Edap Tms SA (EDAP) 2010 Q4 法說會逐字稿

Greetings, and welcome to the EDAP fourth quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Carol Ruth, Investor Relations for The Ruth Group. Thank you, Miss 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 managements' remarks today may contain forward-looking statements. These include the statements regarding the Company's growth and expansion plans.

Such statements are based on managements' current expectations, and are subject to a number of uncertainties and risks that could cause actual results to differ 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. Just a few opening remarks.

While Q4 2010 was a good quarter, year 2010 was a tough year for EDAP. In 2010, our Lithotripsy business was successful, due to product innovation. At the same time, our HIFU business, despite enhanced acceptance, did not grow. EDAP's HIFU opportunity will now come from the irrevocable trend towards utilizing focal therapy to treat prostate cancer.

EDAP 2010 highlights were the effective impact of its cost reduction program, its strong management of cash, and the reduction of EDAP's convertible debt.

I will now hand over the call to Mark.

Thank you, Philippe, and thank you, everyone, for joining us on our fourth quarter and year end 2010 earnings call. During today's call, I will discuss our key achievements and highlights in 2010, and review some of our recent developments.

Let me start by recapping activities across our Ultrasound HIFU business line.

As you may recall, we completed enrollment in the US ENLIGHT Ablatherm-HIFU clinical trial in June 2010. This is a clear milestone, as the enrollment side of the trial is definitely crucial, and almost the most costly -- and also the most costly stage of the trial. We are now nine months into the two-year follow-up phase.

Preliminary patient follow-up is showing satisfactory outcomes. Particularly the mobility profile looks very positive, as we can now say that we have seen zero fistulas in the enrollment -- in the enrolled patients.

This is encouraging given that the prostate cancer treatments, such as radiation and robotic surgery, have experienced fistulas in the typical range of 0.5% to 1.5% of cases, as reported in the Medical literature.

The initial feedback for the ENLIGHT trial is also encouraging from the standpoint of other morbidities such as impotence and incontinence. These early results are in the line with our collective clinical experience in Europe, where over 25,000 prostate cancer patients are being treated with HIFU over the past 15 years.

We have been in ongoing contact with the FDA regarding the HIFU trial. Earlier in 2011, the FDA confirmed that they will not require additional clarification or a discussion regarding the trial during the follow-up phase. The only request according to the process consists of contacting the agency three months before the follow-up phase is completed, so that they get prepared for file examination and panel review. We anticipate that the final data will be submitted to the US FDA for its approval after the two year follow-up phase reaches completion in June 2012.

As reported in today's release, our HIFU sales were down in 2010 as compared to 2009. We sold four Ablatherm-HIFU devices in 2010, down from seven machines sold in 2009. Net sales for our revenue-per-procedure model and for our disposables declined.

I want to spend just a few moments discussing the changing market dynamics in Europe for prostate cancer treatment over the past year. As you may know, the medical device market in Europe typically lags the US by about two to five years.

The Centers of Excellence that stand to be the early adopters of medical technologies have been purchasing and utilizing robotic surgical systems to treat prostate cancer since 2009, and continuing throughout 2010. We believe these Centers are driving usage of this expensive piece of capital equipment to justify their investment, as they have thus focused and concentrated most of their new prostate cancer patients towards this heavy investment.

We believe this will not last for long, as the operating costs of such devices are very high, as well not bringing in any additional revenues to both the hospital and the practitioner, thus making it an expensive [procedure] that is not economically viable over the long run.

In addition to this adverse economic factor, we have to consider the real change that has been -- occurred across the prostate cancer patient profile. Today's patient tends to be younger. Looking back a decade ago, the newly diagnosed patients were typically in their late 60s or early 70s, and had a life expectancy of seven years to eight years. In these situations, a radical treatment approach, such as surgery or radiation, was appropriate and recommended.

Now the patient profile has completely changed, and the newly diagnosed patient has an early stage prostate cancer, and is typically in his mid-50s or early 60s. These patients have an average life expectancy of almost eight years and, therefore, around 20 years to live after they have been diagnosed with prostate cancer.

Based on the medical literature, the majority of these patients will face a recurrence of their prostate cancer during this time period. As such, urologists are more likely to utilize a multi-model treatment approach and strategy that combines different options and allows for salvage therapy. HIFU can be combined with radiational surgery or can also be utilized as a salvage therapy.

Medical and patient communities agree that rival treatment, such as surgery that removes the entire gland, is now typically considered to be excessive for localized prostate cancer in these younger patients. Taking into account the new patients' parameters and their life expectancy after prostate cancer is diagnosed, the focus is no longer on efficacy at any price, but on controlling the disease with the best quality of life preservation. For this, the key features are repeatability, flexibility and non-invasiveness.

