Edap Tms SA (EDAP) 2007 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Edap fourth quarter and full year 2007 Earnings conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Carol Ruth of the Ruth Group, please go ahead madam.

Thank you, Operator. With us today from management we've got Philippe Chauveau, Chairman of the Board, Marc Oczachowski, Chief Executive Officer and Eric Soyer, Chief Financial Officer.

By now you should have received a copy of the earnings press release. If you have not received a copy, please call R J Pellegrino at 646 536 7009 and he will fax or e-mail you a copy.

Before we begin I'd like to remind everyone that management's remarks today may contain forward looking statements. Some brief detailed factors affecting forward looking statements can be found in the company's SEC filings available at the company's Website, at www.edap-tms.com, and are incorporated by reference for all remarks made during the course of this call.

With that, I would like to turn the call over to Philippe Chauveau, Edap's Chairman of the Board, Philippe?

Thank you, Carol. Thank you all for joining us today on this call. I will start the call with a few opening remarks. I will then turn the line over to Marc Oczachowski, our CEO, who will review recent corporate developments and discuss our outlook for 2008.

Thereafter, Marc will pass the line to Eric Soyer, our CFO, who will discuss our fourth quarter and full year 2007, financial results. We will then open the line for questions.

My opening remarks today will focus on three topics, first our 2007 progress in advancing our HIFU technology in Europe, second progress on US clinical trials and third, the strength of our senior management team.

First Europe, in Europe, our performance in 2007 was solid. Our revenue per procedure model for the HIFU Ablatherm device continues to experience strong adoption in key markets, especially in Germany due to our sales and marketing strategy programs.

Our alliance with China Medical Technologies is progressing well. We are working well with the management team of Chinamed, as they prepare to file a CE mark approval in Europe for their HIFU device, to treat other forms of cancer outside the prostate.

Second the US, in the United States, all the FDA trial building blocks are in place for enrolment to ramp up in our PMA clinical trial for Ablatherm HIFU, one, the addition of our well-known Medical Director, John Rewcastle, who joined us in June as of last year. Two, the completion of a $20 million private placement last October, we have secured total funding for the US clinical trials. Three, we have implemented a new communications program targeted at potential patients. And finally, four, we have completed the selection of leading medical sites and are moving forward with the registration of these sites to participate in our trial.

My third remark concerns management, 2007 marks the full year of our Executive leadership team led by Marc Oczachowski, who was promoted within Edap as CEO and Eric Soyer, who joined us in November 2006 as our Chief Financial Officer. They are a strong and committed management team and work effectively, very well together and with the entire organization. They have the full support and confidence of the Board of Directors, as we continue to drive European adoption and the successful US commercialization of Ablatherm HIFU. With that, I will turn the line over to Marc.

Thank you, Philippe. To begin with, we are very pleased with the record revenues that we generated in the fourth quarter of 2007. As outlined in our release, quarterly total revenue increased 43.8% year over year to EUR7 million and was attributed to solid performance across our two divisions.

In the HIFU division, our Ablatherm HIFU revenue per procedure model performed well and continues to be an integral component of our growth strategy. During the quarter we sold three HIFU machines, reflecting our traditionally strong fourth quarter for the sale of hospital equipment.

Our Lithotripsy division had an extraordinarily robust quarter with 13 machines sold world-wide.

After reviewing our operations outside the US, we remain very excited about the launch of our US clinical trial program and the tremendous opportunity in the largest and fastest growing market for prostate cancer.

Outside of the US we are focused on increasing awareness for our minimally invasive solution for prostate cancer in additional medical centers that utilize Ablatherm HIFU, as well an increase in the procedure volume at existing centers.

During the fourth quarter, we added 11 new centers utilizing our Ablatherm HIFU, consisting of eight centers on a fixed and mobile RPP basis and three centers that made capital equipment purchases.

Throughout 2007 we have been actively implementing educational and marketing programs targeting patients and physicians in each of the key European markets. Aimed at extending awareness of the benefits of treating prostate cancer with our Ablatherm HIFU device, the program has successfully encompassed dedicated TV media events, informative sessions and symposiums.

At our most active center, the Harlaching Hospital in Munich, Germany, treatments for all of 2007 increased 45% from the prior year. This hospital has over ten years of experience utilizing Edap's therapeutic ultrasound technology for the treatment of localized prostate cancer and is a recognized international leader in the field. Such enduring support and strong Ablatherm HIFU activity from an historically leading user, clearly confirms that our technology is a consistent and clinically proven therapeutic option for the long term treatment of prostate cancer.

