Edap Tms S.a. (EDAP) Q3 2014 Earnings Report, Transcript and Summary

Good day. And welcome to the EDAP TMS Third Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator 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 of The Ruth Group. Please go ahead.

Thank you, operator. In addition to historical information, this conference call may contain forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of risks and uncertainties including matters not yet known to us or not currently considered material by us. And there can be no assurance that anticipated events will occur or that the objectives set out will actually be achieved. Important factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements include, among other uncertainties of the U.S. FDA approval process, the clinical status and market acceptance of our HIFU devices and the continued market potential for our lithotripsy device. Factors that may cause such a difference may also include, but are not limited to, those described in the Company’s filings with the Securities and Exchange Commission and in particular, in the sections Cautionary Statement on Forward-Looking Information and Risk Factors in the Company’s Annual Report on Form 20-F. Okay. Now, may I please turn the call over to Philippe Chauveau, Chairman; Marc Oczachowski, Chief Executive Officer; and Eric Soyer, Chief Financial Officer. Go ahead gentlemen.

This is Philippe Chauveau. Good morning. Thank you for joining us on our third quarter 2014 investor conference call. I have three opening highlights to share with you: First, our high growth in the global markets we continue to experience with our Focal One HIFU device; second, our strong operational results with solid cash management in the first nine months of 2014; and third, our progress with the PMA application process for Ablatherm HIFU following receipt of comprehensive guidance from the FDA. Now, I’ll turn over the call to Marc. Marc? Marc Oczachowski Thank you, Philippe. And thank you all for joining us for our third quarter 2014 conference call. I will review recent FDA developments and progresses across our business segments and then I will turn the call over to Eric to discuss the financial results for the quarter. Following Eric’s comments, we will open the line for any questions you may have. We are very excited by a strong growth initiated this year and continued during these three quarters of 2014. And before going into the nice and great details of the business update and quarterly results, I would like to discuss the recent FDA development on our PMA for Ablatherm HIFU. During our last conference call, we discussed our frustration will be outcome for our advisory panel meeting held at the end of July. As we noted, the panel voted negatively on the assessment of safety and effectiveness of Ablatherm HIFU device, primarily based on the new indication for low-risk prostate cancer patients. For whom, there are a lot of debates on interest of the treatment at all for these patients. In addition, it was disappointing that the panel was unable to provide us with any guidance as to potentially acceptable approve of that for any technology or technique to treat this low-risk patient population group. This lack of guidance came despite their knowledge that none of the current prostate cancer therapies approved in the U.S. were subject to the same regulatory test as HIFU and therefore holding us to a different standard. Since the panel meeting, at the end of July, we have remained in close contact with the team of the FDA and have had a lot of discussions about our PMA and the way moving forward in the review process. As we explained several times and as many of you already know, the advisory panel gives a recommendation which is not binding on the FDA. The FDA makes its own decision. This is part of the PMA review process and FDA still has to build [indiscernible] and the questions so they could come to a conclusion and make a decision. During these exchanges in communications with the agency, we highlighted Ablatherm HIFU’s approval and use in several international markets including Europe, Canada, Russia, Brazil, Mexico and South Korea and the strong safety profile, the device has established through the treatment of over 40,000 prostate cancer patients in these areas over the last 15 years. Eventually, in the early part of November, we received a letter from the FDA providing specific and comprehensive guidance for an amendment to our PMA which would play the application in an approvable form. This is indeed very positive and encouraging. Again, this is the FDA itself advising us as a company on how to bill amendment of PMA’s file to make it approvable. Specifically and consistent with feedback received from panel, the FDA has recommended during the indication for use to specify a patient population with localized prostate cancer that has greater risk of morbidity and/or mortality from the disease, so called the intermediate risk patients. Further the FDA provided us with recommendations regarding the potential use of our existing European patient registry and database, as well as the safety data from a produced ID cohort to support the potential approval of Ablatherm HIFU with this modified indication. We have until the end of April of 2015 to submit the amended PMA. We believe this is a reasonable deadline. Once our amendment is submitted to the FDA, the agency typically works on a 180 day timeframe period to review this new set of clinical data and other information that they clearly and precisely requested in the letter. This timeframe is similar to the review process. We could expect that the agency might require less time as it is a major amendment only and not a completely new PMA, which means that the great majority of the file has