Edap Tms SA (EDAP) 2007 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 Second 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 the call today is 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 reference for all remarks during the course of this call.

With that said, I will now turn the call over to Mr. Marc Oczachowski, Chief Executive Officer of EDAP.

Hello everyone. I want to thank you for joining us today as we report our second quarter results. Normally, Philippe Chauveau is with us as Chairman, but he is away at the moment and can not join us for this event. He sends his regrets, but has provided his inputs for the session today.

Today we will discuss the Q2 results, as well as updates on the important growth programs to build the future of EDAP as the leader in prostate cancer, HIFU. The Q2 press release today gave you a solid overview of these results, a strong quarter with good revenues from all of our major sales channels, demonstrating what EDAP can do and giving us confidence that this model will lead to success as we add scale to the treatments through our current efforts, through our European growth, FDA success and managing cash flow to support both of these development programs.

I will address today three main topics which are as follows, one, EDAP reported in the second quarter its best results among the recent periods, with a total revenue of EUR6 million or more than US$8 million.

Second, the RPP growth plan is moving forward showing good progress with a 40% growth at the end of Q2, clearly adding scales from our increased marketing and education efforts. And three, the US opportunity where EDAP made good progress in strengthening its strategy to successfully achieve the approval of the Ablatherm-HIFU. This will open the US market for EDAP and the benefit of our shareholders.

Before I get into the detail of these points, let me remind all of you on how we positioned Ablatherm-HIFU in Europe and eventually in the US, once we achieve a successful end to the clinical program now under way.

Ablatherm-HIFU is now [an] accepted treatment for localized prostate cancer and is appealing to men who are concerned about quality of life issues. Ablatherm is proven to work in levels that rival traditional therapies like surgery and radiation.

But [unlike other treatment it] has no incisions, no blood loss, no radiation and the associated illnesses. Instead, it generally requires between one and two hours of treatment to completely destroy the prostatic tissue. This is routinely done on an outpatient basis in North America, because the treatment is so much less difficult than traditional therapies.

Ablatherm-HIFU is now becoming a treatment of choice in Europe and other major global markets for a number of reasons, but often it comes down to lifestyle. Ablatherm has proven its high level of efficacy and slow side affects capabilities, such as the incontinence and the impotence rates, which are two of the major concerns for most men with prostate cancer.

More importantly, and unlike other therapies such as surgery and brachytherapy, the Ablatherm-HIFU is predictable and repeatable from one center to another, thanks to its robotics capabilities and this is a valuable asset for any patient looking for preserving this quality of life after his treatment. With other therapies, the patient has to worry about the skill of the doctor which has a major impact on his chances of success.

Ablatherm-HIFU uses ably documented protocols developed over more than a decade of use, ensuring consistent outcomes at all centers once the doctors are trained, so this is at least one less worry for the patient, and certainly, a major one at that.

So, let's begin with our results, which I will discuss here topically, but leave the details to our CFO to address his comments.

Let's start with the second quarter. One of our best in recent times with about EUR6 million in revenue or more than US$8 million. More importantly, the second quarter shows a striking contrast to the first quarter since we sold two Ablatherm-HIFU machines in Q2 as compared to none in Q1.

As we commented already, machine sales are not predictable or stable from quarter-to-quarter, but they are still [as] part of our models. In Q2, we demonstrated what EDAP does when we mix machine sales, RPP revenues and the services side of our business. The HIFU division posts very strong revenue and an operating profit.

Q2 shows the positive rate of device sales are still having a significant impact on the revenues, and therefore, confirms and strengthens the validity of our model and strategy towards RPP growth plan.

Our Q1 was recently -- was certainly not bad, and contrasting these two quarters showed the strength of EDAP's business. It also showed that adding treatment scale, especially on the recurring RPP business where the revenue will be much more predictable and steady from quarter-to-quarter, will lead this company towards healthy revenue and profit.

Treatments are up strongly compared to last year, and we are very pleased with the growth from our investments and efforts in marketing and education. Of course, we are not satisfied with just 40% growth; we want and need to grow faster. EDAP is excited and enthusiastic like never before, and the business in Europe reflects that in our efforts to make more progress for the future.

