Edap Tms SA (EDAP) 2011 Q2 法說會逐字稿

Good morning and welcome to the EDAP second quarter 2011 conference call. All participants will be in listen-only mode. (Operators instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Carol Ruth. Please go ahead ma'am.

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 would 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 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 would like to turn the call over to Mr. Philippe Chauveau. Philippe.

Good morning everyone and thank you for joining us on our second quarter investor call. I will start my overall comments by saying that Q2 2011 for EDAP was a tough quarter. But I am pleased to tell you that we at EDAP feel good about Q3 and Q4 2011.

In terms of lithotripsy Sonolith highlights include recent FDA clearance and Japan marketing approval for Sonolith i-move resulting in a significant EDAP lithotripsy backlog.

In terms of HIFU, Ablatherm highlights include new development partnership involving $3.5 million grant. Also the high quality of patient follow-up by the top prostate cancer centers in the US is well confirmed and will be confirmed again by Marc in his comments today.

Finally, EDAP's cost reduction initiatives are progressing well in support of EDAP's cash management discipline.

I will now hand over to Marc. Marc over to you.

Thank you Philippe and thank you everyone for joining us on our second quarter 2011 earnings call. Herein today's call I will discuss recent developments across both our Lithotripsy and HIFU businesses and touch upon our quarterly results.

Our Lithotripsy business is continuing to gain traction around the world. We made the strategic decision a few years ago to redesign our lithotripsy devices to incorporate innovative technologie that address the needs of urologists across all market segments.

With the most innovative range of lithotripters available we successfully embarked on obtaining marketing approvals in key markets and launching these devices [post] approval.

In the recent months we received marketing approvals for innovative (inaudible) in the largest lithotripsy markets such as the US and Japan. And we also obtained approval in South Korea. We are now advancing our sales activities in these markets.

As of today our litho sales backlog is almost twice the size of the typical third quarter backlog and historical trends. We are seeing increasing sales interest across key global markets from [urology]. We are very pleased with orders from countries such as Japan and South Korea. We have received marketing approval for Sonolith i-move only a few weeks ago.

A handful of device sales in our pipeline shifted from second quarter and are on track to close in the third quarter of 2011. As such, we currently have a robust backlog of 15 devices including 11 of our recently launched Sonolith i-moves and three IM Sonolith i-sys.

This backlog consists of orders from several regions of the world including Canada, Europe Middle East and Asia. The defined backlog has devices for which we have received confirmed purchase orders. We sold three Sonolith i-move devices in the second quarter of 2011.

The Sonolith i-move secured US FDA 510(k) clearance in early August. With this marketing clearance in hand, we now have the full range of innovative lithotripters, both the technologically advanced compact and mobile Sonolith i-moves and the full integrated Sonolith I-Sys launched in the US.

We are well positioned to become a major player in the US lithotripsy markets and are continuing to ramp up our proactive marketing efforts to US urology communities.

As you may recall we showcased the Sonolith i-move at the American Urological Association annual meeting in May 2011 in Washington DC in advance of the US marketing clearance. The innovative device was very well received by the urologists and it has generated a strong pipeline of projects and leads in the US.

Over the past three months we have been following up with these leads so that we could move forward quickly in the sales process upon receipt of FDA approval. We are now working on processing these projects and moving to the next step of the sales title which is to have the urology groups and partnerships demo the device.

We will be holding our first product demonstration in the New York area on September 6. We are leveraging our sales team to most effectively reach urologists as the key lithotripsy partnerships and large service providers across the US.

We hired a Senior Vice President of Sales and Marketing based in the US to bring 20 years of lithotripsy experience and expertise to EDAP as he was presently with major players in the field of lithotripsy such as (inaudible). He is very familiar with the largest group of users and is well aware of the specific structure of the lithotripsy market in the US based on partnerships and practice workshop users.

