Edap Tms SA (EDAP) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Edap TMS second quarter 2009 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Carol Ruth, of the Ruth Group. Thank you, Ms. Ruth, you may begin.

Thank you, operator. With us today from management are Philippe Chauveau, Chairman of the Board, Marc Oczachowski, Chief Executive Officer, and Eric Soyer, Chief Financial Officer.

Before we begin, I'd like to remind everyone that management's remarks today may contain forward-looking statements. These include statements regarding the Company's growth and expansion plans. Such statements are based on management's current expectations, and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in these forward-looking statements. Factors that may cause such a difference include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission.

Now I'd like to turn the call over to Mr. Philippe Chauveau. Philippe?

Good morning, everyone. As usual, let me share with you some brief opening remarks. Edap, in Q2 2009, progressed on all fronts, as highlighted in the headings of today's press release. Our management team continues to focus on the three critical action areas that are the bedrock of Edap's success. One, HIFU RPP, two, FDA trials, three, managing cash. All three action areas are very much on track, as will be shared by our CEO and our CFO during this call.

Finally, it gives me great satisfaction to tell you that our two new US Board members, as confirmed during our Board meeting in Raleigh/Durham last Thursday, are already providing significant added value to Edap.

Let me now hand over to Marc.

Thank you, Philippe, and thank you, everyone, for joining us on our second quarter 2009 earnings call. I will begin the call by reviewing our financial performance, and then provide an update on recent accomplishments, and upcoming milestones for our US Ablatherm-HIFU clinical trial. We are very encouraged by our robust revenue for the second quarter of 2009, driven by strong sales growth in both our HIFU and Lithotripsy businesses.

As outlined in our press release, total year-over-year revenue increased 37%. We are particularly pleased to have achieved break-even quarterly operating income, excluding expenses for our FDA clinical trial. In addition to our financial strength during the quarter, we believe the recent US FDA approval of our Sonolith I-Sys device validates Edap's technology and potential to enter the US market.

Second quarter 2009 Lithotripsy revenue totaled EUR4.6 million, up 38.4% year-over-year. As mentioned in our press release, we sold 11 lithotripsy machines during the quarter, including five high-range Sonolith I-Sys devices. For the six months ended June 30, 2009, Lithotripsy revenue was EUR8 million up 42.2% from the prior year period. We sold a total of eight Sonolith I-Sys units during the first six months of 2009, compared to two units sold during the first six months of 2008. Our next generation Sonolith I-Sys device continues to drive our Lithotripsy sales growth and provides us with more favorable product mix.

Our customers continue to demonstrate high acceptance for this novel robotized device, which is an advanced shockwave system that provides the highest standards and greatest benefits for both the patients and the urologists. We are leveraging the device and its enhanced features to raise visibility for our entire product portfolio, among both urologists and patients.

We believe that the recent US FDA 510(k) approval of our Sonolith I-Sys device further supports our growth objectives, and validates the broadening adoption of Edap's technology in new and existing geographic markets.

We are extremely pleased that this latest milestone for Edap has clearly demonstrated the capability of our regulatory [affairs] and clinical teams to navigate the pathways necessary to obtain US marketing approval. As a result, we are positioned to enter one of the largest global markets for lithotripsy, and we look forward to establishing strong customer relationships with US urologists, partnerships, and hospitals.

We will begin actively marketing the device and establishing a distribution network to effectively promote the Sonolith I-Sys in the US. We also expect to refine our marketing efforts to reflect the changing US healthcare industry and the regulation surrounding physician-owned lithotripsy partnerships.

At this point, we are not providing any specific guidance on US Lithotripsy sales, but I do want to underscore the fact that high-end Lithotripsy products have a typical sales cycle of approximately 12 months. We look forward to updating your on our progress in entering the US market.

Turning to our HIFU division, we are pleased with the progress of this business, and RPP sales momentum during the second quarter 2009. Total HIFU revenue was EUR2.2 million, an increase of 34.2%, year-over-year. The number of RPP treatments were up 34.9% from the year-ago period, and 37.5% over the six months period, reflecting the traction of the RPP marketing program in driving further market penetration across Europe.