Let me discuss for a moment the device sales in the second quarter. The two machines sold in Q2 show the future of our business from the equipment sales side, a blend of sites who were used to increase out RPP centers which ultimately causes them to purchase a device. On top of second revenue event from a single center, as well as ongoing sales in key markets where EDAP has a growing presence.

One of the units sold was to Aker Hospital in Oslo, Norway. It first started a few months ago with a fixed RPP model, even though Aker is one of the largest prostate centers in Scandinavia. The RPP also gave them the opportunity to start with this innovative treatment quickly and with no capital investments. Due to the great results and positive response from doctors, this major hospital, which has a large recruitment of patients, and therefore is part of the purchasing segments, decided after a few months to buy the device. This is a proof of our model and market segmentation, and it is a real step forward for EDAP in Scandinavia, where they are usually more conservative towards recommending new therapeutic options. We are very excited, as this clear step forward will be used and can place it as an example among Scandinavian countries.

The second machine was sold in Russia bringing to eight the number of Ablatherm-HIFU units in this emerging medical market with great potential. Ablatherm-HIFU is now recognized as the standard of care among the urology and oncology communities in Russia and we have more great expectations to that, since this is a large population similar to the lifestyle of Western Europe and EDAP shows there a 100% market share in HIFU for prostate cancer.

My second point of discussion is our European RPP, Revenue-Per-Procedure program. Treatments are up by 40% from a year ago, and we see this growth trend continuing over in July and August, typically the slowest months of the year due to summer holidays throughout Europe. This is a good initial report, but we want to grow even faster to achieve our goals.

Our European communication program has helped increased Ablatherm's awareness among most of the stakeholders involved in the treatment of localized prostate cancer, such as patients and urologists, but also GPs, oncologists, insurances and healthcare authorities. We have achieved a lot of communications about Ablatherm-HIFU in many newspapers, magazines and television shows on a mass media basis, as well as specialized ones.

One of the key items we learned was that many of our initial marketing plans worked very well, the media efforts, the patient advocates, the [inaudible] tools. But we also learned that the flexibility to implement these from the regional level is a great benefit in customizing the programs to respond to local buyers. We are already making the adjustments to take this program to the next level, by moving more control to our regional managers in each country, so they can rapidly address opportunities as well cure.

This shift is something we observed directly during the roll out of the efforts so far and proved to be a positive effect on top of the marketing programs. Each of them have local support from regional marketing firm experts in medical device education for [cross-]country and its particular populations, both patients and doctors.

We are already seeing the benefits of this process and expect bigger opportunities ahead toward our growth in Europe. We believe decentralizing the control of actions and suggest to communicate directly to the major countries will improve efficacy, speed of action and be well adapted to local specificities.

It will therefore, contribute in growing faster in our RPP plans in Europe. We have built in the four major countries, including Germany, France, the UK and in Italy, very strong EDAP teams and they are now working full speed on the RPP growth plan and are getting extremely excited in getting more control of the localized actions to further convert all the stakeholders in their respective markets. We are at the same time benefiting from our aggressive actions and plans in the rest of Europe and we are expecting new HIFU sites to be opened as well as new countries to be launched.

Now, I will discuss my sub key topics, the ongoing AVA program to secure Ablatherm approval in the U.S., the biggest and most valuable medical market in the world to-date. The biggest news for us is the appointment of Dr. John Rewcastle as the Medical Director. As someone in North America, he brings a great perspective for success in USA trials. And he has an excellent background with key roles in the approval and reimbursement process for cryotherapy. John also wrote the only comparison pieces about Ablatherm and other HIFU technology, so I think we can say the adjustments is in for the HIFU challenge in prostate cancer, we will see that as the clear leader and winner.

