Edap Tms SA (EDAP) 2007 Q3 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 third quarter of 2007. This call is being recorded and will be available for playback by telephone and online. Details of the playback are available on the Company's Press Release.

On the call today is Philippe Chauveau, Chairman, 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. Thank you.

Good day, and welcome to all of you joining us on this call. Today, I'd like to share three overall comments with you.

The first is, over the last few months we've worked through a very involved evaluation of various funding avenues and held discussions with several investors, four of which ultimately delivered the U.S. capital required.

There was less news and fewer updates over this period as the requirement for this process, which I know caused some of you to question what was happening and, in fact, irritated many of you. But the Company in no way slowed down its programs, success or outright dominance in prostate cancer [with] HIFU. In fact, your management team worked extremely hard to deliver top results, while also [exhibiting] capital raised in highly uncertain markets. This is no small accomplishment, as the progress shows.

Second, Edap successfully raised the capital to directly run its U.S. clinical program to win FDA approval. Edap is the only prostate cancer HIFU Company with full control and benefits of its clinical programs in the U.S.

Third, and finally, Edap's growth in Europe continues with a strong RPP program. It's a long transition, but it's progressing well.

I will now turn the call over to Marc Oczachowski, Chief Executive Officer of Edap.

Hello, everyone. Thank you for joining us today on the conference call. I hope everyone has reviewed the Press Release issued yesterday. Our comments will expand on those terms. We will also take your questions at the end of the call.

Clearly, the third quarter was excellent, representing much of the opportunity we have been discussing these past several quarters. I will address today the two main geographies with four overviews.

First, our European and non-U.S. business continues to grow [in reference] to increased Ablatherm marketing activities, most notably in the high improvement of the RPP treatment numbers; just over 50% in Q3 from a year ago in a sustainable revenue model.

We are experiencing great progress in the Urology conversion process and are strengthening our actions to all patients. Number two, we are also continuing our advance in our Lithotripsy business. Number three, our partnership with China Medical Technologies. And four, Edap has secured the full funding necessary to conduct its U.S. clinical [CD] program with the FDA. These efforts are now, not only underway, they are accelerating with the addition of new centers and a PR program to enhance patients' awareness for the treatment.

Let's begin with the European side of our business. First, Edap is seeing great progress and success in converting Urologists, and an unbeatable change in the mindset for Ablatherm HIFU. Doctors are now asking how to incorporate Ablatherm into their practice solutions, rather than considering the HIFU (inaudible). This is a significant change for HIFU and it was built by Ablatherm being the only HIFU device to have such an extensive experience in treating prostate cancer patients.

With that, [we've had] every major Urology conference and clinical event available all around the globe. This clear commitment to the medical consensus is unique to Edap and gets great respect from the doctors. Clearly, Edap is about great clinical care, proven conduct and documented success, rather than just flashy marketing and treatment by a few doctors who get results others cannot replicate. Feedback from urologists shows this.

I have personally attended the recent conferences, like the AUA New York section, the World Congress of Endourology and Lithotripsy, and some national events, such as the French Urology Application Annual Conference, where Edap was several times the only HIFU Company represented and active. The third thing is the main message and feedback I got from other Ablaterm users, but also non-users, was an irrevocable change in mindset and consensus towards HIFU for the treatment of prostate cancer.

It is really obvious that urologists are looking forward to offering Ablatherm HIFU in the future. And the question is how to offset treatment and incorporate this into the patient treatment solution strategies. This being said, and taking into account those important improvements in the urologists' conversions, Edap is continuing and strengthening its marketing and awareness campaign to all patients.

We are also experiencing here some good progress that are demonstrated by continuous increases in the flow of visits in our patient dedicated website www.HIFU.planet.com, with more than 15,000 visits a month. And concretely, with a dramatic and accelerated increase in the number of RPP treatments during the past month, with a 52% increase during the last four months as compared with last year same period.

It makes no doubt that these trends will further continue as Ablatherm HIFU answers perfectly what patients are looking for; maximum preservation of their quality of life, and they now get to know it as we adapt our promotional actions and monthly communication plan by decentralizing (inaudible) directly under the control of our main country managers in Europe.

