostate cancer.

The results that have been achieved over the last years in growing the numbers of RPP treatments are obviously a strong sign of that rising awareness and adoption, while building a robust base of recurring revenue. And beyond the adoption of the HIFU technique, the EDAP HIFU business model is also clearly proving its viability and attractiveness in the long run. The increasing success of RPP along with the achievement of improving margins give us a very strong confidence in models as well as a strong determination and commitment to spread this on wider territories and obviously our goal in organizing now our HIFU future development of the U.S. markets stem from that.

With that I will turn the call over to Philippe.

Thank you for your close attention and we are aware that we shared very much with you over a certain number of minutes which is exceptional. But, this is what we wanted to do and now I propose that we share and start beginning the question-and-answer session, so that we can respond to all the issues that we have raised or you want further explanation about. Operator?

[OPERATOR INSTRUCTIONS]. Our first question is from Matt Dolan. Go ahead Matt.

Couple of questions on -- just kind of on the P&L here. First of all on the RPP side, it appears that ASPs for that product are going up, are we backing into that correctly and can you comment on pricing?

Yes, you are correct. We have shown increase in the average selling price. This is due to the initiation of new sites. When we start the new sites we usually provide for a higher selling price to provide for higher initiation cost. And when the volumes start to grow then we have some additional volume base, pre-[base] that will show slightly lower prices, as this is the case for example in Germany.

So, EUR3,000, is that a good average selling price to think about going forward?

Yes, I think so.

Okay. And then a couple of nitpicky items. No consolidation impact in the quarter. Can you give us an idea of does that continue going forward? And then there is a couple of lines in the P&L, EUR180 and good sales on the HIFU side and EUR264 on the RPP side for UDS, which we haven't seen before. Can you help characterize those items?

Yes. Actually in order to give more accurate and technically relevant information on divisional results, we will now show from 2007 divisional margins on the full contribution mode. That is without retaining in the TMS UDS division a manufacturing margin on HIFU and then offset it in the consolidation adjustment, as this was the case up to 2006. So, the full HIFU and UDS margins are now clearly stated for each division and we have adjusted Q1 2006 accordingly.

Okay, great.

Hello Matt. This is Marc. Coming back on your question regarding the RPP revenue in UDS division that was not seen before, just for the information and for your knowledge this is specific activity that we have in Italy on mobile lithotripsy services.

Okay.

And coming back to your first question regarding the average selling price on RPP for HIFU, as Eric explained, this is due to the opening and more specifically on the model that we started early this year on what we call fixed RPPs. That means if you remember the second segment of the market which is hospital that will have a certain minimum of volume, but will not have volume in after purchase and equipment, so we will place a fixed machine and they will pay us based on the number of procedures.

So, there is incentive in treating [more or so] as the installation and the first treatments are more expensive than if they do a lot of volume. That explains that because we started off few several sites in Germany, France and the UK in Q1.

Okay, great. And just to clarify Eric, so the consolidation impact going forward will no longer exist?

Exactly.

Okay. Few more questions and then I will jump off. First, on the U.S. study, is there still potential for a partnership there or is the official plan now to go alone, and if so, can you provide your expectations with respect to the EUR4 million in cash usage that you provided earlier?

It's difficult to say yes and no to this question. What I would say, our intention is clearly to go on our own and to fund the FDA trials on our own. And on that basis we don't foresee, at the moment, any need for a partner, but it doesn't mean that long-term we say no to that solution.

Okay, very good. And then on the China Medical agreement, given the four-year exclusivity there, what are the implications for your long term product development plans for other tumors, like kidney and liver that we've talked about before? And on the other end of that, what are the implications for the potential of Ablatherm to enter China at some point?

That's a very good question, Matt. Thank you for that. Actually, as we mentioned, China Medical is really specialized in extracorporeal HIFU, when we are more specialized in intracorporeal, or I would say endocavitary HIFU. So, it's really a complement, and it doesn't affect actually our plan of development on other applications, and since there are many ways to approach pathologies, organs and diseases.

Now, regarding our intention on the Chinese markets, obviously, this is a market that we are looking at and being partner in Europe with a clear leader with more than 70% market share in China on HIFU will help us and they will definitely advise us in setting up there the best network for our Ablatherm intracorporeal HIFU.

Great. Thanks a lot guys.

Thanks, Matt.

[OPERATOR INSTRUCTIONS] Our next question is from Donald Collins. Go ahead, Donald.

Yes, since prostate cancer is life threatening, is there any possibility of a fast-track review process with the FDA?

Currently we are working on the full process -- full PMA process. We will review whether a fast-track process is possible, but we don't believe that for now.

Any progress in Canada with any other center sites?

No, we are still working actively and treating both Canadian and American patients on our site in Toronto. And then this is going well, and we are also working in getting the approval from the British Columbia, so that we could start new sites in the other side of Canada in Vancouver. But this is still on its way and we are closely working on that.

Coming back to the fast track of the PMA approval for the Ablatherm, we believe the protocol that we have finalized with the AVA is quite [steroidal] in the environment with two years forward, which is already quite fast.

Are you conducting any studies currently with Ablatherm in conjunction with any hormonal therapies, and can we expect any results soon?

We are evaluating in these combined treatments with hormonal therapy and others and this is something that we are working and we are establishing protocols for this kind of study in Europe. Now, giving any delay or timing on that would be a little bit early.

Thank you.

We are working in most of the -- in many different directions to further increase the applications and inclusion criteria for the others on HIFU indeed.

Very good.

Thanks.

This concludes the roster for Q&A. I will now turn the call over to Philippe. Go ahead Philippe.

Well, thank you very much for joining us today. We appreciate these get-togethers and sharing with you our latest and where we are going. And on this basis, I'd like to close the call and thank you very much and talk to you next time. But don't hesitate to call us, Marc, Eric or myself, on any item that you wish to have further input on. Thank you very much and good evening.