HIFU is today the best positioned technology to address that need. After the era of open surgery and radiation, followed by robotic surgery as the [next] standard of care, an irrevocable trend exists as the international urological community migrates towards focal therapies for prostate cancer, driven by the change in the prostate cancer patient profile and needs. It appears that the existing standard of care treatments like surgery and radiation are not positioned and designed to meet with focal therapies requirements.

We believe this new approach is a clear and significant opportunity for Ablatherm-HIFU, as our technology has unique features and benefits that fully comply with focal approach, allowing for high quality of life preservation, and a good control of the disease over the long term.

The momentum towards focal therapy was again confirmed by the strong traffic at the EDAP booth of the European Urological Association Annual Congress in Vienna just over a week ago. We received a high number of enquiries from urologists and other medical professionals about Ablatherm-HIFU, and conducted multiple product demonstrations.

We have seen some of the so-called historical [opponents] of Ablatherm-HIFU coming to our booth, asking us about getting involved with HIFU during the focal therapy trials and treatments.

In the first quarter of 2011, we achieved a major milestone towards establishing definitive reimbursement for Ablatherm-HIFU in France, when the French National Authority for Health, HAS, granted special temporary reimbursement earlier in the first quarter of 2011. This is the first of several steps that will eventually result in securing the level of reimbursement. This will then enable HIFU centers across France to receive reimbursement and to contribute treatment results to a dedicated registry database. We are collaborating closely with HAS to establish and implement the reimbursement structure in the coming months.

Turning to our Lithotripsy division, we are very pleased with the strong 2010 revenues that were over 10% over 2009. We sold a total of 45 machines in 2010. Sales of our next generation devices were robust, with 11 Sonolith i-move and 15 Sonolith i-sys machines sold during the year. Our fourth quarter was especially robust, with 20 devices sold. That enabled us to surpass the backlog of 13 lithotripsy devices that we discussed on our third quarter call on November 17.

Taking an historical look at our Lithotripsy franchise, our business has grown over 30% during the past four years. Our investment in re-vamping our lithotripsy product line is clearly yielding positive results. EDAP is the only company in the lithotripsy field to have completely renewed its product line in recent years. We have implemented technologically advanced features and design concepts that specifically address the needs of both patients and urologists. With this commitment to innovation identified by the launch of the Sonolith i-sys in 2008, and the Sonolith i-move in 2010, EDAP has been successful at drawing its revenues and taking market share from the competition.

The lithotripsy market is still very dynamic, and has been very receptive to EDAP's different shaded product line. This is clearly a potential for growth in the lithotripsy market based on innovation and marketing actions. We are well positioned in 2011 and beyond to continue to take market share in the dynamic global market, as we are advancing our regulatory strategy in the two largest global markets, Japan and the US.

We are on track to receive marketing approval for Sonolith i-move from the Japanese Authorities later this year. As we announced yesterday, our expanded sales force will be distributing Medical Measurement Systems Urodynamic Products in Japan, and this as a broader product offering to sell to urologists throughout this country.

We are also expanding our presence across Asia, as we received approval in December 2010 for the Sonolith i-move in South Korea, the second largest lithotripsy market in Asia after Japan.

Turning to the US FDA 510(k) application for marketing clearance for the Sonolith i-move, we are moving forward in the approval process, and we are in the second round of question and answer discussions with the US FDA.

In our home market of France, our lithotripters were exclusively registered by the French Public Purchasing Agency in December 2010. This recommendation facilitates and accelerates purchasing cycles for hospitals and clinics that are looking to purchase our broad range of innovative lithotripters.

Presently, managing our available cash resources and improving our financial flexibility remain top priorities. We reduced our convertible debt outstanding at December 31, 2010 to $10.5 million, down from $17.1 million at December 31, 2009. We ended the 2010 fiscal year with $11.8 million in cash and cash equivalents.

We began implementation of cost reduction initiatives across the entire Company in the fourth quarter of 2010, and will continue to look for opportunities to economize across all of our operations worldwide.

As we enter 2011, we are well positioned to grow the top line across our HIFU and Lithotripsy divisions.

I would like to conclude today's message by saying that we are getting back the full return on our investment in our renewed lithotripsy range of products, and that we are concretely seeing the great opportunity for Ablatherm-HIFU as the irrevocable trend towards focal therapy is moving forward to address the current needs of today's and tomorrow's prostate cancer patients.

I will now turn the call over to Eric, who will review our fourth quarter 2010 financials in greater detail. Eric?