This action is just starting to give encouraging and positive results, as we reported a 51% increase in our number of RPP treatments in Q3 as compared with Q3 last year, and a 54% increase for the month of October. The increasing number of [procedures] is a key element of our sales strategy, as it is crucial to maintain and further boost the momentum on HIFU that was given by Ablatherm HIFU, with about 14,500 treatments performed on prostate cancer patients in the 165 trials as of today.

We are also happy about this progress and find it positive, considering that Q3 in Europe is the slowest quarter of the year with the seasonal holidays across the territory. It is important here to avoid, in conclusion, to mention that the figures reported in terms of [un-recognized] activity are only concerning prostate cancer treatments.

Based on this large experience achieved in Europe during the past few years, we are now confident in expanding our HIFU technology and its business model further. We reported through the year about the opening of other HIFU centers outside Europe, such as South Africa, that was opened a few weeks ago. This (inaudible) was very interesting as well, in the sense that the urologists using the Ablatherm HIFU there was [fanning] out with both HIFU devices available for the treatment of prostate cancer. This choice reflects the concrete and real superiority of Ablatherm.

In terms of machine sales, we recorded one other Ablatherm HIFU sold in Q3. This is, again, confirming the unpredictability of this model. Each quarter of this year was different the one from the other. We already anticipate Q4 to be also different, as we have already installed and invoiced two other Ablatherm HIFU units in early November and we have an additional sales boost plus a strong pipeline of products.

The second point, regarding our Lithotripsy business, we have sold 23 devices at the end of Q3. We believe this is a good and positive number, taking into account this is a transitioning year when we launched our new IM Sonolith I-Sys. As a reminder, Lithotripsy is major market where users are very faithful to their brand. It is thus usual to see a slight decrease in volume sales during the launch of a new model from the popular brand.

We also know that working and developing new and innovative products in such a competitive market is a must to maintain our position of key player, and to look for more market penetration by extending our range of machines. It was a -- in 2007 only [development excellence]. We are very enthusiastic as we have already truly confirmed purchase orders for the new Sonolith I-Sys which are projected to be installed by the end of this year. This is showing the great interest and the good response from the market with this innovative high-end Lithotripter.

I will now turn my attention briefly to another area, where many of you are eagerly awaiting news; the agreement between Edap and China Medical Technologies. China Medical is the largest and leading outside of the body HIFU Company, and a fast growing venture seeking to diversify into markets such as Europe.

We [intend to sign] another agreement on the strategies advisor to help with CE approval processes to bring this device into Europe. We will then make them benefit from our large expertise and more than 25 years experience in approving new and innovative technologies in Europe. We both have the same goals and interests in going fast in improving China Medical Technologies HIFU device in Europe, as we are the exclusive distributor of the complete European Community plus Russia during four years after CE mark is obtained.

I will now turn to our second geography, the key U.S. market. First, let's discuss some general terms of the U.S. financing, leaving the details to our CFO. We see this as fair deal for both the new investors and current shareholders. The reasons I say this, and the reason management and the Board agreed to the investment, is quite simple.

Yes, we will issue some additional shares [to Edap current] shareholders but this is [mentioned] for U.S. market presence by Edap, which represents the biggest market in the world for Ablatherm HIFU. This will give Edap direct revenue and profit [for the] U.S. market after approval, and it will undoubtedly benefit its current shareholders and new investors that were part of the deal.

For Edap, it was still in its development to fund the U.S. FDA trials, providing direct access to the biggest market for prostate cancer and the most receptive market in the world for medical embedded solutions to preserving patients' quality of life. Thanks to this financing, we can now be positive for running our trial until the approval is obtained. With just three things, a focused PR team to further [promo] the trials among patients in the U.S. in order to maximize the recruitment of patients in the two arms of our study.

We are also continuing to finalize the contracts with all our centers. As of today, we have five centers running and processing treatments, including Duke University, Durham, the (inaudible) Foundation for (inaudible) Research in [Oakland], the Virginia Urology, Richmond, Thomas Jefferson in Philadelphia, and Vandevilt University in Nashville.

