Edap Tms S.a. (EDAP) Q4 2014 Earnings Report, Transcript and Summary

Good day and welcome to the EDAP TMS Fourth 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 Lee Roth of The Ruth Group. Please go ahead.

Thanks Kate and good day, everyone. Joining 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 risks and uncertainties that could cause actual results to differ from those described in these forward-looking statements. Factors that may cause such difference include, but are not limited to those described in the company's periodic filings with the U.S. Securities and Exchange Commission. With that, it's my pleasure to turn the call over to Mr. Philippe Chauveau. Philippe?

Good morning and welcome to EDAP's 2014 Q4 and full year conference call. I have three brief opening remarks to share with you. First in 2014 EDAP significantly increased its HIFU revenue performance. Second, in 2014 EDAP continued its sound cash management. And third, in 2014 EDAP had further close discussions with the FDA. Overall 2014 continues to show significant progress for EDAP. Now, I’ll turn over the call to Marc. Marc?

Good morning, everyone and thank you for joining us on our fourth quarter and full year 2014 investor conference call. I’d first like to provide you with some details on the recent developments in our FDA clearance process for other than HIFU. I believe it is important to understand exactly what has developed since our last call and where we are heading. We met with individuals at the FDA, who are in charge of reviewing our file at the FDA campus near Washington D.C. on February 3. This was an official closed door meeting called a pre-submission meeting with the goal of discussing in details of our plan to submit a PMA amendment containing additional clinical data supporting the treatment of intermediate risk prostate cancer as opposed to the original application, which was limited to low-risk prostate cancer. If you remember we met with FDA in September of last year to discuss these pathway and we're in agreement with the concept of an amendment to our filing to include intermediate risk subjects. This sentiment was echoed in the non-approvable letter, which included some guidance on what the FDA would like to see in such an amendment. This meeting on February 3 started with the discussion on the general approval process for any latest prostate cancer therapy. FDA informed us is they believe is would be highly unlikely for prospective, let alone the prospective trial to yield a positive clearance this season to follow our intermediate risk in the current era of active surveillance acceptance. The reality is that no studies in the world have conclusively shown statistically significant benefit or any established or novel treatment of our surveillance follow intermediate or even high risk, localized prostate cancer. Both EDAP and the FDA has been struggling with the issue of prostate cancer device approvals, has examined it from every direction and have realized that the issue is the disease itself rather than the technology. Again there is nothing available in the medical literature for any treatment including surgery, radiation or other approved technologies that could be able to scientifically, clinically or statistically prove a clinical superiority over active surveillance. The practice of simply watching the disease and not intervening i.e. doing nothing. It is important to note that many devices that are used today for treatment of prostate cancer either were not specifically clear for its use or were grandfathered. This means they were not cleared based on clinical evidence of safety or effectiveness, but rather based on technological similarity to a device that was marketed prior to the medical device amendments of 1976. All devices currently cleared for the treatment of prostate cancer would likely have difficulty obtaining clearance today, but clearly is required to submit a PMA and be evaluated by a panel. To be clear, this every procedure and device currently used for the treatment of low or intermediate free stage where to start a PMA approval process today none would likely to be cleared and there would be no treatments for prostate cancer patients in the U.S. This does not mean that treatment and technologies do not benefit prostate cancer patients. It means that proving it via the standard FDA process, the PMA pathway is not feasible. As a reminder, the U.S. has one of the highest incidents of prostate cancer in the world. Based on that fact, the FDA suggested that we consider seeking a tool claim instead of a disease treatment claim. To support the tool claim, we will evaluate what HIFU does to the prostate. It ablates the prostatic tissue. This means that we need to conclusively demonstrate that we target the prostate entirely or partially and that what was targeted was effectively ablated using the Ablatherm HIFU device. There are two ways the device could be cleared by FDA by a tool plan. If there were a similar device or predicate already cleared by FDA, the pathway would be the 510(k) process and the device would be compared to the predicate. This is not the case for HIFU as there is no HIFU device already cleared for the ablation of prosthetic tissue. The second pathway is the De Novo pathway. Until 1997, if there was no predicate for a device, then it was classified by default as Class 3, which requires PMA clearance. In 1997, the FDA introduced the De Novo process with the implementation of the FDA Modernization Act, FDAMA as a means to reclassifying De Novo medical devices of slow to moderate risk where there was no predicate to support successful 510(k) submission. FDA is well aware of the safety profile of Ablatherm HIFU as it was rigorously studied in our U.S. clinical trial and summarized in the PMA application. FDA suggested that EDAP pursued a De Novo process for Ablatherm HIFU and we are indeed in the process of submitting a De Novo petition. In parallel, we'll still continue to work on the PMA amendment for the intended use of treating intermediate risk prostate cancer. This is possible as the intended uses are different. We have until April 29 to submit the PMA amendment. We also have the ability to request an extension and we will certainly ask for it as the new and additional pathway, the De Novo petition is taking some time and focus from our team. This De Novo petition and process that FDA recommended is a huge