We have once again demonstrated our ability and successful track record of navigating the US FDA regulatory process with the receipt of the marketing clearance for the Sonolith i-move. We have established good relationships with the agency and remain in ongoing dialog with them.

Regarding the Ablatherm-HIFU [clinical] trials we have now reached 58% of the two years' follow-ups which means we have only 10 months until the end of this phase and before entering the submission phase. We are very satisfied with the work done by our internal team but also with the team of experts working with us on this project.

A key point in the forward phase is the excellent work performed by our investigational centers as they manage to keep the very high rate of follow-up patients.

In general, clinical trials lose as much as 15% to 20% of patients during the follow-up phase. In our (inaudible) trial and as of today, we have lost less than 3% of our previous patients. These show clearly the highest level of quality of post trial and the high level of professionalism of our centers and team.

As a reminder this Ablatherm-HIFU [Evia] trial involves the top prostate cancer centers in the US and these high quality follow-ups is another proof of their high rank positions.

We are continuing to position Ablatherm-HIFU as the premier and non-invasive option as the prostate cancer treatment paradigm continues to shift towards [other therapies]. With more than 30,000 prostate cancer treatments performed worldwide, our Ablatherm-HIFU device brings the international urology community valued (inaudible), repeatability, flexibility and [re-possibility].

We are now concentrating on positioning HIFU therapy on the focal approach. We believe focal therapy responds to a medical need from the urologist and the patient, we expect focal to become the next [stand up] strategy to treat localized prostate cancer.

There are several trials under way in Europe, including France, Norway and soon Germany, which show the significant advantage of using HIFU as the most effective treatment for focal approach.

We expect to see more trials in the future and we aim at positioning HIFU as the first standard of care in the focal market.

In the meantime we can see a number of our current users switching from the rival HIFU approach to a (inaudible) of focal HIFU strategy. This repositions Ablatherm-HIFU in the practice, not instead of, but as a must have to complement traditional and [radical] surgery.

We continue to receive enquiries from very well known prostate surgeons interested in learning more and keeping access to the HIFU technology in the focal environment.

We are also seeing increasing traction in the user products from HIFU as a [curative service] option at the radiation center.

This is becoming a significant market; it reflects the growing number of patients that were treated for prostate cancer with radiation in the past decade. Many of these treatment figures are in very real need for [curatic] options to postpone as much as possible digestive (inaudible) treatments.

HIFU is a very well positioned technology on this segment as it has demonstrated long-term results and clinical evidence based on a significant number of patients in this specific (inaudible) segment.

EDAP is continuing to reach to focus on repositioning its Ablatherm-HIFU technology as a must have complement to surgery across the cancer market segment, where HIFU brings a unique solution to increasing need for minimal invasive options that preserve patient quality of life.

We are very enthusiastic about this marketing and clinical work underway as it is in line with the market trends and future designs of prostate cancer strategies.

EDAP is continuing to pursue opportunities to further develop our HIFU device to incorporate (inaudible) imaging and diagnostic techniques. As we announced just last week, EDAP in conjunction with its partners, Edouard Herriot Hospital and SuperSonic Imagine, has received the highly competitive EUR2.4 million French government grant focused on this initiative.

During the second quarter of 2011, we sold one Ablatherm-HIFU device, this device was sold to our partner in China with the purpose of conducting technical testing as part of the approval process in China.

It is a significant milestone for EDAP on its start to market appearance of Ablatherm-HIFU in China.

Our backlog includes (inaudible) unit sold in Thailand, this is our first unit installed in these markets. We believe it demonstrates and reflects a growing interest in potential for the HIFU technology for the treatment of localized prostate cancer outside of Europe, both to demonstrate the efficacy of our strategies in which some marketing and sales initiatives in new geographic territories.

During the second quarter we continued to drive success in reducing operating expenses to reflect the global economy, and increase efficiency.

As highlighted in today's release, our total operating expenses declined 26% year over year, our cash position as June 30 was $8 million and we are actively pursuing our tight management of cost control.

