Edap Tms SA (EDAP) 2010 Q2 法說會逐字稿

Greetings and welcome to the EDAP second quarter 2010 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; 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 from those described in the forward-looking statement. Factors that may cause such a difference include, but are not limited, to those described in the Company filings with the Securities and Exchange Commission.

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

I will be very brief in my remarks. Good morning everyone. Sales increased over 38% on a sequential basis in the second quarter of 2010, driven in part by higher Lithotripsy sales reflecting our expanded industry-leading portfolio.

We are continuing to undertake strategic initiatives to position EDAP for the future in the face of the challenging global economy that Marc will outline for you in a few moments. Moreover, our robust cash position at the end of the quarter provides us with the financial flexibility to operate our base business. I will now hand over the call to Marc.

Thank you Philippe, and thank you everyone for joining us on our second quarter 2010 earnings call. During today's call, I will discuss the strategic initiatives that we have underway to counter the weak global economy, highlight some of our recent developments, discuss our second quarter results and review our future outlook.

Before discussing our quarterly results, I will outline the strategic initiatives that are underway to position EDAP for the long-term in the face of the challenging global economic environment and subsequent slowdown in hospital capital expenditure.

Let me start with the tremendous and unique opportunity that lies ahead as we attractively position Ablatherm-HIFU at the forefront of the focal therapy approach as the treatment paradigm for prostate cancer continues to evolve.

We are currently in the middle of a complete redefinition of the therapeutic strategy for prostate cancer. Both urologists and patients are demanding less invasive lifestyle preserving treatment options. Due to the increasing awareness of the disease and the improving scanning processes, patients are being detected at an earlier age and also at an earlier stage of disease progression.

It has been made clear that in this new environment, traditional radical treatments, such as surgery, are far too aggressive and, therefore, over treating most of the patients now diagnosed. The counterpart represented by the watchful waiting or doing nothing approach is not satisfactory, and it is not providing for concrete and demonstrable control of the disease.

Focal therapy, which is being defined by the medical community calls for the targeted treatment of the identified cancer within a given region of the prostate, rather than treating the entire prostate with more radical treatment options, thereby significantly reducing the side effects and/or complications.

The goal of focal therapy is to preserve existing prostate function, with the overall objective of minimizing lifetime morbidity, without compromising life expectancy by closely and actively managing the disease and its progression.

One common analogy of the significance of the move towards focal therapy for male prostate cancer is to compare it to the paradigm shift in breast cancer treatment with the move towards site specific treatments, such as lumpectomy instead of more radical procedures such as mastectomy.

EDAP is advantageously positioned to work closely with the international urological community to advance its Ablatherm-HIFU as the optimal treatment for focal therapy. We will thus actively work and support the urology communities in defining this new standard and therapeutic approach.

In parallel, we will use our expertise to collaborate closely with our strong base of HIFU users around the world to run focal therapy clinical trials and build on the clinical experience.

Together we should be able to position HIFU as the first start of care treatment in the newly defined focal clinical strategy. This is clearly a huge opportunity for the HIFU technology to move forward in its acceptance and usage. As the world's leading HIFU company for prostate cancer, EDAP is fully committed to executing all necessary actions to successfully seize this tipping point opportunity for our technology.

Simultaneously, we are continuing to advance our long-term growth strategy to apply our HIFU technology towards the minimal invasive treatment of other medical conditions beyond prostate cancer. It is anticipated that HIFU will play a major role in treatment of many tumors and diseases without costly in-patient hospitalization and the adverse side effects typically associated with traditional therapies, such as surgery or radiotherapy.

Phase I trials for patients with metastic liver cancer are progressing well and we hope to be able to provide you with an update later this year.

We are continuing to actively work to build credibility and drive adoption by raising visibility for the long-term positive experience that we have accumulated in Europe with over 22,000 patients treated to date.

We are pleased with the positive reception of the four abstracts presented at the American Urological Association, AUA, 2010 annual meeting in San Francisco in late May and early June. They represented the largest studies ever conducted among HIFU devices. These results confirm HIFU's efficacy and repeatability, along with its position as a long-term treatment option with high degree of quality of life preservation. Additional publications on the long-term data from EDAP's @-Registry database are anticipated in the coming weeks.