We are pleased with the high level of responsiveness demonstrated by our customers to our flexible RPP sales offering, that complements our current business model. We continue to focus on increasing awareness and [driving adoptions] of our technology through aggressive sales and marketing initiatives.

In Germany, France, and Italy, RPP activity has steadily increased, as a result of our efforts to increase physician and patient awareness of HIFU as a robotized, non-invasive treatment option for localized prostate cancer. In the Netherlands, India, and Mexico, our recently launched RPP sites continue to complete HIFU treatments.

As part of our overall growth strategy, we have seen expanded Ablatherm-HIFU adoption across new geographical territories. During the quarter, received Ablatherm-HIFU approval in Argentina and Brazil, and entered the South American markets with [clear] distribution agreements, with dedicated and experienced partners in Brazil, Chile, and Argentina.

Several clinical institutions in the region have expressed an interest in offering Ablatherm-HIFU to their patients, and we can now provide them with a solution. These recent approvals, and our strong distribution network in South America, mark a clear milestone for our technology, as Ablatherm-HIFU gains further traction as a proven non-invasive therapeutic solution for prostate cancer.

We also have been supported by the growing recognition of Edap within the urology community. During the quarter, our presence at the second annual international workshop on focal therapy and imaging in prostate and kidney cancer, held in Amsterdam, served as an excellent means to directly address physician interest in Ablatherm-HIFU technology.

The event showcased Edap as a leader in the cutting edge focal therapy approach, and confirmed focal therapy as the new trend and future approach to prostate cancer treatment, as a targeted, less invasive course of therapy. We are very excited that HIFU technology has been recognized as the best-adapted technology and clear leader in focal ablation.

As the worldwide leader in HIFU, we are extremely well positioned to benefit from this positive new trend toward the minimally invasive and focal approach. As HIFU gains broader acceptance, and demonstrates its potential across multiple pathologies, including focal, radiation failures and locally advanced cases, we believe the technology is emerging as a real standard of care in the treatment for prostate cancer.

Before I discuss the status of our US Ablatherm-HIFU clinical trial, I would like to comment on the recent expansion of our Board of Directors with two new US-based members. We believe both Dr. Argil Wheelock and Dr. Rob Michiels are highly knowledgeable individuals, and that will be invaluable in contributing to our HIFU European business growth, and our advancement toward FDA approval of Ablatherm. Both of these men are outstanding additions to our team, strengthening the Board's collective ability to fulfill the best interests of our shareholders.

Since our last earning call, we have made significant progress with our US Ablatherm-HIFU clinical trials. We have now enrolled and treated a total of 79 patients in the HIFU arm. We plan to treat more patients in the coming weeks, and currently have another seven patients scheduled for treatment within the next ten days. As of today, we also have 30 patients being evaluated via our clinical trial referrals.

As stated on our Q1 call, we received FDA approval of our proposed protocol amendment to include additional HIFU sites to participate along with the existing 12 centers. We are currently finalizing the implementation of two new sites, which are Triangle Urology in Pittsburgh and Methodist Hospital in Brooklyn. We are very confident in these centers' ability to aggressively screen and enroll eligible patients.

We have specifically chosen these centers for the great deal of potential based on their annual patient volume of localized prostate cancer procedures. The centers are motivated to participate in the Ablatherm-HIFU trial, and have a strong track record in bringing new and innovative technologies to the US market.

During my recent summer tour of US sites, I personally met with the doctors and clinical team at most of our investigational sites. I was very impressed by the commitment to the successful completion of the Ablatherm-HIFU trial.

In order to further support patient accrual efforts, we have strengthened our US team dedicated to implementation. Dr. Douglas Chinn has experience in bringing minimally invasive therapies from the clinic to the market, and recently joined us to liaise between Edap and participating physicians. He is a globally recognized urologist, known for pioneering technical developments, clinical implementation, and physician training.