I will now turn the call over to Eric who will review our second quarter 2011 financials in greater detail, Eric.

Thank you Marc and good morning everyone. I will now take a few minutes to review our second quarter 2011 financial results.

Total revenue was EUR3.8 million or $5.5 million for the second quarter of 2011, as compared to EUR6 million or $7.6 million for the second quarter 2010.

HIFU division total revenue was EUR1.4 million or $2.1 million for the second quarter 2011, compared to EUR1.9 million or $2.4 million for the same period last year.

Results for the second quarter 2011 reflected the sale of one Ablatherm-HIFU device as compared to the sale in the second quarter of 2010 of one Ablatherm-HIFU machine.

Lithotripsy division, total revenue was EUR2.4 million or $3.4 million compared to EUR4.1 million or $5.2 million during the year ago period.

During the second quarter 2011, the Company recorded sales of three lithotripsy machines comprised of three Sonolith i-move devices, compared to a total of nine devices sold in the second quarter of 2010.

As Marc mentioned earlier, we saw some of those device orders move into the third quarter and we currently have a lithotripsy device backlog of 15 confirmed orders.

Gross profit for the second quarter 2011 was EUR1.5 million or $2.2 million compared to EUR2.5 million or $3.2 million for the year ago period.

Gross profit margin was 40.2% in the second quarter 2011, compared to 41.5% in the year ago period.

Please note that the second quarter 2010 gross profit margin was favorably impacted by a one-time French Government grant of EUR500,000.

Operating expenses were EUR2.8 million or $4.1 million for the second quarter 2011, down 26% from EUR3.8 million or $4.7 million for the same period 2010.

The year-on-year decline is attributable to a Company-wide cost reduction program launched at the end of 2010.

Operating loss was EUR1.3 million or $1.8 million for the second quarter 2011, compared to EUR1.3 million or $1.6 million in the second quarter of 2010.

Net loss for the second quarter 2011 was EUR1.4 million or $2.1 million or EUR0.11 per diluted share, and please note that the accounting adjustments of the Company's convertible debt to fair value had virtually no impact on the quarter and has converted to net loss of EUR1 million or $1.3 million or EUR0.09 per diluted share for the second quarter of 2010, which comprised a EUR0.6 million non-cash interest income to adjust the convertible debt to fair value.

A final word on cash, at June 30, 2011 cash and cash equivalents, including short-term treasury investments, were EUR5.5 million or $8 million. We're pleased that the cash utilization in the second quarter was reduced to EUR0.5 million as a result of tight cash management and our strong cost reduction program.

Again we're pleased by the robust backlog of 15 devices as we head into September and from that perspective, I will repeat Philippe's introductory comments, we feel good about Q3 and Q4 quarters.

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

(Operator Instructions). Bruce Jackson, Morgan Joseph.

Just looking at the Lithotripsy business, there's the backlog of 15 instruments, is that as of the end of the quarter or is that as of today?

No that's -- again the backlog is made of confirmed purchase orders that we received and this is as of today.

As of today.

Now out of the 15 devices we have in backlog, we have good chances to deliver an invoice by the end of the quarter, probably 10 to 12 will do.

Okay and then does that backlog -- is it influenced at all by the recent approval in the United States?

No, actually this is --, these are projects we were working on for several months and we are, as I explained before, we are now moving to the next step of the sales process in the US as we've just been approved and the next step will be to start doing demos in centers where people were interested about the technology and the device, and these demos will generate possible orders.

So we are progressing well in the sales cycle to achieve purchase orders very soon.

Okay, so the backlog is mostly outside of the United States?

Absolutely, mainly in, as I said, in Canada, Europe, Middle East and Asia.

Okay great. And then moving over to the HIFU business, you were able to place one unit in the quarter, you've spoken in the past about challenging market dynamics in Europe, can you give us an update on the hospital capital environment and just generally the market dynamics for HIFU in Europe?

