Edap Tms S.a. (EDAP) Q1 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the EDAP TMS First Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Jeremy Feffer, Investor Relations. Please go ahead, Mr. Feffer.

Thank you, Jerry. Good morning, and thank you for joining us for the EDAP TMS First Quarter 2020 Financial and Operating Results Conference Call. On today's call, we will hear from Marc Oczachowski, Chief Executive Officer and Chairman of the Board; 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 and Chief Executive Officer, Marc Oczachowski. Marc?

Thank you, Jeremy, and good morning, everyone. As we continue to grapple with the global COVID-19 pandemic, we hope all of our listeners are safe and healthy. We appreciate you taking the time to join us this morning. I will start with a brief operational update and then turn the call over to François Dietsch, our CFO, to review our financial performance. Despite the impact of the pandemic on our operations, we made solid progress advancing strategic projects for the company. First, as announced this week, we finalized a worldwide exclusive distribution agreement with Exact Imaging for the company's micro-ultrasound technology. This is a significant addition to EDAP's product portfolio and adds significant growth potential to our distribution business. It also fits perfectly with our Focal One HIFU device and will definitely help further its expansion and adoption in targeted prostate tissue ablation. Let me quickly introduce this unique technology and its great potential. The ExactVu device is an ultrasound-based imaging system that can operate and be used the same way as a standard ultrasound, but it also has the unique capability of operating at a very high frequency of 29 megahertz. By comparison, standard systems used in urology usually operate at frequencies between 7 and 9 megahertz. This micro-ultrasound resolution is comparable or better than MRI and represents 300% improvement over conventional ultrasound. Similar to MRI, it allows urologists to visualize and look at suspicious regions within the prostate and target biopsies in real time. Using this technology, urologists can see details that evade other imaging modalities. In an 866-subject study at 9 clinical sites, ExactVu demonstrated sensitivity of 95% for clinically significant prostate cancer as compared to 89% for multiparametric MRI. Exact Imaging's technology also includes a solution called FusionVu. Where an MRI is required, FusionVu allows for the quick import alignment and targeted - targeting of MRI-identified lesion. After the MRI image is imported, ExactVu with its 70 micron real-time resolution allows for very precise targeting that would otherwise not be available to most physicians. Using FusionVu or simply using the real-time micro-ultrasound technology, urologists will use the ExactVu system to perform targeted biopsies where the transrectal or transperineal to confirm with a high success rate in suspicious lesions seen on the image. The beauty of the concept is that in only one device, the physician gets a conventional ultrasound imaging system, an MRI fusion system, a guided biopsy device and a unique micro-ultrasound device that allows for diagnosis and targeting similar to MRI. Additionally, the urologist will control the entire workflow without the need to spend time, effort and money, transferring patients and patient data between the urologist and the radiologist. Thanks to ExactVu, the urologists will maintain full control of his or her patients during the diagnostic process in an office-based setting. As I said earlier, in addition to being a great stand-alone device, ExactVu perfectly complements our Focal One HIFU technology. ExactVu offers all of the steps and procedures that need to be done prior to a prostate treatment. Prior to treating patients, the urologist needs to localize, identify and look at the suspicious area, confirm the suspicion via biopsy and [indiscernible]. ExactVu's high level of definition and ability to target biopsies in real time or via image fusion will provide the urologists with a great degree of precision to establish his or her focal ablation strategy. By combining our two technologies into a single complex offering, EDAP will be the only company on the market to offer a urologist a complete solution for focal prostate cancer management with full autonomy and capabilities from diagnostics to treatment. This type of complete care will also be extremely attractive to patients with prostate cancer as this represents the most noninvasive way of managing their disease by using diagnostics to eliminate unnecessary biopsy procedures and allow for a very precise noninvasive HIFU ablation of the suspicious and diagnosed region of the prostate. ExactVu is supported by a distinguished and growing list of key opinion leaders at renowned health care institutions, including Cleveland Clinic and Johns Hopkins, among many others. There are approximately 72 installations globally, of which 24 are in the United States. We therefore see opportunity to sell Focal One into hospitals that already employ ExactVu and vice versa. Last but not least, in addition to distributing Exact Imaging's products, we also see opportunity to bring on some Exact's sales and marketing personnel to ensure smooth transition and continue our expansion. Needless to say, we are extremely excited to have entered into this distribution agreement, and we are eager to approach both current customers and the sales pipelines of both companies with an integrated end-to-end urology solution. We look forward to providing the next update during our next conference call. I would like to spend some time now on the recent strategic decision we made that we believe will best position