Edap Tms S.a. (EDAP) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the EDAP TMS First Quarter 2019 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] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Jeremy Feffer. Thank you, you may begin.

Thank you, Matt. Good morning and thank you for joining us for the EDAP TMS First Quarter 2019 Financial and Operating Results Conference Call. On today’s call, we will hear from Philippe Chauveau, Chairman of the Board; Marc Oczachowski, Chief Executive Officer; and François Dietsch, Chief Financial Officer. Before we begin, I would like to remind everyone that management’s remarks today may contain forward-looking statements, which 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 materially from those described in such 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. I would now like to turn the call over to EDAP’s Chairman, Philippe Chauveau. Philippe?

Thank you, Jeremy, and thank you everyone for joining us today. It's been less than one year since FDA approval of our Focal One High Intensity Focused Ultrasound device. We remain focused on building upon the strong sales momentum we've established since that time. With four Focal One product sales in the U.S. so far in 2019 and many more at various stages of the sales cycle we anticipate the remainder of 2019 to be a significant growth year in terms of expanding our footprint for our latest industry leading HIFU technology in the U.S. Let me remind you that in Q1 EDAP’s total revenue were an all time high. At the same time we continue to expand our international presence. We remain convinced about the potential of Focal One to disrupt the current prostate cancer treatment paradigm in EDAP’s favor and believe EDAP is well positioned to deliver strong revenues to our shareholders while offering superior outcomes for prostate cancer patients. With that, I would like to turn over the call to EDAP’s Chief Executive Officer, Marc Oczachowski. Marc?

Thank you, Philippe. Good morning and thank you everyone for joining our call. As Philippe highlighted, so far in 2019 we have sold four Focal One devices in the U.S. including three in the first quarter; Maimonides Medical Center in Brooklyn, UCI Health in California and Houston Methodist, all very highly regarded healthcare institutions. We also sold an additional Focal One unit in the second quarter to University of Chicago Medical Center. We are very excited and pleased to report continued high growth in our HIFU revenues during the first quarter of 2019 compared to the same quarter of 2018. We are even more excited to report that this strong growth comes essentially from U.S. HIFU revenues reflecting the continued enthusiasm and momentum that our latest state-of-the-art HIFU technology is receiving in the U.S. since the clearance by FDA in June 2018. Based on this positive feedback, we are optimistic that this could be the beginning of an inflection point in terms of greater Focal One adoption and market penetration. Just a few weeks ago, we attended the annual meeting of the American Urological Association in Chicago and we could really feel the traction, interest and enthusiasm from the U.S. and international urology community. We organized live demonstrations at our booth with Focal One and all of the 30 minutes demonstration slots were fully booked even before the exhibition hall was opened. We indeed did nonstop live demos during the three full days of the conference. Most prospects attending demos were American urologists and many from teaching hospitals and academic centers. We gathered a great number of new leads and interested potential customers for Focal One in the U.S. Adding to our leadership presence at the AUA exhibit hall we had placed in the official scientific programs a novel presentation by Dr. Eduard Baco from Oslo University Hospital in Norway. Dr. Baco discussed an ongoing randomized clinical trial he is conducting that compared the advantages of Focal One with robotic prostatectomy. Having thought leaders like Dr. Baco speak about the benefits and potential of our technology to an audience of his peers and creating a space at our booth for urologists to come together to discuss Focal One and how it could transform the practices is invaluable for helping to drive awareness and future sales of our product. Finally and to give a full update on our U.S. recent HIFU developments, we were invited to present at last week's American Medical Association's panel about the HIFU CPT code process for reimbursement of the technology in the U.S. There are only two CPT panels a year, this is a very important milestone in the reimbursement process as it has a direct impact on the CPT format and code. We will inform the market very soon as the final meeting minutes are released. But again, being invited to this panel reflects the smooth and ongoing progress EDAP is making in building a reimbursement for its ultimate energy based ablation technology in the U.S. Beyond the U.S. markets we have continued to experience strong momentum with Focal One. In particular, we are continuing to focus on expanding our presence in large markets such as Brazil, where we completed two recent Focal One sales including one in the first quarter of 2019. Mirroring what we are seeing in the U.S. our sales pipeline continues to grow in three ex-US territories and we look forward to announcing future deals. Back to our Q1 results and based on the successes and strong sales in our HIFU division and more specifically in the U.S. we also further improved our gross margin profits on total net sales. As discussed in the past, the HIFU division of the company generates a much higher level of gross margins than the UDS division. The HIFU expansion is a strong growth driver in our gross margin rate improvement, which was driven by our solid HIFU performance again in the first quarter. This led to another profitable quarter for EDAP. Our goal is to continue to improve these metrics and further enhance our profitability as the mix of HIFU to overall revenues continues to grow. As such, we are focused on selling additional Focal One units to leading institutions in key territories across the U.S. We are pursuing several opportunities currently and though the sales cycle for these type of novel technologies is long as we anticipated, we remain encouraged by the high level of interest and motivation we're seeing from urologists and treatment centers to add Focal One to their practice. We believe we are well positioned to continue to gain traction in line with our projection. We look forward to providing further updates as we complete additional sales of Focal One in the U.S. François will detail our Q1 financial results in a few minutes, but first I will provide an update on our development activities which represent the key aspects of our long term growth strategies. HIFU is the most advanced ablation technology available and we remain focused on developing this technology. With HIFU continuing to gain recognition among surgeons and with the enhanced awareness of the Focal One system since getting FDA clearance for prostate tissue ablation one year ago, we are focused on developing a HIFU platform to serve multiple ablation indications. We are planning to initiate a multicenter Phase 2 study on Focal One for the treatment of rectal endometriosis and we are also planning a Phase 2 study using a perioperative HIFU prototype to treat liver metastasis. This is an important area of focus for EDAP and we are dedicated with establishing the clinical utility of HIFU for these high need indications. Not only will we be able to offer new treatment option for patients, but we will further expand our positions as the global leader in minimally invasive therapeutic ultrasound. Before I turn the call over to François, I would like to quickly address our lithotripsy business which was a little bit slow during the first quarter of 2019. As discussed in the past, this business is also [based] [ph] on long sales cycle and a quarter does not reflect the trend of the business. We remain confident on our core business consistency and [indiscernible] yearly supplements. And now our CFO, François Dietsch will provide a review of our financial results. François? François Dietsch: Thank you, Marc and good morning everyone. Please note that all figures except for percentages are in euros. For conversion purposes, our average euro/dollar exchange rate was 1.1363 for the first quarter of 2019. Total revenue for the first quarter was €10.1 million, an increase of 10.6% versus €9.2 million in Q1 2018. We are seeing a new weaker level for first quarter. Our HIFU division generated sales of €3.9 million representing an increase of 58.6% versus Q1 2018 HIFU sales of €2.4 million. During the quarter, EDAP sold four Focal One devices including three in the U.S. versus one Focal One during the same period of 2018 and we recorded a 19.5% increase in HIFU treatment revenues. For our UDS business, Q1 revenue of €6.3 million was up 6.3% versus the first quarter of 2018 UDS revenue of €6.7 million. We sold 4 Lithotripsy devices in the quarter versus 8 in the same period last year which drove the increase. Gross profit for the first quarter of 2019 was up 21.3% to €4.9 million from €4 million in Q1 2018. Gross profit margin on net sales was 48% in the first quarter of 2019 compared to 43.8% in the year-on-year period. The increase of 4.2 percentage points year-over-year was driven mainly by the increase of the HIFU activities which has better margin. The 21.3% increase in year-over-year gross profit was second consecutive quarter of profitability. The operating profits for the first quarter of 2019 was €0.2 million compared to an operating loss of €0.4 million in the year ago period.net income for the quarter was €0.3 million or €0.01 diluted earnings per share 258% increase versus net income of €0.1 million or €0.00 per diluted share in Q1 2018. It needs to be highlighted that following expiration of [indiscernible] 2018 there is no marked share value adjustment impact on net income in Q1 2019, whereas a non-cash interest income of €0.6 million was reported in Q1 2018 to address the accounting share value of the outstanding warrants. Lastly, we finished the first quarter of 2019 with a strong cash balance of €18.6 million or US$20.8. And I'll now turn the call back to Marc.