Well in general the market dynamic for [changing] devices in Europe in the economic environment as we've seen in Q2 there are a lot of probabilities of delaying for [changes], and that's what happened in Q2 when we've seen a lot of our projects that we would have expected to close in Q2 to be closed in Q3.

That's in general for the medical device market here in Europe; I think it's taking a little bit more time than usual.

Now speaking about HIFU, again we are in a very crucial transition period as we are repositioning the IFU technology towards segments, where Ablatherm is showing unique benefits to both the patient and the urologist. And we are focusing our efforts on the focal approach to [prostate] cancer that is to become the next stand up strategy.

Okay. Then one last question, can you give us an update on the liposomal drug encapsulation project? Have you started any new studies, or do you have anything to report on that project?

Well we are continuing to work on this project and there are no significant news to be given for part of the -- we'll keep the market updated on any progress we're going to do on that specific project.

Right, thank you very much.

The drug delivery program it's still at pre-clinical stage, so it's progressing well, but there's still a lot to do before it may eventually become commercial.

Right, thank you very much.

Suraj Kalia, Rodman & Renshaw.

Can you guys hear me?

Yes, we can hear you very well, Suraj, good morning.

Guys, I have virtually not heard anything on the call, I've a very bad connection, so forgive me if you've already spent time on this and/or elucidated some of the components.

I was really wondering if your cost cutting initiative, if you can shed some additional color on -- is it being driven, more so in terms of a cash preservation strategy? Is it something you'll have identified as, let's put it this way, waste, that you can eliminate? Really, what I'm trying to get at is does it affect the sales cycle, the SG&A or whatever? I'm really curious, especially given the current environment in Europe -- love to get your thoughts.

Yes, Suraj, it's a bit of a -- all what you mentioned, the overall context we're trying to break even as fast as possible, and that's why we're engaged in the vast cost reduction program, which is referring to every part of the Company, basically, to reduce all fixed expenses and make sure we reach the break-even point as fast as possible. That's also part of our cash management program. And when you embark on this kind of project, of course, you'll find some ways to optimize the operations, and to streamline, basically, every part of the Company.

And, Eric, in terms of the US, how -- I know your (inaudible) sales -- we talked about this in the past, but can you shed some color in terms of what the next three to four quarters your -- as you gradually roll out the product in the US, how should we look at it mathematically? I'm not looking for guidance, I'm just looking -- do you maybe, arrange a few units, or how do you -- or [centers], how should we look at that?

Well, actually, this is something to be followed in the next quarters, as we have the full range of lithotripters now approved in the US. And again, we are the only Company in the world that has completely renewed and upgraded its range of lithotripters. So we expect to play a major role in the US market now in the coming weeks and months.

So, basically, we have also started, before marketing clearance, to promote our devices and our range of lithotripters, and we are now moving to the next step of the sales cycle. We have the machine -- each of the models are -- already having machine in the US for the demo purpose and displaying them on major exhibition in the US. And we would expect to close and convert some serious and very interesting leads and projects that we have already in hand.

And Suraj, as Marc mentioned earlier, the US lithotripsy market is very concentrated on partnership in key accounts, which means that you don't need a huge sales force to reach the key accounts that may represent 70% to 80% of the market. What you need is a very efficient, not huge, but efficient sales force, which we have with our Senior VP that we hired from (inaudible) sales products. And this is very important because that means that any sale on the US market will have a strong leverage and bottom line because there is no big cost structure to having that.

Jonathan Schwartz, Deerfield Limited.

Can you tell me whether the French Government has set a schedule with level of payments for HIFU reimbursement? Is that still in process, or have they done their --?

That is definitely still in process; we are at Ministry level now.

Again, it's in the administration part of the -- France, so it will take a little bit of time and there is no scale or dates given in terms of the [solution] of amount and coverage. But we know it's still in progress, and we know it does move, and it's now in the Minister office for signature to go to the next step. So it's moving forward well.