Thank you, Marc. Good morning, everyone. I will now take a few minutes to review our fourth quarter financial results.

The results reflected indeed the continued weakness in our economic environment, and the subsequent slowdown in hospital spending. Total revenue for the fourth quarter 2010 was EUR8 million, or $10.8 million, as compared to EUR8.1 million, or $11.9 million for the fourth quarter of 2009.

Total revenue for the HIFU division was EUR2 million, or $2.6 million for the fourth quarter 2010, compared to EUR3.3 million, or $4.8 million for the same period last year.

The fourth quarter 2010 HIFU results included the sales of two devices versus four Ablatherm-HIFU systems sold in the fourth quarter of 2009.

Lithotripsy division revenue in the fourth quarter 2010 was EUR6.1 million, or $8.1 million, compared to EUR4.8 million, or $7 million during the year-ago period. We sold 20 lithotripsy machines in the fourth quarter of 2010, including seven Sonolith i-sys devices, and five Sonolith i-move devices, up from a total of 15 devices sold in the fourth quarter of 2009.

Gross profit for the fourth quarter 2010 was EUR3 million, or $4.1 million, compared to EUR3.7 million, or $5.4 million for the year-ago period. Gross profit margin in the most recent quarter was 37.6%, as compared to 45.5% in the year-ago period due to a lower percentage of Ablatherm-HIFU devices sold in the fourth quarter of 2010.

Fourth quarter 2010 operating expenses came in at EUR3.4 million, or $4.6 million, compared to EUR3.6 million, or $5.3 million for the same period of 2009. Fourth quarter 2010 operating expenses included EUR265,000 related to the US FDA ENLIGHT clinical trial for Ablatherm-HIFU, down by 33% on a sequential basis from the third quarter 2010.

Operating loss was EUR371,000, or $496,000 for the fourth quarter 2010, and net loss for the fourth quarter 2010 was EUR7.2 million, or $9.7 million, or EUR0.56 per diluted share.

It is to be noted that the fourth quarter 2010 net loss included the non-cash interest expense of EUR5.5 million to adjust the Company's convertible debt and outstanding warrants to fair value, and to reduce the outstanding convertible debt. Excluding that non-cash interest expense, the net loss for the fourth quarter 2010 was EUR1.8 million, or $2.4 million, or EUR0.14 per diluted share.

As you are now well aware, this interest expense, which was imposed by accounting rules, is a mere actuarial calculation on the debt to be done every quarter, yet with no impact on cash, and no impact on the convertible debt nominal amount, which has been further reduced by $6.6 million in the course of the year, and is now down to $10.5 million, which is close to half of its initial amount of $20 million.

This debt reduction is a very positive move for the Company, and a significant improvement in its financial situation.

The final word on cash; the fourth quarter 2010 was cash positive, and at December 31 2010, cash and cash equivalents, including short-term treasury investments, remained strong at EUR8.9 million, or $11.8 million.

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

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Bruce Jackson, Morgan Joseph.

I just want to make sure I heard the numbers right on the Sonolith placement. So was it seven i-sys placements and five i-move placements?

Yes, that's correct. That's for the fourth quarter only.

For the fourth quarter only. And then there were eight other Sonolith device placements as well for a total of 20?

Yes.

Okay, good. And then the HIFU units were sold. Is that correct?

That was two for the fourth quarter, and four for the year.

And four for the year. Now you mentioned that the placements of the HIFU units seemed to be slowing down, and it's more a matter of market penetration. Could you just comment a little bit more on where do you think the market is going and what actions are you taking from a sales and marketing standpoint to either increase the placements or increase the usage per instrument?

First of all, medical equipment business in 2010 was extremely tough for all players in the industry, and everybody has seen some slowdown in sales of capital equipments during 2010; and we definitely suffered from that in the HIFU division.

Secondly, as I mentioned, there were some large investments done in Europe in hospitals on robotic surgical systems, and people have somehow focused their prostate cancer activity on those new systems that they've invested in in the past two years. So, again, this may have affected again our market penetration with HIFU on the short term.

As I explained during the conference call as well, is that the trend on focal is an irrevocable trend as, again, the patient profile has completely changed, and now patients and urologists are looking for a multi-model strategy to accompany the patient during the rest of his life after he has been diagnosed. And this will definitely go by a multiple type of treatment on this prostate cancer as at 20 years, most of patients will have recurrence.

And this is where we are now refocusing our marketing strategy and sales orientation as well, because again, HIFU tends to really answer and address the new need of the market. So this is what we are building now in terms of marketing strategy and sales.