Dr. Chinn has the most US experience in treating patients with Ablatherm-HIFU. And he has begun closely working with physicians at investigational sites to assist them and answer any clinical or [product] questions. We are confident that his experience and prior success in training and working with physicians to adapt Ablatherm-HIFU's technology will positively impact our patient accrual efforts.

In addition, we recently welcomed [Karen Berry] to the Edap team, as part of our strategy to strengthen our monitoring and coordinating team. As a clinical coordinator, communication manager, Karen will support coordinators at each participating site in selecting screened patients for enrollment, and following them until they are treated.

Karen will promote the trial to patient groups and media outlets to further drive awareness about the Ablatherm-HIFU trial, communicate with patients, answer our trial hotline, and help patients and clinical coordinators identify and screen appropriate candidates.

Concerning the cryoablation arm, we are progressing well with our ongoing discussions with the FDA to review alternative control arm treatment options. For obvious confidentiality reasons, we cannot disclose any additional information at this time, but we will update you as it becomes appropriate.

Overall, we have successfully executed on the majority of our HIFU clinical development initiatives, following FDA approval of our protocol amendments. We have strengthened our clinical team, recruited and enrolled two additional centers to participate in the US Ablatherm-HIFU trial, which has already increased patient screening over the last two months, and given us confidence that our accrual efforts are gaining traction. We believe we are progressing well, and are very excited and enthusiastic. We are confident that we are on track to achieve our original target schedule for Ablatherm US HIFU approval.

In conclusion, we are encouraged by the strength of our overall financial performance during the second quarter of 2009. We look forward to more excitement in the months ahead, as our US Ablatherm-HIFU trial gains momentum, we prepare for the US launch of our Sonolith I-Sys, and continue to increase market penetration within existing markets, while expanding into new geographic territories. We expect these initiatives to support our goal to achieve profitability.

I will now turn the call over to Eric, who will review our second quarter 2009 financials.

Thank you, Marc, and good morning, everybody. I am pleased to review our strong second quarter 2009 financial results. Total revenue in the second quarter 2009 was EUR6.8 million, or $9.4 million, up 37% compared to EUR5 million, or $7.8 million, for the same period in 2008, reflecting strong Lithotripsy and HIFU sales.

In the second quarter 2009, total revenue for the HIFU division was EUR2.2 million, or $3 million, an increase of 34.2% compared to EUR1.6 million, or $2.6 million, during the same period of last year.

During the quarter, we sold one Ablatherm-HIFU machine, compared to the year-ago period, during which no HIFU devices were sold. RPP sales continued to pick up momentum, totaling EUR1.1 million, or $1.5 million. The number of HIFU RPP treatments were up 34.9% year-over-year, and 37.5% over the most recent six-month period as our customers continued to be responsive to a more flexible sales offering.

During the second quarter 2009, we are pleased with the significant success of the Sonolith I-Sys device in driving Lithotripsy revenue after only its second year of commercialization. We sold 11 Lithotripsy machines, including five Sonolith I-Sys devices, for total Lithotripsy revenue of EUR4.6 million, or $6.4 million, up 38.4% from the second quarter 2008, when we sold 10 Lithotripsy machines, including two I-Sys devices for EUR3.3 million, or $5.2 million.

For the six months ended June 30, 2009, we sold 18 Lithotripsy machines, including eight I-Sys devices, for total Lithotripsy revenue of EUR8 million, or $10.6 million, an increase of 42.2% from the first six months of 2008, when we sold 15 machines, including two I-Sys devices, for total Lithotripsy revenue of EUR5.6 million, or $8.6 million.

The revenue growth in both our HIFU and Lithotripsy divisions resulted in an increase in gross profits to EUR3.2 million, or $4.4 million, and gross margins to 46.8%, up 69.4% and 8.9 points respectively from gross profit and gross profit margin during the second quarter 2008.

Second quarter 2009 operating expenses were EUR3.7 million, or $5.1 million, compared to EUR3.3 million, or $5.1 million, for the same period of 2008. The increase was primarily attributed to marketing efforts and the extension of our sales force to support revenue growth.