As we indicated in today's press release, enrolment was completed last month in the US ENLIGHT Ablatherm-HIFU clinical trial. In aggregate, 134 patients participated in the US study. We have now entered the required two-year follow-up phase.

We continue to maintain the strong and active relationships with the participating centers of excellence in the US. Some enrolled patients have already completed the requisite two-year follow-up. Their results are extremely encouraging as they are fully in line with the results we have gotten from the European expert centers.

This was not surprising as we well know, based on our experience, that the unique property capabilities of Ablatherm allow for precise repeatability and [repossiblity] of results across different centers ranging from expert centers to new users as Ablatherm-HIFU is not an operator dependent device. We remain very enthusiastic and excited as we move forward with the follow-up period in our US clinical trials.

Turning to our established Lithotripsy business, we are continuing to obtain the requisite regulatory approvals in order to launch our industry-leading machines in key markets.

At the European Association Urology Congress in late April, we launched the Sonolith i-move, following European approval earlier in the month. The Sonolith i-move is our compact, standalone lithotripter with a revolutionary infrared stereo-vision system for real-time, three-dimensional ultrasound targeting and localization of urinary stones.

The i-move was very well received and certainly was the highlight of the EAU exhibition all this year. We are pleased to report that we sold two machines during the second quarter immediately after the approval and that we already have a backlog of another four units in the third quarter 2010.

In March, the high-end Sonolith i-sys lithotripsy device received approval in Japan, the largest lithotripsy market in the world. We showcased the i-sys at the Japanese Urology Association, JUA, Congress held in Mallorca in late April. The device was extremely well received by the numerous Japanese urologists at an English national annual event.

Right after approval, we recorded our first i-sys sale in Japan. The machine was installed and successfully launched, receiving very positive feedback from the Japanese users. Our strong direct sales force is now actively promoting the device and has a consistent pipe of projects to work on.

Turning to the US, we are recently submitting the application for 510(k) marketing clearance to the US FDA for the Sonolith i-move. We anticipate that we are on track to receive 510(k) marketing clearance in late 2010 or early 2011.

In combination with Sonolith i-sys marketing clearance that was granted a year ago, EDAP will be well-positioned to address all US market segments offering the widest range of lithotripter from compact to fully integrated devices.

We started promoting our Sonolith i-sys in the US a few months ago. We have now have a better understanding of the US lithotripsy market, which is certainly a strong asset as we seek to aggressively position our full range of products as we penetrate the US market.

Entering the third quarter 2010, we are pleased with the strong backlog of lithotripsy machines, which now features nine lithotripsy systems, including four recently launched Sonolith i-move systems with confirmed purchase orders.

During the quarter, we signed an exclusive agreement with Lumenis to distribute its high-technology urological lasers in France. With their marketing-leading positions, Lumenis lasers enable precise, minimally invasive treatment for a wide array of urologic conditions, such as benign prosthetic hypoplasia, bladder and urethral and kidney stones.

These products are a natural synergistic expansion of EDAP's product portfolio as our sales force will be able to provide a broader product line to its established relationships across the French urological community. This is a good opportunity for us to both capitalize on our direct sales and marketing network and to grow our revenues in this major European market.

Turning to our second-quarter 2010 results, sales grew in excess of [38%] on a sequential quarter basis to EUR6 million. The top-line results were driven by the sales of nine lithotripsy machines and one HIFU Ablatherm device. This is a positive trend as we move forward and we continue our effort to grow our business following the aforementioned actions and initiatives.

Also, it is important to note that the medical device business model is extremely dependent on machine sales and also very seasonal, as many hospitals and institutions typically will wait to spend their budget late in the year or near the end of the fiscal year.

This year, we anticipate that the seasonality will be compounded by the weak economic environment. We are actively developing solutions and implementing initiatives in order to identify and save all business opportunities to grow our revenues.