our company for long-term growth. As we announced in our press release last night and after an extensive review of our different businesses, including HIFU, distribution and lithotripsy, we have decided to strengthen and refocus our development efforts towards HIFU for both prostate applications and beyond. As part of this initiative, we will be revisiting our lithotripsy R&D investment strategy, including the discontinuation of our ENDO-UP platform, which has been delayed for many reasons, including technical and supply chain challenges, regulatory hurdles and the ongoing COVID-19 crisis. Based on recent trends, we believe it is important to shift and narrow our R&D focus and marketing towards HIFU and distribution as these have shown strong growth and have the potential for continued growth and higher-margin contribution. Importantly, our lithotripsy business generates revenue and significant and steady cash flow for the company, and we intend to sustain this cash flow by continuing to sell and support our state-of-the-art Sonolith range of devices. But given the opportunities in HIFU that are in front of us and our technology leadership position, we believe now is the right time to pivot more fully toward the business and to accelerate HIFU expansion. As I said, we are not abandoning the lithotripsy business altogether, but we will be narrowing our focus on other opportunities that we deem to be more promising. Turning now to the results. We were able to sustain the momentum that carried us through 2019 into the first quarter. However, as we indicated during our fourth quarter conference call in March, we expected and are now seeing decreased lithotripsy and HIFU treatment activity as a result of the ongoing COVID-19 pandemic. Not only does this affect our pipeline of potential machine sales, but also our recurring consumables business that is driven by Focal One procedure volumes. But as we have stated before, our sales cycles are long, and we expect that sales projects currently in process may be delayed but eventually completed. We are optimistic that this short-term impact will not affect our pipeline of projects nor the long-term momentum of market adoption of HIFU and its numerous benefits for patients, most notably quality-of-life preservation. We have been actively working with and communicating with key pipeline stakeholders through webinars and online training sessions that were very well attended by urologists as well as our global network of agents and distributors. This has been extremely helpful in maintaining our pipeline and has even added some new prospects along the way. There are signs in certain European markets of an easing of restrictions that were put in place during the pandemic. If this continues, it would be very good news for us as we have maintained in inventory several devices and accessories that are ready to ship. Hospitals and staff who just a short time ago were dedicated 100% to fighting COVID-19 will once again be able to perform more elective procedures and evaluate new technology. On another note, we've done our best to protect and keep safe our employees around the world, providing them ability to work remotely and have the necessary equipment to be effective and quickly addressing the needs of both customers and partners. We also have organized our manufacturing operations, so that we could create a high level of inventory before the worst of the crisis. Notably, as restrictions are gradually being loosened in France, we have partially resumed manufacturing activities at our French factory with all possible safety precautions in place. We believe we are well positioned to resume delivery activities as soon as that becomes possible when a more normalized business environment prevails. I would like to reiterate that we have a strong cash position, which will help minimize disruption to the extent possible and allow us to successfully navigate through this crisis. And now our CFO, François Dietsch, will provide some further details on 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 $1.1033 for the first quarter of 2020 and $1.1353 for the first quarter of 2019. Total revenue for the first quarter of 2020 was €7.6 million, a 24.9% decrease compared to €10.1 million for the first quarter of 2019. First quarter 2020 revenue reflects the impact of the ongoing COVID-19 pandemic on both procedure volumes and equipment sales. Total revenue in the HIFU business for the first quarter of 2020 was €1.9 million, a 50.2% decrease compared to €3.9 million for the first quarter of 2019. The year-over-year decline was due to no Focal One unit sold during the first quarter of 2020 compared to four sold in the year ago period. Total revenue in the UDS division for the first quarter of 2020 was €5.7 million, a 9.2% decrease compared to €6.3 million in Q1 2019. Gross profit for the first quarter of 2020 was €3.1 million compared to €4.9 million for the year ago period. Gross profit margin on net sales was 40.2% in the first quarter of 2020 compared to 48% in the year ago period. The decline in gross profit year-over-year was mainly due to lower sales in HIFU business as compared to the year ago period. Operating loss for the first quarter of 2020 was €1.5 million compared to an operating profit of €0.2 million in the first quarter of 2019. The financial impact related to discontinuation of R&D lithotripsy programs is under evaluation and will be reflected in the future quarters. Net loss for the first quarter of 2020 was €1.3 million or €0.04 per diluted share as compared to a net income of €0.3 million or €0.01 per diluted share in the year ago period. Finally, we finished the first quarter with a very strong cash position of €18.5 million. And we now turn the call back to Marc.