Some of you had asked where are we on the AVA trials? The answer is that we are well moving forward in the process. John is overseeing all aspects of the USA trials, putting his expertise to work for EDAP in securing a successful clinical program for the FDA to review. Ultimately, with the goal of an approval offer Ablatherm to remain in the U.S. seeking a treatment with fewer side effects, so they can preserve quality of life. He is already making significant contributions to improve our programs and hit full stride for EDAP in the fall. The good news is EDAP has more centers interested than we can possibly utilize in this single study, which we believe is an excellent prognosis of the future opportunity once Ablatherm is available in the US.

We have added several major opinion leaders to the studies, as well as a strong team of private centers to help speed patient recruiting following the strict protocols set by FDA to ensure study quality. We have every expectation of excellent results because Ablatherm is so well documented in use around the world and their consistent protocols. Ablatherm is unique from the typical AVA trial program, because the results are so consistent and not in doubt to us. So, we are excited to get through the treatment phase as rapidly as possible.

In the meantime, we are seeing a steadily growing number of men from the US going to Canada and Europe to receive treatment. EDAP is not actively marketing in the US, since that is a clear violation of protocols demanded by FDA for a technology currently under investigation, and a rule we are very respectful of.

In fact, a recent feature in US News and World Report on the future of prostate cancer treatment highlighted two technologies, the da Vinci surgical robot for making surgery less of a problem to recover from, although noting that the data shows that surgeon skill is what matters for outcomes regardless of whether the surgery is by a robot or standard open surgical procedures. And HIFU, with all of the clinical data from EDAP users, I think we can all agree this puts EDAP in very good company, as right now the da Vinci is considered the top medical technology in the US for prostate cancer. And EDAP is being held here as an equally effective option. With EDAP's focus on the clinical documentations and consistent standards we expect to secure the same consensus in the medical community through our efforts on the FDA program.

This is where EDAP's strong cash position and even stronger cash management are so important. Medical companies are known to be great investments, but are also known for needing great cash reserves. EDAP is well funded with more than US$12 million on the balance sheet, denominated in euros, so we are presently benefiting in our US programs from the favorable Euro to Dollar exchange rates.

We are steadfastly managing cash flows to fund necessary investments, sometimes even short-term commitments for cash to inventory and other activities in one quarter, but always sure to get maximum value, or clear returns, so that capital is available for key programs. Even though our cash position remains strong, we are actively working on financing options on a medium and long-term basis to cover completely our leading investments to successfully conduct our US clinical trials until the approval is obtained and the launching phase starts.

This being said, we are also carefully working on the financing program as the markets recently crashed; this is not favoring at all, any deal closing in such a turbulent financial environment. And we have no reason in rushing a deal as our cash position is allowing us a certain flexibility as of today. We will therefore continue working on choosing the right options and alternatives in conducting successfully our major projects and programs.

I will now close my comments with a reminder of some key facts about Ablatherm and our excitement for the future. EDAP is a clear dominant company in HIFU for Europe, taking most of the HIFU for prostate cancer market today. EDAP is a company growing the HIFU market by recruiting, training and supporting new user sites as rapidly as possible.

We have major centers supporting Ablatherm, the top centers of Europe in fact, because our clinical data is clear, consistent and simply the best. EDAP is the top provider for efficacy, now demonstrated with long-term results. EDAP has shown it can preserve quality of life without comprising success of treatment.

I'll 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. Eric?

Hello everybody. Our release earlier today contains a pretty detailed financial discussion, which I'll review here with some additional comments.

As a headline, I want to say that the second quarter, with total revenues of EUR5.9 million, showed the strength of our business when we include machine sales. Second quarter revenues increased 28% compared to first quarter revenue due to the sale of two Ablatherm units in the second quarter, and changes in the total mix. Clearly, the scale of revenue is the major element in our future success.

The addition of two sold machines with an already strong and growing RPP business with the HIFU division back to profit at the end of Q2. Also the second quarter group results show steady revenue in the UDS division where EDAP is investing ahead of the autumn launch of the Sonolith I-sys litho machine coupled with a return to profit in the HIFU division combining for a smaller net loss on the company basis and good cash flows.