been already reviewed by the FDA team. We appreciate the comprehensive feedback the FDA has provided us and see this as a major opportunity to continue the approval process for Ablatherm HIFU. We also appreciate the great and collaborative working relationship with the agency which in several points of the latter, continued to encourage the dialogue and communication we did have so that we could move forward in an effective and synchronized way. This letter and precise guidance is a very positive step in the FDA approval project for Ablatherm HIFU in the U.S. and shows a clear will and motivation from the FDA to guide us in the path that would make our file and PMA approvable. The stated timing and recommendations are also very reasonable and clearly bring a short-term opportunity for this project. We plan to make the most of this opportunity and look forward to updating shareholders on our progress as we continue moving forward. There is no doubt that FDA approval and U.S. commercialization of Ablatherm HIFU would be a tremendous accomplishment for our team and it remains a key strategic objective for EDAP. However, we are by no means focused only on capitalizing on the potential U.S. opportunity as we have significant presence in a number of key international markets. We are continuing to build these major markets through a highly focused sales and marketing initiative, aimed at educating the urology community on the substantial therapeutic benefits of HIFU for the treatment of prostate cancer. I am extremely proud to say that this is one area in which we continue to make meaningful progress as evidenced by the triple-digit HIFU revenue growth we achieved this year. In the third quarter of 2014, we recorded HIFU sales of EUR 2.4 million, an increase of 94% over the third quarter of 2013. While the HIFU division contributed total revenues of EUR 7.7 million in the first nine months of 2014, an increase of 114% over the prior year period. On a unit basis, we sold 10 systems through the first nine months of 2014 compared to two in the same period last year. Just as important as the growth itself is where the growth is coming from. The 10 devices sold this year included six of our next-generation Focal One Systems, demonstrating the ongoing shift to more advanced focal therapies that are capable of delivering maximum efficacy and optimal results in the treatment of localized prostate cancer. Of the Six Focal One devices we sold so far this year, three of those sales occurred in the third quarter with one device sold to Mannheim University Hospital home to one of Germany’s largest urological centers with more than 4,000 patients treated annually. In addition, our Focal One devices have found homes in the leading public and private sector prostate cancer centers in France with installation at Institut Mutualiste Montsouris in Paris and Nantes-Atlantis urology clinic which holds the distinguishing of being not only the top ranked private prostate cancer clinic in France, but also the country’s only private clinic dedicated exclusive to urology. These are very encouraging trends that support our enthusiasm for the overall HIFU market opportunity. The increased number of Focal One devices in our product mix is a clear indication of the growing physician demand for innovative technologically sophisticated solutions that can advance patient care to another level through unmatched precision and efficacy. The product mix and the solution itself between Focal One and Ablatherm HIFU demonstrates the interest and impact of our unique and complete range of HIFU devices that cover the needs in market segments thus providing best adapting answer to urologists and their prostate cancer patients. We can also expect to experience the impact of the recent upgrade of the European Association of Urology guidelines for HIFU in the treatment of prostate cancer for both primary care patients and patients that have failed radiation therapy. In addition to the great strides we are making in our self efforts, we have maintained our position as a leading authority on high-intensity focused ultrasound technology in the medical community. In the last several months, our devices were highlighted at two of the four most events in our industry. In September, we presented our Ablatherm-HIFU technology as a viable treatment alternative for prostate cancer patients at the World Congress of Endourology in Taipei, Taiwan. More recently, in October, we presented the result of our ENLIGHT trial or FDA study of Ablatherm-HIFU in an abstract session of the Fourth International Symposium of the Focused Ultrasound Foundation in Washington D.C. This abstract shows a positive conclusion and promising results from our USA IDE study and the ability of Ablatherm HIFU to provide, assess and effective treatment to low risk prostate cancer patients in the U.S. These are both prominent and international events and these presentations reinforced, both the strength of our technology and our leadership position within the industry. In summary, we’ve made remarkable progress in recent months. One, we continued to enjoy growing demand for our best-in-class HIFU devices in the number of markets throughout the world. Second, our overall results through the first nine months of the year was strong with 27% growth of our total revenues, we are encouraged by our ability to build on the success as we approach 2015. And finally the guidance we have received from the FDA regarding our Ablatherm PMA submission provides us with the clear path to continuing the regulatory approval process with the ultimate goal of offering our technology as a new treatment alternative for prostate cancer patients in the U.S. I will now turn the line over to Eric who will discuss those great results in greater detail.