opportunity for the company and Ablatherm HIFU. It will most probably accelerate getting our globally recognized and proven technology into the hands of the American urologists and their patients. Time wise it is difficult to give an expectation but the next milestone is for us to submit our direct De Novo petition to the agency. We are currently actively working on it and once submitted, the FDA has 120 days to review its end of the stated, although in practice it may take longer to complete the review. Again and I've discussed several times, we cannot know exactly when a decision will be made as it depends on the number of comments and questions we might receive from the FDA during the interactivity review process. The FDA posing questions to us to review class until it is uncertain. We believe the review should be straightforward as the FDA is already familiar with a large portion of files since the device is the same, only the intended use is different. As you can understand, we are extremely excited by this great news and we will continue to communicate the report as we move forward in our two parallel processes and applications. Bringing Ablatherm to market in the U.S. remains one of the most important objectives for our company and we're pleased that our ongoing discussions with the FDA resulted in the De Novo path as I just described. Penetrating the U.S. market is an integral step toward a broader global growth objectives but we cannot discount a significant progress we’ve made in the rest of the world. The record revenues we generated for the full year were driven by 70% growth in revenue from the HIFU division over 2013. This growth in HIFU revenues is a reflection of the increasing recognition of our technology by the worldwide Urological Community and the growing acceptance of HIFU for the non-invasive treatment of prostate cancer. Within the HIFU division, we are especially encouraged by the accelerating adoption of our Focal One device of which we sold six in 2014 compared to one in the previous year. This increasing traction is a clear indication of the growing interest in the use of Focal therapy to treat prostate cancer and our Focal therapy solution specifically. Together our Ablatherm and Focal One offerings is EDAP a unique position in the global HIFU market as we not only benefit from world-class technology, but a comprehensive HIFU portfolio with devices able to address multiple areas of endless need in prostate cancer. In January, Focal One was approved by Health Canada, the Canadian Regulatory Authority for the treatment of prostate cancer. This is another important milestone as we continue to expand the global footprint of our next generation focal therapy. The approval is exciting in its own right that even more gratifying is that we sold our first system to Montreal Jewish General Hospital just two months after it was approved. Montreal Jewish General is home to one of the leading prostate cancer treatment centers in Eastern Canada and their purchase of the system provides a key validation of our technology as we expand our presence in the Canadian markets. As we advanced our HIFU technology in the prostate cancer arena, we have learned a great deal about the power of HIFU and its potential in other cancer indications. We had explored some of these possibilities over the years, but that maintained our focus on maximizing the commercial opportunities in prostate cancer. I’m proud to report as we recently took a major step toward expanding HIFU’s research beyond prostate cancer through our participation in the HECAM Consortium through which EDAP will collaborate with its long-time academic partners of INSERM and other prominent cancer centers who develop another HIFU treatment for liver cancer. As part of our participation, EDAP will receive EUR2.4 million in a non-diluted financing from BPI firms. Led by General Electric Healthcare, the goal of the consortium is to develop new technology-driven solutions for the early diagnosis and treatment of liver cancer and empower physicians to make better informed therapy decisions. Liver cancer is one of the most prevalent form of cancer and the most common in many countries especially in the developing world. With an estimated 600,000 deaths per year worldwide, liver cancer is one of the leading causes of cancer death globally. In addition to the severe health consequences there is a high economic cost associated with the disease. It is an honor to be included among the world-class group of company’s academic researchers and clinicians and we look forward to working with them toward the development of better ways to address this devastating disease. HIFU is a key driver of our future growth, but our lithotripsy business continues to be an important and stable contributor to our revenues. In 2014, total revenue from the lithotripsy division was EUR18.1 million representing a slight decline approximately 4.7% from 2013. In the first quarter of 2015 with strength in our lithotripsy business we have multinational strategic OEM partnership with Quanta System, a leader in the manufacture of medical lasers. Per the partnership, Quanta will manufacture customized urological stone lasers to be sold under EDAP brand through our global network. The addition of urological stone lasers is an excellent complement to our broad lithotripsy portfolio and enables us to offer a complete range of minimally invasive solutions for urinary track stone indications. In summary, 2014 was a very exciting year for EDAP and we’re well positioned to build on the success of the past year as we move forward in 2015. We achieved record full year revenue growing total revenues 11% over 2013. This strong growth was driven by a 70% year-over-year increase in HIFU revenues over 2013 as we continue to benefit from our best-in-class technologies. We're seeing a robust demand for Focal One system in the country that it is approved and pursuing regulatory approvals in other strategic markets. We continued our tight cash management and closed 2014 with a great cash position of EUR12.1 million. We made continued progress with the FDA and now have two potential tasks to the U.S. market. We are focused on completing our De Novo petition. As always, we thank you for your continued support and look forward to updating you on our future accomplishments. With that, I would like to turn the call over to Eric to review our financial results. Eric?