Our revenue per procedure model for the mobile Ablatherm-HIFU machines showed signs of improvement in the second quarter as compared to the first quarter. We continue our efforts and strategy to build adoption of the HIFU technology for primary-care patients. We are also aggressively positioning our Ablatherm-HIFU device across niche markets, such as radiation [sellers], focal treatments, and other indications where Ablatherm brings unique solutions, advantages, and benefits to both the patients and the urologists.

We are continuing to focus on our cash preservation as we ended the quarter with a robust cash position of EUR11.4 million. We believe that the conservative cash management strategy is a key point in the current economic environment, so that we will be able to continue the execution of our strategy over the long-term and continue to preserve the best interests of the Company and its shareholders.

I will now turn the call over to Eric, who will review our second quarter 2010 financials; Eric?

Thank you, Marc, and good morning, everyone. We'll take a few minutes to review our second quarter financial results. The results reflected the continued weakness in the global economic environment and the subsequent slowdown in hospital spending.

Revenue for the second quarter 2010 was EUR6 million, or $7.6 million, compared to EUR6.8 million, or $9.4 million, for the second quarter 2009. As Mark mentioned, revenue on a sequential quarter basis rose 38% as compared to EUR4.3 million, or $5.9 million, in the first quarter 2010.

Looking at the HIFU division, revenue was EUR1.9 million, or $2.4 million, for the second quarter 2010 compared to EUR2.2 million, or $3 million, for the same period last year. On a sequential quarter basis, HIFU division sales rose 20% compared to EUR1.6 million, or $2.2 million, in the first quarter 2010. The higher sequential quarterly sales were due to the sale of one HIFU, higher disposable sales and increased RPP revenue.

Turning to the Lithotripsy division; total revenue was EUR4.1 million, or $5.2 million, compared to EUR4.6 million, or $6.4 million, during the year ago periods.

On a sequential quarter basis, sales increased in excess of 48% as compared to EUR2.7 million, or $3.8 million, in the first quarter 2010. In the second quarter 2010, we recorded sales of nine lithotripsy machines, including four Sonolith I-sys devices and two Sonolith i-move devices. Looking forwards, our current backlog stands at nine lithotripsy systems, including four recently launched Sonolith i-move systems.

Our gross profit for the second quarter 2010 was EUR2.5 million, or $3.1 million, compared to EUR3.2 million, or $4.4 million, for the year ago period. Gross profit margin was 41.5% in the second quarter 2010, compared to 46.6% in the year ago period. On a sequential quarter basis, our gross profits rose by 45% as compared to EUR1.7 million, or $2.3 million, in the first quarter 2010.

(Technical difficulty) EUR3.7 million, or $5.1 million, for the same period 2009. Second quarter 2010 operating expenses included EUR0.7 million related to the US FDA ENLIGHT clinical trials for Ablatherm-HIFU.

Operating loss was EUR1.3 million, or $1.6 million, for the second quarter 2010 compared to EUR0.5 million, or $0.7 million, for the year ago period. Excluding US FDA trial expenses, second quarter 2010 operating loss was EUR0.6 million.

Net loss for the second quarter 2010 was EUR1 million, or $1.3 million, or EUR0.09 per diluted share, compared to a net loss of EUR0.5 million, or $0.7 million, or EUR0.05 per diluted share in the year ago period. The second quarter 2010 net loss included a non-cash interest income of EUR0.6 million, or $0.8 million, to adjust the company's convertible debt and outstanding warrants to fair value, compared to a EUR0.7 million, or $0.9 million, non-cash income during the prior year period.

We ended the second quarter 2010 with cash and cash equivalents, including short-term treasury investments, of EUR11.4 million, or $14 million. As Mark discussed, we continue to be well-funded, which provides us with the financial flexibility to operate our base business both in the US and in Europe.

With that, I will hand the call back to the Operator, who will open the line for questions. Operator?

(Operator instructions). Matt Dolan with Roth Capital Partners.

Good afternoon, everyone. This is Matt Pommer in for Matt Dolan. Thanks for taking the questions.

Good afternoon, Matt.