Second quarter 2009 operating loss decreased to EUR0.5 million, or $0.5 million [sic - see press release], compared to EUR1.4 million, or $2.2 million, in the second quarter 2008, driven by year-over-year increases in HIFU and Lithotripsy device sales, as well as RPP sales.

We are very encouraged. Our solid performance in the most recent quarter allowed us to achieve break-even quarterly operating income, excluding US clinical trial expenses, and demonstrates our progress towards reaching profitability.

Second quarter 2009 net loss was EUR0.5 million, or $0.7 million, or EUR0.05 per diluted share, compared to net income of EUR0.9 million, or $1.5 million, or EUR0.10 per diluted share in the same period of 2008. The EUR1.4 million decrease was mainly attributable to the [EUR]0.9 million reduction in operating loss, offset by the EUR2.3 million negative impact in the accounting adjustment for convertible debt and warrants to fair market value.

Net loss for the most recent quarter included a EUR0.7 million non-cash financial gain adjustment, compared with a EUR3 million non-cash financial gain adjustment in the year-ago period.

At June 30, 2009, we had cash and cash equivalents, including short-term treasury investments, totaling EUR13.6 million, or $19.1 million.

Over the last six months, the EUR1.4 million cash burden was mainly attributable to the EUR1.3 million, or $1.8 million, expense on the US Ablatherm-HIFU trials. We remain encouraged by Edap's strong cash position and will, of course, continue to conservatively manage our business, maintain our cash and reduce costs, while improving efficiencies to maintain financial strength in today's still difficult environment.

Regarding our outstanding debts, we are pleased that, following the recent increase in our stock price and trading volume after the US FDA approval of Sonolith I-Sys, the portion of the outstanding convertible bonds have been exercised, reducing our total debt by $2.9 million. As a result, our balance sheet has improved, while our quarterly interest payments under the convertible bond offering have been reduced going forward.

While we hope our relentless efforts and our operational achievements in the coming months will further reflect in our share price, the repayment or redemption of our convertible debt is a subject of close attention by the Company's management. And finding the best solution for every stakeholder of the Company remains a top priority.

With that, I would like to hand the call back to the operator to answer any questions you may have. Operator?

Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. (Operator Instructions).

Our first question is coming from Matt Dolan with Roth Capital Partners. Please state your question.

Hi, Marc. Hi, Eric.

Hello, Matt.

Congrats on the quarter. I was hoping you can maybe provide us with some information on backlog. How does that look exiting Q2 going into the second half of the year for both businesses?

Well we have, like usual, some machines in backlog and we are adding, as of today, six Lithotripsy machines and one Ablatherm machine. And we are working -- as you also know that in Europe, July and August are quite quiet. And so, we still have the busiest months of the quarter before the end of Q3 to work on. But as of today, as I said, we have six Lithotripsy machines and one Ablatherm machine in backlog.

Okay. So it's about flat sequentially, okay. You mentioned some interest in South America. Can you provide us maybe regionally? RPP was pretty strong; can you give us what that growth was by region? Were there any areas that were particularly strong?

Well, I don't have the exact numbers and current numbers with me, but basically as we announced, we have opened an RPP site in Mexico. And we have signed, as I said in the conference call, that we have signed some partnership and distribution agreements in South America, like Brazil, Argentina and Chile. So we are starting to commercialize in these newly approved countries.

Okay. But the business you had in Q2, was there any area that was particularly strong, or you think this type of growth is sustainable?

The business we had in Q2 was coming mostly from Europe because the new sites in South America are still launching.

Okay. So no one country just came in with a number of procedures; it looks like it's pretty consistent?

Yes.

Can you talk, Eric, about the gross margin a little bit? That improved nicely, both sequentially and year-over-year. Is that a mixed issue that will continue, or how we should think about gross margin here in the mid, upper 40% range now?

Well, as I commented earlier during the conference call, the increase in volume has a very positive impact on gross margin. And this is very typical, when your business model employs a number of resources that are fixed costs and when additional volumes help cover this cost. And this is typically the case for Edap, where as you know, both the HIFU business with the RPP installed base, and the Lithotripsy business with the distribution and service capacities, there are significant fixed costs.