Thank you, Marc and good morning, everyone. Thanks again for joining us today. I will now take a few minutes to review our financial results for the three and 12 months periods ended December 31, 2014. Total revenue for the fourth quarter 2014 was EUR6.5 million, $8 million; compared to EUR8.1, million $11 million for the fourth quarter 2013. Total revenue for the HIFU division was EUR1 million, $1.3 million for the fourth quarter 2014 compared to EUR1.5 million, $2.1 million for the same period last year. Total revenue for the lithotripsy division was EUR5.5 million $6.7 million for the fourth quarter 2014 compared to EUR6.6 million or $8.9 million in the year ago period. During the fourth quarter 2014, the company recorded sales of 14 lithotripsy machines, including 12 Sonolith i-move devices, and two Sonolith i-sys devices. This compares to 18 devices sold in fourth quarter last year. Gross profit for the fourth quarter 2014 was EUR2.4 million or $3 million compared to EUR3.3 million or $4.4 million for the year ago period. Gross profit margin on net sales was 37.3% in the fourth quarter 2014 compared to 40.1% in the year ago period. Operating expenses were EUR3.5 million, $4.3 million for the fourth quarter 2014 compared to EUR3 million, $4.1 million for the same period last year. Operating loss for the fourth quarter was EUR1 million or $1.3 for the fourth quarter 2014 compared to an operating profit of EUR226,000, $309,000 in the fourth quarter of 2013. Net loss for the fourth quarter 2014 was EUR2.6 million, $3.3 million or EUR0.11 per diluted share as compared to a net loss in the fourth quarter of 2013 of EUR570,000, or $778,000 or EUR0.03 per diluted share. Net loss in the fourth quarter 2014 included non-cash interest expense of EUR1.2 million to adjust the accounting fair value of the outstanding warrants. I am turning now to the results for the full year 2014. Total revenue for the full year was EUR26.8 million, $35.4 million, up 11.2% compared to EUR24.1 million or $32 million for the full year 2013. Total revenue for the HIFU division was EUR8.7 million, $11.5 million in 2014, an increase of 70% over EUR5.1 million or $6.8 million in 2013. We sold a total of 10 HIFU machines in 2014 comprised of six focal ones and four Ablatherm machines. This compares to one focal one and two Ablatherm machines in 2013. Total revenue for the lithotripsy division was EUR18.1 million $23.9 million for 2014 compared to EUR19 million or $25.2 million in 2013. In 2014, we sold 42 lithotripsy machines, compared to 45 in the prior year. Gross profit for the year was EUR11.2 million or $14.8 million and gross profit margin on net sales was 40.6% up from 38.7% in 2013. Full year 2014 operating loss was EUR1.7 million, $2.3 million, an improvement of EUR1 million over an operating loss of EUR2.8 million or $3.7 million in 2013. Operating loss for the full year -- for the year of 2014 included FDA related cost of EUR1.2 million or $1.6 million. Net loss for the full year 2014 was EUR512,000, $676,000 or EUR0.02 per diluted share as compared to a net loss in 2013 of EUR5 million or $6.7 million or $0.24 per diluted share. Net loss in the full year 2014 included a non-cash interest income of EUR1.8 million to adjust the accounting fair value of the outstanding warrants. At December 31, 2014, cash and cash equivalents including short-term treasury investments was EUR12.1 million or $14.7 million. With that, I’ll turn the call over to the operator, who will open the line for questions. Operator?