Thank you, François. In summary, we believe that our continued momentum in early 2019, the high growth of our HIFU revenues in Q1 2019, the second consecutive quarter of profitability that we received for EDAP and our current sales activity create a strong platform for future growth. We are still in the early stages of commercializing Focal One, but the positive feedback we continue to receive from urologists for this novel technology continues to be encouraging as we focus on growing this franchise in the U.S. and key markets around the world. Again, we are very happy about the great performance we achieved in Q1 with over 60% growth in our HIFU revenue and a profitable quarter. I will now turn the call to question-and-answer. Operator?

Great, thank you. [Operator Instructions] Our first question here is from Walter Ramsley from R-Squared. Please go ahead.

Good afternoon, thank you for taking my question. Could you break out the revenue for the quarter between U.S. sales and the rest of the world?

Well, we can't, I mean we don’t have here [disclose] [ph] the breakdown of the sales, but we have the overall revenues from the…

Well, okay, the revenues, I'm sorry, yes, overall revenues.

Yes, the overall revenues, I mean I'm not, again we don’t have them separated by geographic area, it's more by division for UDS.

Okay, in that case do you have an estimate of how much the currency impacted the results?

You mean if we had some exchange loss or gain in the quarter? That's your question?

Okay, yes. Just, you know, also how it affected the costs and the revenues. If that was, like if [indiscernible] …?

Yes, I don’t think it is very significant and also you have to understand that we also sell in Asia like in Japan, so the number or the figure we might give you on exchange gain or loss will also include the exchange rate fluctuations between euro and Japanese yen as well as in U.S. dollars, so I don’t think it is very relevant. But just, [indiscernible] your question I mean we had a very strong increase in the distribution of our revenue coming from the U.S. again driven by the number of sales we did in Focal One in the U.S. in Q1.

Right, the reimbursement in the United States, could you take a minute and describe where that process stands and when you expect to get Medicare reimbursement and private insurance, when that might come to fruition?