Thank you, Marc, and good morning, everyone. I will now take a few minutes to review financial results for the three and nine months periods ended September 30, 2014. Total revenue for the third quarter 2014 was EUR 6.9 million or $9 million, a 24% increase year-over-year compared to EUR 5.6 million or $7.4 million for the third quarter 2013. Total revenue included a EUR 0.5 million or $0.7 million one-off revenue related to the licensing of HIFU patent. Total revenue for the HIFU division was EUR 2.9 million or $3.9 million for the third quarter 2014, a 135% increase compared to EUR 1.2, $1.7 million for the same period last year. As Marc already noted, we recorded sales of three Focal One devices in the third quarter of 2014. Total revenue for the lithotripsy division was EUR 4 million or $5.4 million for the third quarter 2014 compared to EUR 4.3 million or $5.8 million during the year ago period. During the third quarter 2014, the company recorded sales of 7 lithotripsy machines, including high Sonolith i-move devices, one Sonolith i-sys device, and one Sonolith Praktis device. This compares to 9 devices sold in third quarter last year. Gross profit for the third quarter 2014 was EUR 3.4 million or $4.4 million compared to EUR 2.2 million or $3 million for the year ago period. Gross profit margin on net sales was 45.2% in the third quarter of 2014 compared to 40.3% in the year ago period. Operating expenses were EUR 3.1 million, $4 million for the third quarter 2014 compared to EUR 2.6 million, $3.4 million for the same period last year. Operating income was EUR 339,000 or $443,000 for the third quarter 2014 compared to an operating loss of EUR 333,000 or $444,000 in the third quarter of 2013. Net income for the third quarter 2014 was EUR 6.6 million or $8.6 million or EUR 0.26 per diluted share as compared to a net loss for the third quarter of 2013 of EUR 373,000, $497,000 or EUR 0.02 per diluted share. Third quarter 2014 net income included non-cash interest income of EUR 6.5 million to adjust the accounting fair value of outstanding warrants. I need here to reiterate the comments I made in the previous quarters and on those fair value adjustments as they are quite significant to our results and financial statements. As you know for our U.S. GAAP accounting rules, we need to adjust the outstanding warrants book value to market fair value at the end of each quarter based on a number of market criteria, the most sensitive of those being EDAP’s fair price. The significant change in the fair price during the summer has triggered a decrease in the warrant market fair value as of September 30, 2014 and consequently an interest income in the third quarter to account for the amount of that variation. For those of you who are not U.S. GAAP experts, I’m aware that this is indeed technical dragon [ph] and makes the understanding of our results quite confusing. What is important to keep in mind in the matter is that this interest income for expense depending mostly on the downward or upward variation of the fair price is a non-cash accounting adjustment and that our operating results is a more straight forward reflection of EDAP’s performance. Turning now to the first nine months of 2014. Total revenue was EUR 20.3 million or $27.4 million, up 27% compared to EUR 16 million or $21.1 million for the first nine months of 2013. Gross profit for the first nine months of 2014 was EUR 8.8 million, $11.8 million and gross profit margin on net sales was 41.7% compared to 37.9% in the year ago period. Operating loss for the first nine months of 2014 was EUR 707,000 or $954,000, an improvement of EUR 2.3 million over an operating loss of EUR 3 million or $3.9 million in the first nine months of 2013. Excluding FDA-related costs, operating result for the first nine months of 2014 was an income of EUR 0.3 million or $0.4 million. Net income for the first nine months of 2014 was EUR 2.1 million, $2.9 million, or EUR 0.09 per diluted share, as compared to a net loss of EUR 4.5 million or $5.9 million, or EUR 0.22 per diluted share, in the same period last year. Net income in the first nine months of 2014 included non-cash interest income of EUR 3 million to adjust the outstanding warrants to fair value. Of course my previous comments on such fair value adjustments for the three months periods apply just the same for the nine months period. This adjustment is non-cash and the nine months operating loss which was again EUR 707,000 which includes FDA trial expenses is a more relevant reflection of EDAP’s operating performance in the period. The last word on cash, At September 30, 2014, cash and cash equivalents, including short-term treasury investments, were EUR 11.1 million or $14 million. This cash position remained solid. Over the nine months period the company’s operating cash flow before working capital variation was breakeven and the net cash utilization of EUR 2.8 million excluding the impact of the June 2014 fund raise was mostly attributable to investments in working capital related to the increase in HIFU sales. Thank you very much for your attention. And I will now turn the call over to the operator, who will open the line for questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from RK Ramakanth from H C Wainwright. Please go ahead.