So both those two models also are well positioned to build volumes, which we demonstrated in Q2. And when we build volumes, margin typically improves in this type of business models.

Okay. So 46% is a number that can continue?

If we're able to and we're confident to continue building volumes, both in RPP and Lithotripsy, it should ultimately reflect on margins, yes.

Okay. When you look at the Sonolith I-Sys entering the US market, how would you ideally like to commercialize the device in the US? And when would you expect to have an announcement of either a partnership or a direct initiative?

Well, obviously we are -- and we have started actively to discuss with most of the main players in the US, but for obvious reasons as well, and as probably some of our competitors may be hearing as well and listening the call, we don't want to -- as we are just starting now, we don't want to publicly disclose our sales and marketing strategy. But be sure that we are -- and we've been in contact for the past few weeks with most of the main players in Lithotripsy in the US. And we are, since we've got the approval by the FDA, actively starting our marketing and sales program.

So when would we expect a partnership?

Don't worry, once we have any further news, we're going to let you know about that. But we -- again, we just want to continue our discussions and work, and make progress in discussing with the main players, and find the right way and the most adapted way to commercialize our machine. That again is adding a great potential as it is the latest Lithotripsy machine that has been launched worldwide, bringing new innovation, new robotized concept in Lithotripsy as well. And that is having the latest shockwave type of technology which is very well fitted to the American need of very effective machine and strong and powerful.

Is part of the criteria in selecting a partner having someone that could potentially sell Ablatherm-HIFU?

Well, again the two technologies are technologies that are used and managed by urologists. So there could be some synergies there. But for the time being, we are looking to commercialize the Sonolith I-Sys as a Lithotripsy machine. And again, we want to make sure that we get the right network of partners, agents or whatever, so that we could get to the maximum potential of the market.

Okay. And last question on ENLIGHT, the cryoablation arm. How does this impact your expectations to complete enrolment by the middle of next year? And if the cryoablation arm is changed, is there any impact on your total enrolment targets? Maybe it's worth repeating what those target numbers are in terms of number of patients?

Well, it is definitely important, and again, we are discussing with the FDA on that. We can't give any expectation before we get to the end of the discussions with the FDA. But again, today's part of the trial and we have to recruit 205 patients on the cryo arm. But again, we are working on that and we may have some answer in the weeks to come. But again, for obvious reasons, since we are confidentially and closely discussing with the FDA, I cannot further comment on that.

Are you still confident in enrolling by the end of next year, so more than doubling your HIFU arm and getting 200 patients in the cryo arm?

Well, on the cryo arm, again, I won't comment further, as I just said. Now, on the HIFU arm and considering all the changes and the actions that we are currently implementing and the strengthening of our US medical team, yes we are confident that we are still on track for the approval of our Ablatherm-HIFU on the targeted agenda.

Okay. Thank you, guys.

You're welcome, Matt.

Thank you, Matt.

(Operator Instructions). Our next question is coming from [Jonathan Schwartz] with Deerfield Capital Management. Please state your question.

Congratulations, Marc and Eric on a great quarter. Eric, I wonder if you could just give me a little more detail on the conversion of some of the converts? You don't have to give me the exact number, you may not know it, but a range in terms of the number that were converted, number of additional shares issued. And if you have it, current shares outstanding as a result of the new issuance.

Yes. Well, as I said, one of the bondholders decided to convert a portion of their holdings in convertible bonds, which represented $2.9 million, which is approximately 440,000 shares, the strike price of [$6.57].

I see, wonderful.

My understanding that is now $17.1 million.

$17.1 million remains of the converts?

Yes.

Yes, wonderful. Thanks very much, and congratulations again.

Thank you, Jonathan.

Thank you, Jonathan.

(Operator Instructions). It appears we have no further questions. I'd now like to turn the floor back over to management for any closing comments.

Thank you all for attending this conference call and for the questions that you raised. I will now close the conference call and look forward to our next one, which will be scheduled as for the quarterly results and press releases that you all know about. Thank you very much, and goodbye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.