Okay, great. And then on a positive note, in France, you have this temporary reimbursement. Is the reimbursement going to --? You said it's temporary. Does it become permanent at some point?

Actually, this has been designed by DHS last year to allow new technologies and innovative devices to somehow get a reimbursement quicker than the normal way. And then that's why we need to use the registry to get our results and treatment registered so that we can move towards the next step, which will be a definitive reimbursement.

And then in terms of the drug development program that you have ongoing with a liposomal encapsulation, any progress on that during the quarter?

Yes, we are continuing to work on that, and we are continuing our development on that as well.

Okay, great. Thank you very much.

Alex Schwartz, Matrix Management.

Thank you, guys, for these results and the information on this call, and then for a stellar year for Litho. I also was going to ask some questions about the drug development. I was curious to know are there -- has anyone else announced that they're working on a HIFU-activated drug delivery system?

Well, I'm not -- this is Eric. I'm not an R&D expert, but to our knowledge, there are a few HIFU players working in the field, but they're more working on liposomes activated by the heat effects of ultrasound beams. Our HIFU approach is a bit different, and we hope more effective in that it's based on liposomes which are activated by the ultrasound itself; the frequency of the ultrasound, not the heat effect; based on cavitation?

Got it. And in the press release, I understood that it applied to the drug doxorubicin. Are there are any other drugs that this would apply to?

Well, it can be applied to a number of drugs. The first trials and the first experiments have been done on drugs for breast cancer, and that's going to be probably the first and next step. But the principles of HIFU-activated liposomes can be applied to a number of different drugs.

Got it, okay. And who is doing the development work to make the equipment? Is it Monsieur Blanc who is overseeing it?

Yes, that's the whole team together with INSERM, which is the French government body for medical research.

Okay. And how many people are working with him on this? Are there any new hires for this, in particular at EDAP?

No, we're doing that with the same team that works on the HIFU in general, be it on prostate cancer or liposomes activated.

Okay. Is this funded with grants like the first phase was? The second phase?

Yes, it is something we've just applied for, and we hope to get [something] to finance this program as well.

Okay, and if it is not through grants, how would it be financed?

Well, most of it is -- most of the [company] work is done by INSERM and/or a Norwegian partner, so EDAP brings its expertise in HIFU which we already have, so the company work is not in our books.

Okay. And at this point, do you know how much we've spent to develop and produce equipment for this?

I don't have it offhand, but it is not a big amount. It's very little so far.

Okay. And I guess I had one other question. In this next -- where are we in the trial? Are we doing animal trials at this point?

We are about to start, yes.

Okay. And lastly, is the route to approval for this, would that be the same as HIFU? Would it be done in Europe first?

That's the European approach so far. Nothing is decided on a more broader basis.

Terrific. Thank you. You've been very helpful. I appreciate it.

Thank you, Alex.

(Operator Instructions). John Schwartz, Deerfield Ltd.

A couple of questions. What roughly are the revenues per treatment for consumables; where a user has had the machine, not per procedure? Is that something in the EUR500 or the $500 range?

Yes, the average sales price is between EUR500 and EUR550.

EUR550; and what -- roughly what percentage of revenues from HIFU in France are per procedure, and what percentage are from machines right now?

So far, it's mostly on procedure basis (inaudible).

Right. So going forward, presumably with French -- with HAS reimbursement, it would also be primarily per procedure revenue. Is that right?

Yes, most likely. That's going to be the majority of the revenue. The distribution is, again, is about two-thirds of revenue per person and one-third of machine revenues, and that's going to continue being the same.

Okay. And have you --? And to just get a little more clarity on where we stand with HAS reimbursement; as it stands now, going forward, there will be reimbursement. Is there some -- my understanding is there's a five-year program at that point to register the decision as to what happens next. Is there any, under normal circumstances, without force majeure or something, is there any reason why that reimbursement would stop? Can we feel that for the foreseeable future we have reimbursement in France. Is that a correct statement?

Yes, I think so. There is no -- again, the temporary reimbursement is a kind of reimbursement that is given to technology but with a close follow-up on each. And again, with the results we've got and the 25,000 patients treated and followed, and the number of patients that we have already included in our registry worldwide, which is more than 7,000 patients, we know as a matter of fact that HIFU brings efficacy, and more importantly, brings preservation of quality of life and alternative options for patients on primary care and salvage.

Right. So they just monitor that.

Absolutely.

Do you have any sense --? The expected, I think it is 10,800 cases a year that the Government sees being done with HIFU got my attention. And do you have any sense what the likely trajectory could be of sales growth in France as a result of that? Would it be reasonable to expect to get to that in five years and have a straight line trajectory where we would add 2,000 procedures a year? Is that much too optimistic? Do you have some sense --?