Thank you, François. Again, we are very proud of our team for maintaining their drive and dedication during the worst of the pandemic, and we remain very optimistic about the opportunity to drive significant commercial adoption of the Focal One HIFU. The processes that we quickly put in place when COVID-19 emerged are serving us well as we are continuing to provide uninterrupted support to current customers while at the same time, engaging in whatever outreach is possible to continue to build the pipeline. We wish for everyone's health and safety during this very challenging time, and we'll continue to focus on supporting our employees and customers. We look forward to providing you with our next quarterly update in August. We will now open the call to your questions. Operator?

[Operator Instructions]. The first question is from Andrew D'Silva, B. Riley & Company.

Yes. I'm glad to hear everyone sounds well. Just to start ex U.S. in areas that have started to reopen, has there been a change in the cadence for your ability to obtain sales traction relative to while the lockdown was maybe fully implemented in those countries? And have you been able to sell any HIFU systems year-to-date even outside the first quarter or is that just unrealistic to assume with the current COVID-19 environment?

Andy, good to hear you're good, too. Actually, we can see some beginning of activity in some countries in Europe, but that's very recent. And that has been translated by people starting back to use the technology to treat patients and to, like I said, start back doing some elective procedures. So we see our mobile business in Europe, like in France and Germany, getting back into operations with some session reservation and treatments as well as we can see also some of our customers getting back into operation, but that's very slow and progressive. In terms of the sales process, it is still very difficult for the sales team and the sales force to move around as the restrictions are still pretty tight in terms of traveling and also in terms of meeting people from the administration or purchasing departments in most of the hospitals in most of the countries. So we can feel the activity starting back because people are starting to use their equipment and do something else than only focusing on COVID-19 in the hospitals. But in terms of selling devices, closing deals, it's still a little bit early to have access to the full stakeholders in the sales process.

Okay. No, that's completely understandable. And then can you just give an update, if any, as it relates to CMS? Have you heard anything on timing? I'm just curious you're still expected to have draft guidance in early summer. I know they've had to pivot and work on things like telehealth a lot more than initially expected, but wasn't sure if that changed. Any timing assumptions on what they're working on for HIFU?

Well, so far, we've got no news. I mean, we know that there is no change in the usual agenda of releasing proposed rules. So we're still expecting to get some proposed rules in July, which is the normal slot for the OPPS proposed rules. And we know that they are starting to release some other information in other divisions. So it looks like they're online and on time. They have not delayed any sort of release.

Okay. Great. And just as it relates to the R&D pivot in the UDS segment, how important has innovation been historically, given how mature the market is and that a lot of it is related to replacement cycle that you have going on right now? Does new technology platforms or integrated systems or anything like that really matter because I was initially thinking of ENDO-UP in kind of that fashion? But I'm curious, just historically, if there's been an uptick whenever new platforms or additional innovation has taken place?