For the remaining five (audible] contract submitted for [specimens]. Just to say that we could have done faster, but we agree that speed of action is important. But we also considered that quality of the study sites is crucial and, in addition to the prestigious centers listed before, we are currently adding top U.S. names and centers in the management of prostate cancer. It is extremely important to do that to secure the motivation and enthusiasm from the best experts and centers in the U.S., and one would even say, in the world. And we needed the necessary time to build the best team ever to bring our Ablatherm HIFU to (inaudible).

I was recently at meetings with our investigators in the U.S. and I could really feel the excitement from the team in all the centers. It was fantastic for me to see their happiness and motivation in being part of the trial with Ablatherm HIFU, and appreciate how strongly they believe in the technology. We will make further announcements as we progress in this trial, but I want to share with you our solid excitement about where we are today; fully funded and fully running.

To conclude and summarize, we have never been in such a good position and we strongly believe everything is now put together to make it happen for two major reasons. One, our European RPP program is fully funded and running well, showing high growth. Second, our U.S. trial is now fully funded and it is now full speed, including the best [thing for Edap] ever.

I'll now ask Eric Soyer, our CFO, to highlight some of the key points of our financials, then we'll open the call for your questions.

Hello, everybody. Our release earlier today contains the financial results in detail for the quarter and nine months, which I will review here with some additional comments.

Overall, the business side of Edap continued to show good progress in growing [all of the] treatments, [particularly] the (inaudible) large ticket HIFU machines sales with predictable recurring treatment sales. We have increased funding in several marketing and sales initiatives to gain this result, thus, increasing our (inaudible) ahead of the expected sales volume in RPP.

The Lithotripsy business remains strong through the transition with the I-Sys launch. And finally, the Company is now fully funded for both its European growth plan, already underway, and the fully Edap sponsored U.S. clinical program which reserves all marketing rights to the Company and its shareholders.

First, let's cover some of the key numbers and trends, and then we'll discuss the recent categories in more detail. Third quarter and year-to-date Group revenues are essentially steady at EUR15.2m, with machine sales revenues year to date lower in both divisions, due to fewer Ablatherm device sales. But, again, we all know that machine sales can vary from one quarter to the other. And three fewer Lithotripsy [plates], due to the (inaudible) transition.

Our 2007 revenues also still suffer from the strengthening of the euro and, thus, the negative impact of foreign exchange fluctuation of non-euro sales, and especially Lithotripsy sales denominated in Japanese yen.

HIFU revenues, however, were up 21% over nine months and up [29%] for Q3 only and now represent a larger percentage of Edap total revenues from the success of our RPP plans. Treatments in RPP were up [37%] through the first 10 months and [trekking] increases over 50% in the last four months, indicating a solid finish to the year based on these trends. [New] figures contributing 5% increase in the (inaudible) revenue over the nine months are clear and very positive signs of the increasing adoption of Edap's HIFU solutions and devices.

Group gross margins are down slightly, due to shifts in Lithotripsy sales and negative effect from currencies. HIFU margins remain in the 60% range with the year to date trending at 58%. This is actually down slightly from the first half of the year, due to some volume discounts Edap previously launched as part of the strategy to improve high volume (inaudible), which ultimately returns higher revenues and efficiencies for the Company.

HIFU division loss is only EUR145,000 for the first three quarters; down from EUR411,000 a year ago, in spite of the higher spending on marketing and lower machine sales. This is, again, a good indication that the program in place, and especially the promotion of the Edap marketing model, are succeeding.

Total operating loss at the end of Q3 is about double compared to last year, to EUR1.5m, mainly due to Edap's resumption of four FDA programs ahead of the capital raised for dedicated funds and higher marketing activities. Year to date, Edap has spent EUR1.1m on FDA programs compared to very small sums in the prior year.

One of the things that sets Edap apart from most companies bringing a completely new therapy to market is our cash position, showing at EUR7.6m with improving volumes plus the recently raised $20m for clinical programs in the U.S. The large portion of Edap's cash use is not only cash burned in marketing programs, which will return future revenues and profits, but dedicated to working capital needs, such as inventory and equipment, which can be recaptured in later periods.