Gross profit at the group level in the first six months is EUR4.3 million reflecting gross margin of 41.1%, down slightly from the prior year due to change in the UDS sales mix and currency, while HIFU margin remained steady at 60% for the first half. Second quarter HIFU margins were 61%, up 4% compared to the prior year period.

The group operating loss was EUR0.7 million in the second quarter and EUR1.9 million, year-to-date. Operating loss includes FDA trial expenses and higher costs for the expanded marketing and sales support fueling HIFU revenue growth. Q2 results also include a EUR0.4 million non-recurring profit, which reflects a portion of the compensation agreement with HealthTronics. Cash position remained strong at EUR9 million, or $12.1 million, at the end of June.

If we focus now on the HIFU division, the HIFU revenue reached EUR4.4 million at the end of Q2 '07, and EUR2.8 million in the second quarter alone. This is an increase by 45.4% over the second quarter of 2006 and 74.7% over Q1 2007. The increase includes the sales of two Ablatherm units with additional sales expected in the second half and the steady growth of RPP sales, up 40% over the six months of 2006. The second quarter revenue increased to help the HIFU division past breakeven at the end of June, with its EUR354,000 operating profit in the quarter, and EUR20,000 profit in the first half, despite the increase in marketing expenses by 19% over the first half of last year.

In the UDS division, revenue was stable on the long-term view at EUR3.1 million in the second quarter, up 2.4% and 27.5% over Q1 2007 and Q4 2006 respectively, and down 5.2% for the first half of 2007, as compared to 2006, with a six-months revenue of EUR6.2 million. The decrease of EUR0.3 million in the six months is primarily connected to negative exchange rate impacts of EUR0.2 million on the Japanese Yen, which reached a historical low against the Euro in Q2, 2007, and starts rebounding now. We also sold a slightly lower number of machines; 18 lithotripters in 2007 against 21 in 2006. The average prices increased 1% due to product and country mix.

UDS gross margin decreased by 6.5 points to 27.5% year-to-date in 2007. The decrease is due to the exchange rate effect on machines sold in Japan to date, and mix as a higher portion of products was sold including optional equipment. Options increased revenue, but are purchased from third parties and thus decrease the global margin rates.

Generally, we continue to see the UDS division as a stable cash flow business that covers a significant portion of the costs necessary for the HIFU division. While the profit and loss, they will vary from first quarter of the year to the other, generally this business is steady, breakeven and competitive on a global scale, as the development of the new Sonolith I-sys lithotripter machine to be launched in autumn, should help us sustain revenue and margins.

A last word in cash. The total cash used in the second quarter was EUR300,000 much lower than in Q1, primarily as a result of strong sales and also reflecting the exit price of HealthTronics warrants for US$300,000. On a full year basis we expect the cash yields excluding all FDA and USD working costs to be approximately EUR4 million.

With that I will turn the call over to Marc.

Thank you for your close attention. I hope this call has given you some of the confidence and excitement we are feeling here at EDAP. We thank you for your continued support and enthusiasm for mutually making Ablatherm a new standard of care in localized prostate cancer and bringing the HIFU care to new markets, where patients can benefit from this important therapy.

I propose that we will now begin the question-and-answer session. Operator, would you please provide the instructions on how to participate.

[OPERATOR INSTRUCTIONS]. Okay gentlemen, our first question is from Donald Collins. Go ahead Donald.

Yes, I have four questions. The first question is I understand that you will be introducing some add-on features with your lithotripters and I am just wondering if that will allow you to raise prices and possibly increase margins, maybe closer to 30%? That's the first question.

Actually the Sonolith I-sys will indeed bring some innovative and new features to the market and this machine is also positioned on the high-end lithotripsy segment of the market which was not completely affordable to do it for EDAP range of lithotripters, so it might bring more potential in the market and higher prices.

Okay. The next question is in relation to Chinamed. The market basically is giving no value to your relationship with Chinamed, could you possibly articulate some of the revenue opportunities that shareholders may expect to see with your relationship with Chinamed going forward the next, let's say several years?