The treatment experience and clinical evidence in support of Ablatherm HIFU as an effective treatment option for localized prostate cancer is continuing to grow. In 2007 approximately 3,400 treatments were performed, contributing to the 15,000 cumulative treatments at 176 clinical sites.

Ablatherm HIFU continues to be a recognized and valid option for localized prostate cancer.

Recently, Dr. Blana published an article on the long term results with HIFU in patients with localized prostate cancer. The study underscored Ablatherm HIFU's clinical superiority in terms of efficacy, safety and long term data and was ranked highly by UroToday, an on-line news and educational resource developed by a world-class leader in urology.

The study was viewed by over 10,000 urologists. In the past few months we have recorded a significant number of hits on urotoday.com, reflecting our strong campaign creating adoption and awareness of Edap's proven Ablatherm HIFU technology.

We are pleased to announce that Edap will be presenting our new Ablatherm HIFU treatment at @-registry program at the European Association of Urology Congress this week. The @-registry is a centralized database that will compile all outcomes for all patients who have undergone Ablatherm HIFU treatment. Its unique goal is to further establish the role of HIFU and to collect data from the physicians in several countries.

The program will strengthen the demonstration of the long term effectiveness of primary and salvage HIFU treatment. The strong efficacy and safety data already established at RPP centers and the effect of different treatment parameters on Ablatherm outcomes.

We look forward to presenting our unique @-registry database as it is a tremendous tool for physicians and the scientific community to assess HIFU treatment outcomes.

With the 20 million private placements that we completed in November 2007, the US Phase II and III clinical trials of Ablatherm HIFU is now fully funded. The trial, known as Enlight compares the outcomes of Ablatherm and cryotherapy for the treatment of low risk localized prostate cancer. The trial is being conducted at well respected academic centers and private practices in the United States and in Canada. As of today, the total number of fully registered sites in the trials stands at nine hospitals for HIFU and five for cryo.

Last month we launched the patient awareness program for the Enlight study. The launch is a major milestone for Edap. This program consists of customized communication strategies, inclusive of the patient website, www.PCaResearch.com, and a centralized call center. The program is designed to accelerate awareness of the trial with prospective patients through media outlets, grassroots outreach and in-office patient and staff marketing.

As mentioned, we sold 13 lithotripsy machines during the fourth quarter, which brings the total number of devices sold for the year to 39 lithotripters.

During the fourth quarter of 2007 we launched our newest device, the Sonolith I-Sys, our newly designed integrated lithotripter, using our patented electroconductive technology, includes several state of the art features, including superior x-ray imaging, a unique automatic cross-positioning system and the most advanced shockwave source capable of 170 mm treatment depth.

During the fourth quarter of 2007 the device was successfully installed in centers in Poland, Portugal and Norway. We are on track to file a 510K with the FDA for the Sonolith I-Sys later in 2008. We believe that the advanced feature of this device will enable us to effectively position our product within the high end segment of the competitive US marketplace.

We were pleased with our record fourth quarter revenue and our overall performance for 2007. We will now provide a brief outlook for 2008.

As we start 2008 with a little over one year of aggressively promoting our RPP model, we are experiencing the normal transition of centers from the RPP model to direct ownership of our capital equipment. These transitions reflect the growing adoption of our technology and the flexibility of our business model. As centers continue to increase the volume of patient treatments, the economics for the hospital will favor direct ownership. However these transitions can result in a short term revenue impact on our RPP model growth.

For example, in the first quarter 2008 RPP revenues will be impacted by two large European hospitals that have transitioned from the RPP to direct ownership. In the first quarter of 2007, these two centers generated strong RPP revenues, while in the first quarter 2008 we will only record income from the Ablapack disposable, a one time use consumable. As our business grows, these transitions will have less of an impact on our revenue model.

Next, as many of you know, the United Kingdom National Institute of Health & Clinical Excellence, NICE, issued in February 2008 its updated recommendation for the treatment of prostate cancer to a watchful waiting approach from its historical recommendation of immediate surgical treatment. This shift from one extreme to the other has resulted in a trend moving from the over treatment to the under treatment of prostate cancer. We believe this is a strong and positive step forward for HIFU as it is positioned right between these extremes.

Ablatherm HIFU is an effective treatment option with minimum side effects and competitive cost. Current recommendations are less than satisfactory for all stakeholders and we believe future recommendations will recognize this.