Absolutely and that's a key point and I think I spoke about it during the first part of the call today, but just to repeat, and as I said we were invited last week to the AMA CPT panel which is again only twice a year panel, so it's good to be on that one. As I said in the past, we submitted our file to the AMA beginning of this year, so we were very quickly put on the panel without waiting to be on that panel, on the second panel of the year which is usually in October and that panel will decide based on the submission [review] [ph] the code that will be given to our technology. So that panel was held in Chicago last week. The vote is confidential so we don’t know the vote and we will know the vote probably in the next weeks or month once the minutes are released by the AMA. So we will communicate on that. The next step after that will be the establishment of the CPT code probably by the end of this year and then once the CPT code is given by AMA there will be some work on giving a value to the code and usually it takes around a year to do so. So the expectation is that we might be able to have the code by the end of this year and the value of the code by the end of next year to have a full CPT code in place, it could be in the beginning of 2021. And once you have the CPT code you can start negotiating with private payers and so forth.

Okay, excuse me, that sounds good. If there are other questions lined up I will get off, if not I have two more. Is there anybody else waiting to ask questions?

Yes, I think we have one more questions from Walter.

Okay, in that case, the lithotripsy business it was somewhat down in the first quarter but you said that was temporary for the full year, do you see that increasing what 5% to 10%.

Well, we'll see that, that's usually what we've seen in that part of [indiscernible], but it is pretty consistent and as a model growth, so again we're just at the beginning of the year. As I said a quarter does not reflect the entire year and we have a strong pipeline of projects and prospects, so we remain confident.

[Operator Instructions] The next question here is from Brooks O'Neil from Lake Street Capital Markets. Please go ahead.

Bonjour Marc, thank you for doing the call in English. I took French in college but that was a long time ago and I didn’t do very well.

Hi, hey Brooks.

So following up on one of the questions you were just at, obviously there'll be a period of time here before you get CPT code and let's call it official reimbursement here in the U.S., but can you talk about the economics of the system from the perspective of U.S. hospital operators and U.S. doctors as you see it today and why you think there might be fairly rapid adoption of the machines and use of the machines here without formal reimbursement code?

Yes, that's a good question Brooks and indeed I mean as people would probably remember we have today, we've been given my Medicare a temporary code that's called a C-code and we also have private out of the pocket paying patients and the business case is pretty simple as only a few patients a month, from using the C-code and another few from the private basis will make the machine profitable at the hospital level. So basically today, and I think we, today it is very easy to breakeven on the investment and return on investment and actually two years ago of the Houston Methodist Hospital, the administration of hospital did an article explaining on how could you get back on your investment for HIFU device in less than two years. So basically and they were doing around 30 to 35 patients a year, so basically with 30 to 40 patients volume on a machine per year you can get back your cash with less than two years and the operational profitability is reached very quick.

So you are saying a hospital could earn high return or reasonable return on investment if they just see three patients a month?

Yes, on the current structure of reimbursement and payments.

And is it possible for a doctor to be reasonably well reimbursed for his time in using the machine today as well?

Sure, it's a little bit more complicated than doing these kind of claims using a CPT code but they can use an unlisted code and get reimbursement that will be about the same - and get reimbursement that will be about the same level of other treatment or they can also privately deal, with most of them do today.

Just my other question is, is it your plan to target the academic teaching hospitals here in the U.S., the 100 or whatever it is, largest ones, or are you thinking you might be able to find a market also in the, let's call it, the community hospital market here too?

The goal is really to continue the strategy in targeting teaching hospitals and academic centers for two main reasons, one is that they have the investment capability and most of the time they also want to be first in getting the new technology and offering it to their patients and second it also part of our strategy in terms of quality of treatment potential registration of the database from those centers, so they have to be organized to do so. So for that two reasons our focus and targets remain some teaching institutions.

Perfect, great, congratulations on the progress, keep it up.

Thank you, Brooks.

Our next question here is from Matthew Pilkington from Strategic Credit Concepts. Please go ahead.

Hi Marc.

Hey Matt.

How are you?

Good.

A couple of questions, first one is could you go over the – other uses, I think you mentioned breast cancer and liver cancer and you were saying Phase 2 trial on the liver cancer? And the second question would be on whether you are going to bring back your mobile unit or whether that's going to be, you are not going to do that anymore?

So to the first question, yes indeed I said that the intention from the company this year is to get started on Phase 2 trials for both rectal endometriosis and liver metastasis and then for the mobile we continue to provide mobile services or mobile provider on the other term, the first generation, but for the same reason as I explained to and I answered to Brook's questions Focal One will remain on with a focus on being sold to six institutions and teaching hospitals.

Great, okay that answered my questions, thank you.

Thanks Matt.

This concludes the question-and-answer session. I'd like to turn the call back to management for any closing comments.

All right, thank you everyone for attending our call today and again we're very excited by the strong progress we've made during Q1 with very high grossing or HIFU revenues and profitability for the overall company. Talk to you again soon and looking forward to hosting the next call very soon. Bye-bye.

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