I just wanted to first dig into the slowdown that you're seeing, maybe get a little bit more color on that. Did you see things slow down considerably more in the quarter or since? And is this just affecting capital expenditures, or are you also seeing declines in procedure volume? And maybe you could talk a little bit about any kind of geographic variability in those headwinds that you're seeing. Thanks.

Well, actually, there are a few things there. And one is, considering the economic environment, expenditure are -- people are getting more conservative on the expenditure, and hospitals are not spending their -- usually their budget on the first days or weeks of the budget in the year. So that's for capital expenditure, I would say, mainly.

Now on the treatments and procedures, we can also see a slowdown as, again, in the case of prostate cancer, this is not an emergency treatment, so people will delay -- in a crisis environment they will delay their health expenditure as well. So this is a combination of both.

And at the same time, I would like to remind that we are a business that is very seasonal. And, again, this is important not to follow the figures or the results on a quarterly basis, but much better on a yearly basis.

That's helpful, thank you. And I guess, on the ENLIGHT trial, now that you're in a follow-up phase for this, and I'm wondering if the spend will trend down, or how you expect the spend to trend [over here].

Matt? Hello, Matt?

Yes, can you hear me?

Yes, now. But the line was cut, so we didn't hear the question.

Sure. Sorry, I'll repeat. With the ENLIGHT trial, now that you're in a follow-up period, do you expect the spend to trend down? Or how do you expect it trend going forward here? Thanks.

Well, obviously, spendings will go down as the most active phase, which is the promotion or the recruitment of patients was also the most expensive phase. Now that we're entering the follow-up periods, we expect that the total spendings to completion should be in the range of $3 million to $4 million.

Okay. Thank you very much, guys. I appreciate it.

Thank you, Matt.

Thank you.

(Operator Instructions). Jonathan Schwartz with Matrix Management Company.

Good afternoon gentlemen.

Good afternoon Jonathan.

Hi, Marc and Eric. Can you give me a little more -- give us a little more color on how we would move -- position ourselves for focal therapy. How to get the cooperation of the various urological communities to do that? And how would men get to know that this option was available, which my understanding is, it's very attractive? How do we get that our there, so that people know it's possible?

Sure. I won't -- obviously, I won't give all the -- too much detail on the strategy, because there are some other type of options for focal. So we want to keep that a bit confidential so that we can make sure we are the first one to position our technology for focal.

But mainly there are two ways today to follow and to be supporting. One is, again supporting and working with key opinion leaders in the urology communities so that a focal strategy could be defined. Because, as I said earlier in the call, that we are in the middle of the definition of focal approach as the new standard for the treatment of prostate cancer. So that's one way we have to be actively supporting and helping the medical community to meet, and again, to agree on the detail, I would say, definition of what is focal and who are the patient candidate for focal and what's the way to use focal.

The second axis of our action plan and strategy is to, in parallel, work in building clinical experience and clinical proof of HIFU being the technology, the best position and the best adapted to answer the need of that new strategy that is focal treatment, and that goes through working with our users.

And we have today 250 centers regularly using Ablatherm-HIFU, so that we can count on that very strong base of users, with whom we have an extremely good relation and long-term work and investigational work as well. So, the idea is to work on, again, clinical trials, and bringing clinical evidence that HIFU, and its unique and specific technical and technological advantages, could really answer and fit focal strategy.

Marc, is it actually available today? If a man knew about this and walked into a urologist in France or Germany, and said, I'd like focal therapy, to one of the more experienced, advanced people doing --

Yes, and actually, we can see more and more of our users doing some partial focal or zonal treatment using HIFU. The fact is that it is -- there is no definition -- clinical definition of what is focal.

Right.

It is something that is starting to be used, but without being completely defined. And in order to be used by most of the people, and to be approved by the urological community, it has to be defined. Certainly, people are starting to work on it. That's the way new things are created, right?

Right. So if somebody wanted it today, they'd go to someone who's experienced and sophisticated with HIFU and they'd be pioneering, but you could get it today, is that right?

Absolutely.

Yes. And another question; how many locations are there now? Are the three largest markets today Germany, Italy and France?

Yes, absolutely.

How many -- I'd like to know how many locations there are in those countries, and how does that compare with the number of locations four years ago, say, in 2006?