In advance of the NICE announcement, we believe that the urology community across Europe implemented a wait and see attitude that led to lower treatment volumes in December, January and February.

In the United Kingdom, we will further focus our efforts on the private pay segment of the prostate cancer market. We will implement our own direct mobile operations and launch our first mobile Ablatherm HIFU machine in the UK during 2008. That will, thus, be operating under the three direct models in the UK including mobile RPP, fixed RPP and equipment sales to fully cover the addressable prostate cancer markets.

We are pleased with the strong start of our Ablatherm HIFU equipment sales in the first quarter of 2008, with two machines sold and the positive outlook for our HIFU division in the first quarter of 2008. Also sales of our disposable Ablapack remain strong, which we believe reflects a positive trend.

Our Lithotripsy business is also coming off a record fourth quarter, which outpaced traditional trends.

I will now turn over the line to Eric, who will review our fourth quarter and full year 2007 financials.

Thank you Marc and thank you everyone again for joining us on this morning's call. I will now discuss our fourth quarter and full year 2007 financial results.

Our fourth quarter and full year financial results were in line with our expectations and reflect solid revenue growth across both our HIFU and Lithotripsy businesses.

In addition to record fourth quarter 2007 revenues, we experienced healthy 10.2% growth in full year 2007 revenue of EUR22.3 million compared to EUR20.3 million for the full year of 2006. This figure was the result of an increase in HIFU net sales, which increased 22% versus a year ago, primarily based on expanding machine sales and adoption of the revenue per procedure model.

The full year 2007 change reflected a 36% increase in Ablatherm HIFU RPP treatments to 1,273 from 936 in the full year of 2006, bringing the cumulative number of Ablatherm HIFU treatments to over 15,000 at 176 global sites at the end of 2007.

Our revenue and growth helped to boost our gross profit to EUR3 million in the fourth quarter of 2007 and EUR9.2 million for the full year 2007, a 10.3% increase versus a year ago. The gross profit margin reached 43.1% in Q4 2007, due to healthy sales of both HIFU and lithotripsy equipment, and was stable at 41.3% for the full year 2007.

In 2007 we dedicated a large portion of our resources to the FDA clinical trials for Ablatherm HIFU and built our marketing and educational initiatives in Europe to drive adoption. These programs resulted in a planned increase in our operating expenses to EUR3.8 million in Q4 2007, up from EUR2.9 million in the year ago period.

Operating expenses totaled EUR13.3 million for the full year of 2007 representing an increase of 16.3% versus a year ago, which was EUR11.4 million in full year 2007.

Operating loss for the fourth quarter of 2007 was EUR0.7 million versus EUR1.1 million in the year ago period. Full year 2007 operating loss was EUR4.1 million compared to EUR3.1 million for the full year of 2006.

Our 2007 operating loss was composed of EUR2.7 million from our European operations and EUR1.4 million related to our US operations for the advancement of our Ablatherm HIFU clinical trials with the FDA, while the operating loss of EUR3.1 million last year did not include these costs related to the US PMA trial.

As a result, the fourth quarter of 2007 net loss was EUR2 million or EUR0.22 per diluted share, compared to last year fourth quarter net loss of EUR1.1 million or EUR0.30 per diluted share. Net loss for the most recent quarter reflected a EUR1.2 million non-cash financial charge related to the accounting adjustment of Edap's convertible debt and outstanding warrants to fair value.

For the full year of 2007, net loss of EUR5.4 million or EUR0.59 per diluted share was wider than the last -- than the full year of 2006 net loss of EUR3.4 million or EUR0.39 per diluted share, due to already announced FDA spending and funding expenses.

At December 31 of 2007, cash and cash equivalents including short-term treasury investments totaled EUR18.6 million. This was helped by our $7.5 million common equity pipe in August of 2006 and more recently a $20 million convertible debt rate in October of 2007.

We are extremely pleased that the company maintains a fully funded strategy in both Europe and the United States.

In Europe we continue to promote our RPP business model and drive a better HIFU market penetration, while in the US we believe the recent capital raise reflect strong positive expectation on the future of our HIFU solutions among investors in the US market. We believe this additional capital will allow the company to fully complete or [Enlight] FDA clinical trials, which means high cash usage in 2008 with the planned implementation of the enrolment in patient treatment fees.

With that, I would now like to turn the call over to the operator for the Q&A session.

(OPERATOR INSTRUCTIONS). Your first question comes from Matt Dolan with Roth Capital.