So, in other words, the people below the ministerial level have done their work and presumably made some specific recommendations, is that it? So, unless there's a change at the ministerial level, somebody in the French Government knows what this is likely to be, is that fair to say?

Sure, yes.

Can you give me some color on China approval. Is there any way to tell how long it takes to get approval for HIFU in China, or is that just hard to say?

Again, it's very difficult, like everywhere, to give a timeframe for an approval process. But again, we have gone through an important milestone during the summer, as we went through the technical testing of the device that was portrayed by our partner in China back in June. So that's -- again, that's a concrete proof of a good progress in the process for the Ablatherm-HIFU in China.

Right, thanks. Let's see, in Europe, has there been any addition to the early adopters? Have new urologists in Germany, France -- of course, in France, it's been so developed, I wouldn't expect any, but Italy, anywhere else, added HIFU and become RPP customers for HIFU?

I tell you the change we have now, as we are repositioning Ablatherm-HIFU to be following the kind of [focal], we can see a lot of new urologists enquiring about HIFU. And among those, we are currently in very strong discussions with top urology surgeons that are looking into HIFU as the must have complement to their surgical tools and ability. So that's something which is new.

And we have new users coming and starting to use Ablatherm-HIFU on focal or salvage. And that's a good news as well as -- those surgeons were [various] surgeons, and they are now moving forward to HIFU as a non-invasive technology that would preserve quality of life and that would be answering their need, but also their patients' need.

So is it fair to say that with focal there's sort of a different relationship with the surgeon, HIFU is less a competitive technology that simply makes it unnecessary for them to operate, and more of a complement that can be done with their typical surgery. Does it become a little more friendly partnership for the surgeon? Is that too optimistic because that's obviously been an issue in --?

That's exactly what's happening, actually. And again, it's taking a bit of time and we'll continue to work on that. Again, the urology community has to be in agreement in the definition of focal, the definitive interest is coming to HIFU for that specific approach that will be a complement to the surgical traditional approach.

And that interest is primarily in Europe, I presume?

Yes. It's primarily in Europe, but also in the US, as even though they cannot [accelerate] the technology in the US periphery, but the urologists in the US are also following that, as they are part of the commission of the focal approach, as a therapeutic strategy.

Right, right. Eric, can you give me some idea of what the cost of the FDA trials will be over the next 10 months? And actually what they've been so far, for the first two quarters?

That's approximately a couple of million dollars until completion.

Couple of million to complete.

To complete.

And how much did we spend in the first two quarters on FDA?

About $1 million.

About $1 million.

No, not -- $0.5 million, sorry.

$0.5 million, but $2 million to complete, roughly?

Yes because right now, we are in the follow-up phase, which is virtually no cost, or very little cost. Once we reach the completion of the follow-up phase, we'll have to submit the files. Work at the comparative arm, which is also another aspect of the program. So to be on the safe side, I think we should expect a little increase in spending from the trials to reach completion.

Right. Who are the principal competitors in litho, worldwide?

The major competitors are a German company and Swiss companies such as Dornier, Siemens and Storz.

Right. And are they strictly in the litho business or do they do other things? (Inaudible).

Storz is mainly in the litho business, Dornier is in the litho business, plus some additional things for the urology business. And Siemens is a huge medical company, mainly in imaging.

Mainly in what?

In imaging.

Imaging, yes.

And last, how does the new grant work in terms of our income statement? Presumably some of that goes to other partners, but some of it comes to EDAP. Does that come in as revenues, or does that support research off the income statement, and so research is being done, and it's paid for by the grant and we don't have to pay for it? How does that work?

Out of the EUR2.4 million, approximately EUR1.4 million will be allocated to EDAP only, and the remaining to the other partners. And just as you said, the most likely accounting procedure will be to account for this as a reduction in R&D expenses.

I see. Yes, that makes sense. It should -- so it won't affect the revenue line but it should affect the Company's bottom line.