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

Good morning, Marc. Good morning, Eric.

Yes, good morning RK.

Hope you guys are doing good. I’ve few quick questions, I know on the 510(k) De Novo application you have limited information at this point to tell us, but what I’m trying to understand is, is there some new data that you need to provide or you’ll have all the data, which is just putting together of the application. And the second question within that is for the PMA, you had one of those interim looks by the FDA, the 100-day event or something like that. So do you have something like that in the 510(k) application as well?

No, to answer the first question on new data, we don’t need to at this point to start a new clinical study filed to provide new data. We can use what we’ve got in the ID and as well as what we’ve got in year out to provide clinical data supporting the De Novo petition. And then for the second process on the De Novo is different from the process on the PMA. So we -- as far as we know, we won’t have a 100-day kind of meeting or things like that. It’s a little bit different. It’s all expanding the FDA website.

Okay. Very good. And then congratulations on getting the HIFU device into the Canadian market. I’m sure you're very excited about that, but could you kindly help us understand, how big the Canadian market is, so that we have a feel for the market potential there for Ablatherm or Focal One?

Well the market has two different sizes. Today it's extremely big because it's on top of the United States where the technology is not approved. So it’s an easy way for American patients to go and get and receive HIFU treatment. Then once its approved in the U.S., the Canadian market will be of its size. And again there are a lot institutions there that would be able to use such a technology and it’s the Canadian markets. And again strategically that is important today is that it’s on top of the United States geographically and it has the technology available on both the Ablatherm and the Focal One.

Okay. And then regarding HIFU for liver cancer, it’s a nice extension, but is this the first time that EDAP is looking into liver cancer? I thought at some point, you had done some work in liver cancer and where does that work stand?

That’s still the same research project. It's just that you have different phases and now we are moving into new and more advanced phases of the clinical trial and development of that application.

Okay and the last pieces on Quanta. So, how will this impact your topline and what sort of financial obligations do you have for Quanta and when would we actually see some revenues come in from this relationship?

We just signed the OEM contract with Quanta and I won’t disclose details of that confidential agreement between our two companies but basically again the idea there is to create more synergy and more dynamism in our ESWL range of lithotripters to bring a ureteroscopy solution so that we can really cover everything and every need in the treatment of stone disease. And as far the question is on when can we start generating sales, that we did a prelaunch of that laser and our complete range of stone solutions at the EAU in Madrid and the official commercialization launch will be at AUA in mid-May. So we might be able to start generating revenues in Q2 of this year or in Q3 sorry, after June.

Okay. Thank you very much, Marc.