The fourth quarter is already off to a strong start in both HIFU and UDS with 200 [turns] already sold, and overall a pipeline that may yield additional sales before year end. [Repo] is also off to a strong year -- end of year, with (inaudible) to be delivered on top of a strong pipeline of activity in our existing Litho products.

Now that we've covered the general financials, so let's turn to the recent successful capital raised for the U.S. program. We all know that this has been a longer than expected process, essentially due to the very difficult market conditions over the summer in the U.S. And we are now quite pleased with the result of these efforts, which finally bring to the Company all necessary resources to implement its strategy to develop the full HIFU potential on the very promising U.S. market, actually the largest in the world.

The terms of the deal are relatively straightforward. We have raised $20m in unsecured convertible debentures with a 9% coupon. The debentures convert to [$6.57] per share. The investors also received five year warrants, five at $6.87, representing potential additional funds of over $11.5m if they are exercised.

In all, the rate represents in round numbers 3m new shares for the debentures and up to 1.68m potential shares of warrants. Again, we believe this is a fair deal for all; the Company, its shareholders and the investors. This, obviously represents dilution for existing shareholders, as already announced and duly authorized, who are getting in return a now very solid and credible opportunity to enter the U.S. market.

Because, first, the new funds will be dedicated to the U.S. strategy and all [succession] to sustain the FDA approval process. Second, the Company has (inaudible) a body of clinical recommendation and about 14,500 [technology] treatments that gives us the edge needed to conduct this clinical trial with great confidence in the outcome.

Third, the warrant (inaudible) represents very interesting potential additional funds; up to $11.5m to finance market entry and operational build up once approval is achieved. And fourth, Edap's own full marketing rights and benefits from the U.S. market potential, as there are no key partners with whom we must share the revenue and profit upon U.S. approval.

The raise was completed with the assistance of Cowen and Company, as the lead (inaudible) agents, together with [or typical partners] and funded by four U.S. investors, including a current large shareholder and three new investors, all excited about the future progresses of HIFU in the U.S. market. We share this excitement, based on the feedback from doctors in the clinical trial, feedback from American patients treated in our customer's facility in Toronto, and a growing number of American patients seeking treatment in Europe Ablatherm centers.

Clearly, the adoption curve in the U.S., particularly in Europe, is giving us the expectation of our business opportunity following successful approvals.

Recall that Ablatherm is designed, not only as an effective treatment for prostate cancer with minimal impact on a man's quality of life, but also as a financial and efficient treatment option (inaudible). Ablatherm has low upfront costs, or even none on the RPP program, has rapid treatment times and requires minimal man hours for staffing. This will be a highly attractive opportunity for insurers and healthcare systems to offer an effective treatment while actually keeping costs at reasonable levels; a truly rare opportunity!

Reviewing quickly [typical messages], the first one is that the [HIFU] penetrations are growing strongly in HIFU RPP procedures with volumes increasing by 50% and more in recent periods. Inflation of this volume into added revenue growth is currently proving the viability of Edap's HIFU model.

Two, despite the slide shown on [its sales], the view is as expected for the transitioning process for our new products, we remain very positive about the Lithotripsy business and, notably, with the market potential of the new (inaudible). And three, the U.S. program is now fully funded and fully reserved for the benefit of Edap's [first] approval. So it's high expectation for U.S. adoption generally much faster than the European phase observed already.

With that, I will turn the call over to Marc.

I hope this call has given you the confidence and excitement we feel here at Edap. We thank you for your continued support and enthusiasm for (inaudible) healthcare in localized prostate cancer and bringing HIFU care to new markets where patients can benefit from this important therapy. I propose that we will now begin the questions and answer questions. Operator, will you please provide instruction on how to participate?

(OPERATOR INSTRUCTIONS). We have a question from Donald Collins. Go ahead, please.

I have several questions. First question is, can you talk about the progress and the number of physicians, or urologists being trained on a monthly basis, let's say, sequentially for the last five or six months?