Good morning, Marc. Good morning, Eric.

Hi RK.

Congratulations on the quarterly earnings, glad to see the jump in the HIFU revenues. Talking about HIFU and the PMA, I was wondering if you can help us understand how you plan to go forward with this amendment versus amount of work that needs to be done and what kind of -- what’s the number of patients that have already been treated in Europe who can fall into this new indication that would just help us understand how strong you can get your data base together?

That’s a great question and actually that’s exactly something on what we are currently working and we’re going to follow again the advice and the different advices and recommendations that the FDA made in the letter. We’re going to work extremely closely with the FDA team, both the clinical and technical team and again work with them on our strategy in collection of data. We are at the same time and we already started a little bit before the letter because again we kind of -- we’re working very close with the FDA and we’re expecting what was in the later. So we started to kind of watch at our European data base; we’ve treated more than 40,000 patients. So now we have to stratify a little bit of data base and see what are the data we can use and we have again a huge choice in about 40,000 patients treated in the last 15 years. So, this is exactly what we are doing now to get out of the data base what could be interested for review by the FDA.

Okay, great. So, is it possible for you to beat the deadline and get this amendment before April or you would really require the full time, the full six months that FDA provided you to get them and then back to them?

I mean as you know RK this, we really don’t give forward looking statements, but basically I mean we believe the deadline is reasonable. And again, we’re going to work very closely with both FDA and our centers so that we can get everything really as soon as possible.

One more question on this and then I’ll jump back into the queue. What’s with this new indication, is that a bigger patient population that you will be able to serve or what’s the kind of size of the patient population that we could be thinking about?

Well, if you look at most of our publications and again, we have more than 70 peer reviewed publications on our Ablatherm HIFU results, since 10 years or 15 years, you would see that, yes indeed in terms of risk population is a big group.

Okay. Thank you.

Welcome.

Our next question comes from Matthew Pilkington with Steel Partners. Please go ahead.

Hi, could you tell me which countries you get national health reimbursement on the HIFU machine for a procedure?

Could you repeat the question, I didn’t hear you very well.

National health reimbursement country, which countries give national health reimbursement? I think France does.

Yes, France does; Italy; and Germany as well; and UK, that is -- I mean all the European countries have different ways of getting organized for reimbursement but there is access for reimbursement in the major European countries.

And approximately, it’s roughly 100% of the procedure or is it partial?

Now, it’s in most of them.

Okay. Thank you.

You’re welcome.

[Operator Instructions]. The next question comes from Stanley Mazor, [ph] a private investor. Please go ahead.