You’re welcome, RK.

[Operator Instructions] The next question comes from Jonathan Schwartz of Low Tide Partners. Please go ahead.

Good morning, Marc, good morning, Eric and congratulations on all the sales of focal devices.

Good morning.

Good morning Jonathan.

I have a couple of questions, am I correct that the per treatment payment for Focal devices is in the EUR700 to EUR800 range per treatment?

Well that’s -- I don't get your question because that's not the case and these -- the price of the focal pack, which is disposable for each treatment, yes is around EUR800 to EUR900.

That’s what I meant. In other words each time obviously this is for hospitals or clinics that own the focal device, but each time there is a treatment, the revenues to EDAP somewhere in the EUR700 to EUR800, right?

You’re right. That’s the disposable cost.

Yes I wanted to see if there was any way to get some idea about the number of cases from which these hospitals that have acquired focal devices can choose to use Focal treatment as opposed to either some other treatment or watchful waiting? Would you have any idea of the range of numbers of treatments, obviously they’re different at all the hospitals but they are large hospitals and there is a large clinic. Is the range a couple of 100 cases per year or is it more like a 1,000 or 2,000 cases per year? Do you have a sense of that at each of these institutions?

Yes well as you said, we have different types of hospitals from private to public hospitals using Focal One in Europe now and it varies a lot from one to the other. But as a reminder global -- biggest hospitals in Europe or in the U.S. won’t do thousands of treatment per year in total for prostate cancer. It's more about hundreds and again, it really varies as well from one center to the other on the percentage of focal treatment that they would do.

Right. Right.

It's difficult to say.

Anyway, order of magnitude is thousands, is that correct basically with these large hospitals?

No. No I don’t know. In Europe, you might have maybe one hospital or two hospitals that would do more than 1,000 cases a year including all technologies.

I see, okay.

For example, the Institut Mutualiste in France we see which is ranked number one public hospital treating prostate cancer they are I think performing about 500 to 550 cases altogether per year.

All right, that gives me a sense. The second question is about the website, I wonder if you would consider something for the website. As you know the joint venture between Elbit Systems and GE, the company called InSightec, which maybe the most comparable company to EDAP in the HIFU space is valued in their private offerings at about $200 million knows their offerings were sophisticated, private firms are investing. I wonder if you would consider putting a presentation on our website, which includes a comparison of EDAP and InSightec which could show for example the number of patients treated, the number of years the treatments have been ongoing, the number of peer reviewed articles. I’m sure that [Glenn Dean] [ph] and Lee could come up with things like that and others to compare the two. I thought it might be interesting information for EDAP shareholders most of whom may not be aware of InSightec and may not be aware of the comparison, I think the comparison is relevant because InSightec is valued in the space and is valued by sophisticated people like GE which is a partner. Would that be something that you might consider?

We take note of your comments.

Okay.

The thing is that InSightec is more of a HIFU company today for the treatment of uterine fibroids. So, it’s not really comparable to what we do on prostate cancer, but again we take note of that.

Thanks Marc, and then one more question. Is it correct to assume that the cost of FDA follow-up in 2015 will be similar to the cost of FDA follow-up -- FDA work in 2014?

We'll see again. We easily don’t give forward-looking statement Jonathan as you know.

I see okay. Well let me put it another way, are the functions that need to be performed very similar in both years?

Well I would say no, because last year was a full year focused on PMA with a preparation of a panel that is a huge work and extremely expensive and today we're again and in this year we’re going to run in parallel two processes, one is the De Novo Petition, the other one is the amendment on the PMA. So it's going to be up -- in the operations and the work to do is going to be slightly different than in the cost. Again we continue managing costs and [consorting] them as much as we can.

Right I understand, but it sounds as if there’s somewhat less of the extensive work to do in 2015 anyway. Thank you. Thanks Marc.

Thanks Jonathan.

There are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

This is Philippe Chauveau. There being no further questions, I will now close this conference call. Thank you so much for joining us. Talk to you next time.