Yes. Actually, we don't have accurate records on the number of urologists trained, but we have accurate records on the number of new sites that have been involved and we have opened, so far this year, 33 new sites. And we know that, as a matter of fact, that in general between one and three operators are trained by site. When we think about trained operator, or urologists, it is people that have been treating patients, not only people that have seen [doctors].

Are you ever going to consider introducing the Sonolith lithotripsy in, maybe, a 510k medical device approval in the United States?

[Not completely].

When might that be?

We are going to process that and I did say that's a 510K, so this is something we expect for next year.

What about the market opportunity of that product in the United States?

The market opportunity in the United States is quite good for these high-end products. In the U.S. the markets were big machines, and again high-technology machines are very welcome. So this is exactly the position of these products, but we also know that lithotripsy, as we said, is a mature and competitive market. But the U.S. is indeed representing one of the largest markets and is one of the highest levels in terms of equipment.

And do you ever anticipate expanding your Ablatherm HIFU into Latin America?

We are actually, as I mentioned earlier in the call, we have achieved the large experience in (inaudible) and installing Ablatherm HIFU all across Europe and we are now expanding outside of Europe, including Latin America. So we are prospecting actively in territories outside of Europe.

And last question. French reimbursement, I know this is a sore subject, but what are you doing to secure and to maybe find a successful conclusion to this problem?

We are continuing to provide clinical data as we go ahead in getting more results and more [presentations] to the French Association of Urology, as well the French Authorities, to get the reimbursements.

But as we mentioned several times, this is not completely dependent on us and we are working, again, as much as we can, pressuring as much as we can. And working on doing a lot of [floating] at Ministry of Health and Social Security level, but this is something that we can't, and we don't, know when it will happen.

Thank you very much.

You're welcome.

You have a question from [Matt Willis]. Go ahead, please.

Hello guys, good morning.

Hello Matt.

A couple of questions. First, with respect to the RPP business, can you describe your growth and procedure volume relative to utilization? Are you seeing most of the growth coming from longer-term accounts using more, or is it mostly from new account additions? Help us weigh that.

Actually, we have -- of course, by admitting new sites it helps increasing the volume, but as well we see our long-term users on RPP including more patients as time goes forward.

How many patients are the longer-term users doing on average per quarter?

That is actually a very difficult question to answer since we have, as you know, two kinds of RPP users. The one that we call the fixed RPP. That means hospitals that can provide enough patients for us to put in place the machine on a fixed basis there. So we ask, and we are experiencing on this specific model, between 30 and 45 as an average treatment figure.

And then for the mobile RPP treatment, it's varies a lot from one user to the other, because we have users that will be treating like five to 10 patients a year and we will have some others that will treat 20 to 30 patients, so it's really depending.

Okay, great. And then secondly, on the HIFU business, any plans for sales force expansion in your current markets for next year?

Actually, as we announced two months ago we, end of last year, early this year, improved tremendously the sales force in the main markets in Europe. And thanks to our 20-years' old network of distributors and [activities and events] outside of Europe, we have a complete network that is starting to promote other [networks] as well outside Europe.

Okay, very good. And then, with respect to the U.S., can you give us an idea of what your expectations are for the pace of patient enrolment, now that you have a few sites up and running on a per-center basis?

Actually, we are -- as I said earlier, we are now finalizing the different contracts with hospitals that are not completed yet. And we are going to do a lot of effort in promoting the trial towards U.S. patients, so that we can create and maximize the recruitment of patients, for both the HIFU arm but also the trial arm. And we are still expecting to fully recruit and treat the patients within 12 to 18 months from now.

Great, okay. And then, now that you have the financing in hand, can you give us an idea of what your expectations are for trial expenses over the next year or two?

Sorry Matt, you were speaking about trial expenses?

Yes. What are your expectations -- now that you have the financing in hand, what are your expectations for costs associated with the trial in 2008 and, potentially, beyond?

Yes. Costs in 2008 should be in the range of $8m to $10m because, as we explained earlier, the key process expenses are basically front loaded, with about 70% of all costs being spent in the first 18 months used in patient enrollment. So we will spend in the range of $8m to $10m in the first 12 to 18 months.