Exactly.

Over what period will that become --?

And the cash [generation] as well.

The cash, of course, yes. And over what period, Marc, does that EUR1.4 million come in?

That will come in, in several steps. We may have one first installment of that amount to be paid to the Company towards the end of the year or early weeks of next year. And then throughout the length of the program, which is approximately 20 to 24 months.

Right, so it'll come in over roughly a two-year period.

Yes.

And where will the research actually be done; will it be done in three different places? Of course Edouard Herriot Hospital is right there in Lyon, but --

This is a partnership, so each one of the partners brings its own expertise. EDAP has of course the HIFU expertise, and we already have the Ablatherm device technique. But the aim of the project is to embark advanced imaging techniques on the HIFU device, and those techniques are mastered by the SuperSonic Imagine companies, which is in Aix-en-Provence in the South of France.

So they will work together with us to embark on these technologies. And of course the clinical aspect, and the trials, will be done at Edouard Herriot Hospital in Lyon.

Right. And how does this approach compare with the approach being taken by some of the other people working on enhanced imaging? The Chinese company that's working with -- I don't remember who -- I think it's Siemens, and there's a Canadian start-up that's working with Siemens --

There is -- everybody is trying to improve the HIFU approach with better imaging capabilities. Because the actual limiting factor to the HIFU treatment is literally the imaging capacity and diagnostic capacity.

The innovative approach of EDAP that it is very flexible because we will be able to use both MRI images and advanced ultrasound images, which is very important, because a number of projects outside EDAP rely mainly on MRI images, which is a very costly approach, and we don't think it may be the better approach. So we prefer a much more flexible approach combining the best aspects of both MRI and ultrasound, but in a much more cost-effective approach.

So how would that actually work then at the clinical level? For typical conventional HIFU treatment that's being done all the time would there be both types of equipment, or would you just use existing technology?

One HIFU equipment, which is the Ablatherm-HIFU device from EDAP, but first of all I'm not an expert, and I don't want to embark in too lengthy an explanation but we will be able to use both MRI images at the diagnostic level, because it's a very efficient technique in terms of image to -- in terms of accuracy and actual detection of tumors. But then we will be able to monitor the treatment outside the MRI [office room] using advanced ultrasound technology.

Right. So is there a thought that ultrasound technology itself could be improved so that imaging with ultrasound can get to a new level?

Yes.

So that's quite exciting.

Yes, so we think.

And last question, is the Company discussing extending the 2012 maturity with bondholders?

Well that's -- this debt is due in October 2012, so that's more than one year from now. And by this time we will have completed the follow-up phase in the US trials which begins a major milestone for the Company. So, as you know we operate in a changing and volatile environment, and there is reasonable expectation that by this time the markets will have more evidently recognized the true value of the Company, up to a level that might render conversion possible. So that's one thing.

The other thing is that as you know the debt has been already significantly reduced, and it is now down to $10.5 million which is a much more manageable amount to find any kind of solution if we have to discuss an extension or any adjustment to that debt.

So there's still a number of options to be considered, and that will depend of course on how the markets recognize the Company's value. And we believe there are still great expectations in that matter. So if I want to summarize this, I would say this is a matter of close and constant consideration, but this is not a matter of concern.

Right, I understand. Thank you, Marc, thank you gentlemen.

(Operator Instructions). [William Lightfoot], a private investor.

I am sorry, but my question has been already answered by the previous questioner. It was in regard to the expectation on when the HIFU would be approved in China, was one question.

And then the second one was as to the status of the HAS reimbursement program in France. Those were the two questions, and I think that they have been answered somewhat by the previous questioner.

Okay, thank you, William.

Thanks.

Having no further questions this concludes our question and answer session. I would like to turn the conference back over to Philippe Chauveau for any closing remarks.

As there are no further questions I will now close the conference call. Thank you everyone for participating, and goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.