Hello guys, good morning.

Good morning Matt.

Good morning Matt.

A number of questions here if I can. First looking at the HIFU business, Eric, can you break out procedure volume on both the RPP and sold unit side, as well as pricing in the quarter, any trends there?

Yes on the HIFU business, last year which is 2007, we had 1,273 RPP procedures and we had approximately 2,150 additional treatments on sold machines.

Okay, great. And pricing?

Well, pricing of machine was stable. Actually it was a bit higher, because last year -- the year before in 2006 we had sale of used machines and we only sold new machines in 2007.

I'm sorry and RPP, the pricing on RPP?

The pricing on RPP, we've had a slight decrease due to a volume incentive, especially in Germany.

Okay, and then secondly it looks like RPP volume in the second half of the year actually accelerated, while your sold unit volume may have been flat to slightly down. I'm trying to weigh that with your comments regarding a slow down in Europe potentially here in Q1. How should we look at the RPP business in terms of volume growth going into 2008? Is the growth rate you put up sustainable? Or are these factors here that you're seeing, at least early in the year, going to slow things down?

We believe that we are -- we will continue growing quickly and with interesting growth rates in 2008. But as we have experienced, and as I was commenting just before, we may have some slow down in the activity in December, January and February. But as we are in March now we are seeing activity coming back.

Okay. And then you had a couple of higher volume sites convert to sales. Is that something that you're going to continue to allow going forward as site volumes continue to increase, they'll transition to a sale? Or is that something you would rather preclude?

No, this is something which depends first on the site itself. And as the volume of treatment increases, they may find some interest of purchasing the equipment as it happened already in two centers.

But what we say is that as we are growing and as we are continuing to grow our RPP revenues, the impact of those big RPP centers transitioning to sales to purchasing equipment will not have a significant impact.

Okay. And then on the UDS side would a 510K approval warrant a US distribution partnership? And when would you expect to have a deal there in place?

And secondly, the I-Sys device appears to be improving your operating margins, at least in the fourth quarter for the UDS business, what type of pricing and margins are you able to get on that product?

Regarding the 510K the target for us to file the 510K before the end of this year and operate the launch of I-Sys early in -- in the early days of 2009. And, therefore, we are now establishing and thinking of our self strategy for the Sonolith I-Sys in the US. But we won't disclose any information as of today, but this is something we are actively working on.

Regarding the sales of the three I-Sys in December, they had actually no impact in the growth margin as they were first units with limited -- with some industrialized product. And we are looking to decrease the cost of manufacturing as we are now entering the phase of utilization of the equipment.

And generally that would have a higher growth margin than the rest of your UDS division?

Yes we expect so.

Okay great. And then in terms of the US study you gave us the sites that are actively enrolling. Will we be getting patient -- specific patient enrolment on a quarterly basis to help track the progress there?

Absolutely. Actually we have launched them. That was again a major milestone for us to launch the marketing and promotion program for the trial. That will definitely promote the trial and create awareness among patients. And so, we are expecting now to start actively recruiting a high volume of patients. And we start to have some good feedback from the call center that is receiving more and more calls from patients.

Okay, are there patients enrolled today then?

Sorry?

How many patients are enrolled today?

So, far we have treated a little bit less than 30 patients.

Okay great, and --.

And we are scheduling patients now.

Okay and two more quick questions, I think a few quarters back in terms of profitability we talked about Q4 of 2008 reaching an RPP run rate that would get you there. Do you care to update us on the potential to reach breakeven, obviously excluding your R&D expenses associated with the trial, but in terms of your current commercial businesses? What are you expecting in timing of profitability?

As we commented last year -- in the middle of last year what is important here is that the timing is not so much of an issue. The most important thing here is that after the straight equity [pipe] we did in 2006 the program of bringing the company to profitability with the RPP model in Europe is fully funded, and is still fully funded, and is on track with the financing that we have.

Okay great. And finally in terms of China Medical, still -- are you still expecting a mid 2008 launch there and just maybe give us an idea of how significant you think that product could be or that product line could be in the first year too and then I'll jump off? Thank you.

Yes, actually we never really expected a launch in 2008 as we concluded the agreement with them in the middle of last year, so a few months ago, in fact. And we are working with them as a consulting company as they are applying and working on the CE marking. So, we first need them to obtain the CE mark of the product here in Europe, so that we can start distributing and promoting the product.

Okay very good, thank you guys. Thanks for the time.