Regarding Chinamed, I think the fact is that we have signed an exclusive distribution agreement with them in Europe, which is definitely, an extremely important news for us as being completely there on all HIFU applications in Europe.

Now this being said, we have, and Chinamed has the source to make the machine CE marked. So they are now working on that, and we are trying to help them on a consulting basis to work through the CE marking of their products. Once this will be achieved, which is something more simple than doing an FDA trial or approval process, then we could start working on selling equipment and getting revenues out of it.

Have you projected any revenue forecast on this going forward the next several years? Is this, in other words is this included in your business model for profitability by the end of '08?

No, it is not, because it is a little bit early to say, first of all when the CE marking will be achieved and this is information we cannot disclose as yet. And we are expecting revenues in Chinamed on a more, I would say long-term basis, than to '08.

Okay. And what is your present day, let's say viewpoint of Canada and Australia as far as getting more market share with the Ablatherm-HIFU?

We are continuing treating patients there and we have a growth in Canada and that's what I wanted to express in the conference call, of about 50% to 55% increase of number of treatments done in the Ablatherm trials in Toronto. In Australia, we are also continuing to improve and to increase the number of treatments there. So, we are continuing experiencing growth in the two countries.

On the last conference call, you talked about Vancouver, what's the status of Vancouver?

There is nothing new that we could tell today, but we are still -- the only thing we can say that we are still working on this -- on the project of getting a way of treating patients in British Columbia.

And what is the status of hiring a public relations firm in the United States for more awareness?

Yeah, actually this is absolutely part of our plan and this is exactly what John Rewcastle is working on at the current stage so that we can achieve, as I said, a full speed and full stride in the fall.

So, you are --

We're in the process of putting.

So, we could expect a PR effort sometime in this fall?

Definitely.

Okay, thank you very much.

You're welcome Don.

Okay. Our next question is from Mark Weindling with GunnAllen Financial. Go ahead Mark.

Hello, I have a few questions for you gentlemen.

Hi, Mark.

The first question that I have is with Rewcastle coming on does that mean the Hugues is no longer involved with the US effort, and is just serving on the board of directors?

Actually, Hugues is still active indeed as a board member and is kind of transitioning on the US effort with John.

So he is still involved with US, then?

Yeah.

Okay. You have mentioned in your comments earlier that due to the debt market's fluctuations that for the present time you are not looking at the debt market, and I understand that, and actually I am appreciative of the fact that you are not. However, that doesn't address the equity market, have you given any thought to looking into raising capital by way of equity?

That's an option we are definitely working on and exploring the scenario, but we want to wait for the markets to return to normal because this is not something we can really address in this very short-term, and we will want to make sure that the market will allow a nice deal that's been cut to achieve rates in the coming days.

And then I guess my last question is really more of a philosophic question to you gentlemen than anything else. I was wondering what your perception is of the stock markets behavior with the equity of EDAP and the stock price drop, based upon the fact that business and the situation of the company itself has never been better? There seems to be a real dichotomy between the two. Do you have any feeling or statements concerning that?

Well, if I can start the comment, first of all -- we are not usually commenting on the stock price but, although we are very much aware and concerned about it and about the interests of our shareholders. I think that the first comment is that the whole market suffered, and medical technology companies even more and definitely, I guess EDAP suffered from that very difficult context.

As Marc was saying, we are working on bettering results on the short, medium and long-term and that's what of course reflects in the stock price ultimately. And also, once we will be able to start the public relation efforts on a much greater scale, I hope that it will help us bring some better awareness on the stock price as well and increase the stock price value.

Okay. Well that's all I've got. Thank you, Marc.

Thank you.

[OPERATOR INSTRUCTIONS]. Okay gentlemen, there appears to be no more questions. Marc I'd like to turn it back over to you for any closing remarks.

Yes. Thank you, gentlemen for being with us and we are obviously looking forward to communicate with you as soon as we get any news to tell.

Thank you everybody. And, we'll get some more news as soon as possible. Thank you very much. Bye-bye. Thank you, guys.

Thank you. This call has been concluded.