What again gets my attention is, and of course I do not know a lot about it, but my sense is that in the French system when the Government says something should happen, it tends to happen. People pay a lot of attention to that and things are organized such that if there's reimbursement and if this is the appropriate procedure, and that comes from the central government, people don't ignore that. So is 2,000 procedures a year added much too optimistic do you think as a result of this reimbursement?

Well, it's difficult to say, because clearly we are working on the reimbursement process. And as I said earlier today, the HAS step was a very important milestone, but we still have some steps to go before getting the reimbursement numbers. So that's the priority today, and according to that, we'll be able to have a better visibility on the growth potential.

But now the -- and I completely agree with you, is that the recommendation and the evaluation of the HAS, which is the Health Authority here in France, to say that the potential for HIFU is to grow up to 10,800 patients a year as compared to about 800 patients to 900 patients a year today is very encouraging and very promising for the technology; and even more when we think that the HAS did the evaluation without taking into account the new kind of focal therapies. So that number might be increased as we move forward into the new standard of focal.

But again, it's a little bit early for us to say at what speed we'll be able to penetrate the market, but the good news here is that we have a clear idea of what is the potential and what is the recognized potential by the Health Authority for a technology like HIFU.

And is there a range of reimbursement? We don't know the number yet, but is it likely to be -- right now, is it around EUR2,500 for a -- per procedure? Is that what the Company's revenues are without reimbursement? Is that a good number?

We can't know. That's where we are, and obviously --

I understand that. No, I was just asking, for private patients right now, is that roughly what the revenues are per procedure? EUR2,500?

Well, that's the average selling price per case on our side, but then the hospital has to add some internal costs to be (inaudible) to the patient. So that's not the cost for the patient, that's the cost for the hospital.

Right, I see. Okay. And so there is no telling what the Government reimbursement figure will be?

No, but obviously, when we know that, it's going to be released.

Right. The reason I get excited is at EUR2,500 per case, if it takes five years to get to 10,000, and if 1,500 or 2,000 are added in the early years, that's a very significant addition to HIFU revenues; and I assume the margins on that business are 50% or more. I'm not asking you what they are, but they have to be in that range, I would assume.

Yes. No, we agree again that the upside is huge. And again, the good news is the recognition from the Health Authority about the potential of HIFU in prostate cancer.

Right, yes; of course. Can you give us any more color on cost reductions, headcount, number of headcount; number of people; what we could expect in the future, that sort of thing?

Well, these cost reductions, we can see some of the early impacts in 2010; as you've noticed that our operating expenses were down by EUR600,000 compared to the previous year. So that's one first impact. But most of the cost reduction initiatives are -- have been designed to be implemented in 2011. Those initiatives are related to all cost areas, and that is with the exception of R&D. R&D actually was increased because we don't want to damage our innovation capabilities, as this is key for the Company's development.

But other than R&D, every other area of the Company has been under review, close review on the cost side, and not subject to reduction.

Right, thank you. Thank you very much, Marc and Eric. Thanks for your help on this.

Thank you, Jonathan.

Thank you, Jonathan.

[Ronald Jacobson], a private investor.

I just have one question, and that is if there's any thought or knowledge as to when the FDA approval will occur in the United States.

Are you speaking about the 510(k) for our lithotripsy machine, or about the PMA trial in HIFU?

HIFU.

HIFU; again, what we've said and what we know is that we are in the follow-up phase, and that follow-up phase should finish in June 2012 as it started in June 2010.

Then we're going to go fast and submit the file, and then it's again difficult, and even more today, to tell exactly how many weeks it may take for the FDA to come back to us to get the final review. But we would expect to have an approval in the first half of 2013.

But again, it's subject to the PMA and to the FDA review of the file.

And are you waiting for any FDA approval on any immediate products that you've submitted?

Well, we are, as we also explained earlier, we are processing the 510(k) approval process for our new lithotripsy machine, the Sonolith i-move; and we are now processing the second round of question and answer with the FDA, so we are well advanced in the process.

Okay, thank you so much.

You're welcome.

Thank you, Ronald.

There are no further questions at this time. I'd like to turn the floor back over to Mr. Chauveau for closing comments.

Well, thank you, everyone, for participating in today's conference call. As there will be no more questions, I will now close the call, and hope to talk to you next time on our conference call, or directly, as you know, through our agency.

Thank you very much and goodbye.

This concludes today's teleconference. You may disconnect your lines at that is time. Thank you for your participation.