Thanks Matt.

Thank you Matt.

(OPERATOR INSTRUCTIONS). Your next question comes from Don [Cowen] with [NTB] Inc.

Good morning. I'd like to ask, what is the total market size, the replacement market of the lithotripter in the United States? And how much of that do you think that you can, maybe in the first year in 2009, capture?

Actually the total number of machines -- lithotripsy machines in the US is about 600 to 650 units. And the replacement market is about 10% of the total market every year. So, basically it's between 50 and 70 units that are sold every year in the US.

And today our main competitor that has a product, which is positioned in the same segment as the I-Sys, is providing in the US about 20 to 25 units per year. So, that's on this segment that we're going to fight and try to take as much market share as we can.

What is that in dollar amount?

In dollar amount it's about at an average selling price of a machine in the US between small, large and medium, would be approximately around $300,000. So, it's about, let's say, 60 units times $300,000. It's a total market of $18 million.

Okay, you said in the last call that you were planning on filing a 510K medical device on that in November or December. Now there's some slippage, I was wondering why the slippage? Is it because you're trying to seek the proper marketing partner to position yourself for this entry?

Actually I don't remember saying that we're going to a 510K end of last year, because it was always scheduled on filing it on 2008. And we will do it. We will file the 510K directly by ourselves. So, we are not expecting and -- waiting for a partner to do that.

Why --?

The launch in Europe was scheduled to be October, November and that was done. Maybe it's a confusion between the two launches. We said we will launch the Sonolith I-Sys in Europe on the last quarter. So we did. And we will file the 510K for the machine later on in 2008.

Is that generally a 90 day approval process?

Yes it is generally a 90 day, indeed, except if there are some more exchange of questions and answers. But usually I think it's safe to speak about between three and six months process.

Very good, thank you.

Thanks Don.

Your next question comes from Walter Ramsey with Walrus Partners.

Good morning, congratulations. Thanks for taking my call, a couple of questions. I wasn't a 100% clear when you were talking in the introduction about the slow down in the RPP or total prostrate cancer treatments in December, January and February is that related purely to the HIFU business? Or is that surgery and everything?

Hello, Walter good to speak with you. It was -- actually it is related to different factors. One is general environment, which is quite slow, actually the start of 2008 in Europe and I think in the world was quite slow.

Another factor was, as I mentioned, the fact that we've got two big RPP centers that have converted to buying their equipments. And these are sales that we had last year in RPP that we won't record this year as RPP.

And finally, my comment on NICE have shown a little bit in Europe, a wait and see attitude from the urology market on prostate cancer treatments in general, as they were all expecting for the NICE guidance to be released, which was done at the end of February this year.

I see, okay. Okay, I understand now. The -- another question, there was a write-down non-cash expense on -- related to the convertible bonds, was that all taken in the fourth quarter?

Yes. Well, actually was in the fourth quarter, for instance the capital raised was in October. And then the accounting rule is all to assess the fair value of the convertible debt at each balance sheet date, which was done at December 31, and the accounting model shown an increase in fair value of this convertible debt which reflected in a non-cash financial charge in the income statement.

This is something that will be assessed every quarter and again it's a purely accounting treatment with no cash involved.

No, I'm just trying to get the numbers straight. So, the EUR1.2 million that was all assessed in the fourth quarter of 2007?

Exactly.

Okay. And the EUR254,000 currency exchange loss, that was all in the fourth quarter of 2007 also?

No, actually a portion of that was in the fourth quarter of 2007, due to severance packages of some employees within the company. And another portion of that was the impact of the South HealthTronics Termination Agreement, which was in Q2 last year.

Okay. And then just one last thing, I don't know if you can make the forecast, but the lithotripsy product line altogether, do you have a ballpark idea of what the growth rate in revenues might be in 2008?

Actually, we don't give guidance on those figures. But what we've all said consistently is that the Lithotripsy business is a long growth business model -- business line for us and it should be so in 2008, although we expect the newly launched Sonolith I-Sys to help us to sustain the sales.

So, just in general, you would expect it to be no worse than flat, right?

No, I wouldn't say so. I would say moderate growth.

Okay, alright thanks very much.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I will turn the call back to Philippe Chauveau for closing remarks.

I would like to thank you all for joining us this morning and invite you to our next conference call for our Q1, '08 results in May and on that thank you everyone for joining us.

This concludes today's Edap fourth quarter and full year 2007 earnings conference call. You may now disconnect.