Okay. And finally, for Eric. On the gross margin you gave us some commentary there; thank you. But any thoughts on the margins going forward? Can that get into the above 40% level in 2008, or how should we look at that here over the next few quarters?

I don't want to make any forward-looking statement on this margin level but, as we explained earlier, with the shift to an increasing portion of HIFU sales with better margins, that should help the global corporate margin to increase. But again, that's -- we're working on it, but I don't want to give a forward-looking statement to you now.

Okay, very good. Thanks guys. Take care.

Thank you. Goodbye.

(OPERATOR INSTRUCTIONS). Next, we have a question from [Walter Lambsley]. Go ahead, please.

Thank you. I have a couple of detailed questions. Congratulations, by the way. Eric, can you give us the end of the quarter figure for the inventory and the accounts receivable?

Sorry. The accounts receivable is --.

And inventory?

It is EUR1m, so it's about $1.5m at the end of Q3.

Okay.

And, again, what was the question, Walter?

The inventory figure for September 30?

Inventory was EUR4.4m at the end of September, which is $6.2m. This is slightly ahead of the previous quarter figure. Again, this is due to some inventory build-up for the new [sanitizer] machine to prepare for the market launch. And that will be recaptured in the coming months when sales for -- [which is orders are concretized].

Okay. And then just to clarify my understanding here, can you just tell me how many patients were treated during the quarter using the RPP, and how many patients were treated on the machines that were sold to the hospitals and other clinics?

So, we have recorded and -- (inaudible) you have to record the number of RPP treatments performed during Q3. It was 283 patients during Q3. Now, we don't as yet have the total number of patients since we have, as I said earlier, now 165 centers treating patients. And it's difficult and it takes time to record the exact number of treatments performed in the total number of machines that we have on the field. But this is a figure we may have somewhere at the end of the year.

Okay. So, at the end of the quarter, the Company had 165 RPP centers. What was the number in September 30, 2006?

At the beginning of 2007, we had 132 sites.

Okay.

So we have 33 new sites that were added from the beginning of the year, in the last nine months.

Okay. And just one last thing, I guess. The consumables that were sold for the HIFU, for the machines that were previously sold, do you have a figure for that?

Again, as I was explaining, the consumables with which we call the [Abla-packs], increased by 55% from last year. And this is -- you know that the consumables -- these are single-use consumables, which means that this is a clear indication of the adoption of HIFU treatments.

But there is still, we have to take a little bit of care around this figure as -- than the sales of Abla-packs recorded both Abla-packs sold to current users, and also the Abla-packs that has been delivered with the sales of equipment. So it doesn't mean -- when an Abla-pack is sold, it doesn't [immediately view]. So there is a little bit of difference between the number of Abla-packs delivered and the number of treatments performed in our installed base of machines.

Yes, I understand.

That's why it takes a bit of time to exactly record the number of treatments really performed on the machine.

And then, in the fourth quarter the Company has already sold two Ablatherm machines, and what's the potential for the additional sales? Just maybe one more, or can you sell two or three more?

I can -- on Q4 we have units sold and invoiced two machines and we have one in backlog. So [at this term of life] we will have three sales in Q4. And we have a (inaudible). We have a strong and solid pipeline of projects. But as we said, sales of equipment are -- it's a long cycle of sales and it may take some time, so we may have some more, or we may not. We have three solid sales done.

Okay. Good. And as far as the new lithotripter line, are you going to be able to generate a big revenue contribution in the fourth quarter, or is that likely to occur in the first quarter?

No. I have mentioned as well, we're going to deliver, install and invoice three machines and we have three confirmed processed orders, so that contract will contribute, indeed, to the revenue of 2007.

Okay, congratulations again. Thanks very much.

Thank you very much.

Thank you, Walter.

There are no more questions at this time.

As there are no more questions at this time, I would like to close the conference call by thanking everyone who has attended and asked questions. And I look forward to our next conference call where we will meet again and, hopefully, get more questions to forward our business. Thank you very much.

Thank you. This call has been concluded.