We have -- in total we have approximately 250 sites, again using on a routine basis Ablatherm-HIFU. Most of them are located in Europe, like around 75% to 80% of the total centers are in Europe, as we started with Europe. So -- and the three main market, as you said, are Germany, France and Italy that are totalizing approximately 150 centers, the three of them.

I don't have in mind the numbers of sites that we had back four years ago in these countries. But certainly, these are numbers that are growing. I would say, almost every month now we are recruiting new centers and new users. And we certainly had a very strong acceleration in number of centers at the end of 2006/early 2007 when we started to really promote our revenue per procedure model, with the objective of giving access to the majority of the potential users -- hospitals doing prostate cancer.

Right, right. So, thank --

And we are continuing to extend again our base of users, but not only in that three major countries. But also -- as in the rest of Europe, such as in the UK or in Spain, but also outside of Europe where we started -- if you remember, where we started one or two years ago to actively as well promote both our fixed and mobile models. Our pay per use or capital expenditure models in the rest of the world, such as in Middle East, Asia, but also in Latin America.

Right. And, typically, in Europe, in the big markets, aside from the old established hospitals and big users, what's a typical number of treatments per month for some of the -- well, for the smaller users? Is it one a month? Is it -- what's typical?

Well, it's very variable. It's very variable, and that's why we adapted our business model, so that we could cover very small users. We have some users that will do five cases a year. And we're going to go and bring the machine to those hospitals maybe once or twice a year at maximum. And we will have established centers on a fixed basis that would do 200 patients a year. So it's very variable and it's very wide in the variations.

Right. One more question, if I may? Some of the enrolments were done quite some time ago. Could you give us some information on what the results have been where the enrolments have been done and some time has passed, three months, six months, more --

On the enrolment, where?

I'm sorry; I'm skipping to the FDA trials.

[All right].

Just on what the PSA scores have been where men have been treated and then there's been some follow-up. Do we have information of that sort yet?

Sure. Certainly, I won't go in too much detail there, but we've got -- as I said earlier in the call, that we've got some patients already that have finished the two-year's follow-up. And the results we are obtaining with -- on those patients are very similar with the results we've got in Europe on our expert centers. So we've been able to repeat the same outcomes on the clinical trials in the US, as what we've got in Europe for the past 10 years. And again, that was not a surprise because we know that Ablatherm-HIFU, being [robotic] is extremely repeatable, and it is extremely -- is absolutely not operator-dependent.

Right.

But again, we only have few patients that have fulfilled the two-year's follow-up. But this is very encouraging and we are extremely enthusiastic about the results.

And are the follow-ups on men who had less than two years similar, in terms of the PSA scores. Are they what you'd expect?

Absolutely.

So it turns out that men in North America are no different than men in Europe?

Absolutely.

What a surprise. Thank you. Thanks very much.

Welcome.

(Operator Instructions). Matt Dolan with Roth Capital Partners.

Hi, guys, it's Matt Pommer [on] one more time. Just wanted to ask a follow-on question about ENLIGHT as to [that] have you had any additional communication with FDA on your new strategy?

No, actually, the -- we -- again, we -- our new strategy was publicly announced and so on, and we didn't have any comment. We didn't receive any comment from the FDA, so, so far so good.

Okay. And I was wondering, can you outline when you should expect to cement the whole package?

And secondly, what's your level of comfort around the new strategy and its chances for approval here?

Well, with regard to the submission, again, we completed the enrollment at the end of June, so we have a two-year's follow-up that will bring us to the end of June 2012. So basically we can expect a submission in the late days of 2012, or early days of 2013 for a quick approval after that.

Now, what are the chances? I am not the one to answer that question. We did all what we could to maximize our chances. But again, when you're -- with the FDA you can't give an answer in their behalf, and before the end of the trial.

Okay. All right, I appreciate the follow-up. Thank you.

Welcome.

I'm showing there are no further questions at this time I'll now turn the floor back over to management for any closing remarks.

There being no more questions, I am formally closing this conference call and I wish to thank you all for joining us today. Thank you and goodbye.

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