Yes. My question was, so right now you’re getting reimbursement from France?

Actually the reimbursement was kind of announced during summer and it’s in segregation phase. So, we expect this would reasonably start probably early next year.

Next year, okay. And when I look at the panel, the advisory panel’s discussion, I found it note worthy that they said that your HIFU was no worse than the current modalities being used. So if it’s no worse than, at least has to be as good as or better than, it can’t be worse than. And I am a HIFU survivor. I truly believe in this procedure. I wish you well and keep up the good work.

Thank you very much for that.

And your next question comes from Terry Carlton, [ph] a Private Investor. Please go ahead.

Yes, good morning. I’ve got a couple of general questions related to the HIFU division revenue stream. The fee per used model that you haven’t placed, what percentage of the division revenue is currently coming from replacement or kit fees on a per use basis?

We’re just thinking about kit fees, you mean the consumables on the procedures, right?

Yes.

Yes. Well that accounts for approximately 25% of total revenues.

25%. And I would imagine going forward; we would expect to see that number increase?

Well, 25% that includes consumables and the revenue per procedure model. Well, hopefully with the adaption of the technology we should see that number increase, yes.

Yes. Does having the government approval in France and reimbursement approval give you leverage to increase your pricing for disposables?

That will -- well, in France that will most probably increased reduction and the number of treatments in France. And as I commented earlier that’s something we should see an impact on earlier next year, we didn’t see an impact yet, but that should come next year?

Yes. Thank you, Marc. And one more quick question. I would like to see EDAP making some effort to market use of HIFU device directly to consumers through magazine advertisements and other publications. Are you considering doing these things to drive demand on the consumer end?

We’ve done that in the past at some occasions and we have also to be very careful about regulations in the different enrolls [ph] about promoting a medical treatment from manufacturing companies. But yes, that’s something we might want to consider depending on the need.

Thank you very much.

Thanks. Thank you.

The next question is a follow-up from RK Ramakanth from H.C. Wainwright. Please go ahead.

Hi Marc. What’s the backlog that you have at the end of the third quarter for both HIFU devices including the Focal Ones and the lithotripsy devices, normally you used to give that?

We indeed use to give that kind of information, but for competition reasons we didn’t want to -- because we are at the end of the year which is a key period for the company and for recording sales and working and closing deals and projects. So, we wanted to be a little bit more shy on that just for competition reasons. So, we’ll -- we are working on a strong pipeline of projects and on the backlog we had at the end of Q2. And again, we are focusing on closing deals as the end of the year is arriving. So, again we don’t want to disclose all our strategy numbers and projects to the competition by this call.

Okay. And a general on the lithotripsy market, you are holding steady ground in terms of sales and that’s nice to see. But are there any strategies of how to expand that market, is that market expandable at all? And if so, how would you do that?

So, as we’ve discussed and announced I mean several times this year, a market that is matured, but still very dynamic. So, there is appetite for technology and there is appetite for innovation and that’s what we work on. And again, we continue investing in innovation for lithotripsy as we believe that’s the main way to take market share from competition and taking market share from competition in the mature market that’s the way to grow. And we’ve shown that in the past few years that was possible as we grew our revenues in lithotripsy. So, we’re continuing on that strategy.

Thank you.

Thanks.

The next question is from David Jenome, [ph] a private investor. Please go ahead.

I wondered if you could comment on the acceptance of progress you’re making on in any of the Eastern Asian countries?

You mean for HIFU?

Yes, for HIFU.

Yes. We work on programs there and of course in the incidents of prostate cancer in Asia it’s not as high as in Europe, but yes, we have some installation, we have some of different HIFU devices installed in Eastern Asian countries such as Thailand, Philippines, Taiwan and we are developing and building that option there as well.

Thank you.

Welcome.

And as there are no questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to Philippe Chauveau for any closing remarks.

There being no further questions, I would now close this call. Thank you everyone for participating on today’s conference call. Talk to you next time. Good bye.