I'm not sure I get your question exactly, but what's important here, and as you know and as we've announced, I mean, we have a lot - I mean there are a lot of great and highly potential projects with HIFU, including platforms as well. I mean, the concept of the EDAP [indiscernible] we are speaking about for a number of times and months. And we really want - the idea here is really to focus on all those new market, new application - new potential application that we could develop on HIFU and really put all of our resources on that, so that we can move that forward as quickly as possible.

Basically, all I was asking as it relates to ESWL innovation as you create new platforms, historically, has that been able to drive revenue in your opinion? Or is it dominated really by the replacement market at this point and new technology [indiscernible].

Yes.

Okay. Perfect. Perfect. That makes sense. And then just my final question. In the United States, right now, we have the CARES Act and along with that, came the Paycheck Protection Program. Are there any similar sources of funding you're able to access right now as well in France? Or are you able to utilize anything like that in the U.S. since you do have operations here?

Yes, absolutely. We've requested to get some benefit from the PPP program. And actually, we've been approved. So now we're waiting for the process - the administrative process of that. And they are similar, subsidized and helps that we can get in France, and we are in line as well. We're on that program as well as in Germany. In most of the places where we have operations, our financial and administrative teams are making sure that we can get all the protection and the subsidies that are given.

We have a question from Sean Lee, H.C. Wainwright.

So my first question is on the agreement with the Exact. So my understanding was that they previously had an internal direct sales team handling the sales, at least in the U.S. So would all that be discontinued or is that some sort of a transition period where two of you will co-promote the products? How is that handled?

So actually - and I don't want to speak on the name, but what we concluded is an exclusive worldwide distribution agreement. So basically, the EDAP's sales force agent or distributors and marketing team will distribute and market their products everywhere in the world. And we'll try to give them the most benefit of our strong and again, global network of sales. We will also provide service and application for them. So that's the agreement we have.

I see. And in the call, you mentioned that there are 74 installed devices already globally and - with 24 in the U.S. I was wondering how much overlap are there between their devices and HIFU?

There's no overlap at all between that technology and the HIFU. That means - if not, they would be competing. But they are extremely complementing, as I explained. I mean, the imaging - the Exact Imaging part is really the diagnostic part and HIFU is the training part. And that - putting those 2 technologies together, again, brings a global and complete offering and end-to-end solution from diagnostic to treatment in prostate cancer, and most importantly, in focal approach of managing prostate cancer. So that's a perfect complement, as I would say. And in the [indiscernible] installation that they currently have developed around the world, mainly in Europe and in the U.S., some of them are already using Focal One and some of those are not. So that's why it's also a very quick sort of opportunity to get to those accounts that are not yet using our technology or vice versa. Like I said, I mean, all the centers where we have Focal HIFU, it's also sort of an easy reach for us to offer them that new and very promising technology for diagnostics.

I'm sorry, I wasn't being very clear initially. By overlap, I meant the - in the installed base, but you did answer that question. So thanks for the additional color. And my final question is on the sales side for the HIFU in the COVID pandemic. With the hospital budgets likely to be under stress for much of the year, is the company considering alternative strategies like additional financing options or such things to help alleviate the impact?

Well, we have already in place a number of different options and business models, as you know, from the capital sale to leasing, going through mobile use, paper use and these kind of things. So we'll indeed continue to offer all those models. And we'll also work very closely with the hospitals, but it's too early to say if - what decision has been made at hospital level in terms of budget utilization and needs, but we'll follow that very closely.

There are no further questions at this time. I'd like to turn the call back over to Mr. Marc Oczachowski for closing remarks. Please go ahead, sir.

Thank you, Operator. And again, thank you, everyone, for attending the call today. Stay safe, take good care. And we'll definitely keep you posted on the developments. Thank you. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.