Edap Tms S.a. (EDAP) Q2 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the EDAP TMS Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Mr. Glenn Garmont, Investor Relations. Please go ahead, sir.

Thank you, Hector. Good morning and thank you for joining us for the EDAP TMS second quarter 2021 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 Francois 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 the 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 CEO, Marc Oczachowski. Marc?

Thank you, Glenn, and good morning, everyone. I will start by providing a brief operational update and then turn the call over to Francois Dietsch to review our financial performance. I'll recap a few of the highlights that we covered in our pre announcement press release of August 4. Total company revenue for the six months ended June 30 was EUR20.7 or $24.8 million, representing growth of 22.5% over the first six months of 2020. And while our HIFU division continued to be negatively impacted by the ongoing effects of the COVID pandemic on hospital CapEx trends, we were very pleased to see US treatment volumes increase a very healthy 79% over the second quarter of 2020. This is important for two reasons. First, the growth in the US treatment volumes is very noteworthy because it is a leading indicator of growing adoption by urologist of Focal One HIFU as a prostate cancer treatment alternative. Second, we believe this growth in US treating volume reflects the positive impact of HIFU reimbursement rules that went into effect on January 1 of this year. Recall that CMS in its Physician Fees Schedule final a rule established for the first time with payment to physicians performing the highest procedure in the US. Regarding the rule, CMS has set a total relative value unit for RV use for a physician performing a HIFU procedure at 29.09. This translates to an average payment of $996 for urologist performing a HIFU procedure on a Medicare patient in a facility setting. As a reference, a comparable established minimally invasive therapy for prostate cancer Cryotherapy, the odd at 22.72 RV use, which translates to $786 for the urologist under the same setting and patient conditions. So HIFU can significantly broaden the revenue base of urologist treating prostate cancer patients. And we believe this new rule will be a meaningful long- term catalyst to accelerate the Focal One adoption. And on the topic of reimbursement, I would like to share with you a recent update that could very positively impact reimbursement rates in 2022 and beyond. Earlier this week, we requested and were granted an opportunity to present at the summer meeting of the CMS advisory panel on Hospital Outpatient Payments or HOP panels. The HOP panel is a mechanism whereby CMS brings together a group of subject matter experts to consider and discuss changes to current reimbursement rates for specific outpatient procedures or technology. Recall that on the hospital payment side, HIFU is currently reimbursed as a level five neurology Ambulatory Payment Classification or APC. This translates into a payment for a hospital performing a HIFU procedure on a Medicare patient of around $4,500 in 2021, as a national average adjusted locally based on the wage index. However, based on the analysis of the reimbursement paid for other prostate cancer ablation procedures including cryo surgical ablation, we believe there is a strong argument to be made for level six APC reimbursements for Focal One HIFU. For the sake of comparison, these HIFU were reimbursed at level six this year, the average reimbursement would increase from approximately $4,500 currently to approximately $8,500, a huge increase of nearly 88%. This is important because the lower reimbursement for facilities limits how broadly phototherapy may be offered to the full range of Medicare patients. At the meeting, which occurred this past Monday, the HOP panel voted unanimously in favor of the increase. And while the final 20.2 rule will not be published until November of this or December of this year, it is worth noting that CMS has historically given the HOP panel's recommendations very strong consideration. If we are successful in moving our APC classification to level six from the level five next year, we believe this will be a significant driver for many more hospitals to initiate a Focal service program. The financial analysis of requiring a Focal One machine and offering the critical benefits to a broader patient population becomes much stronger. We are very excited and hopeful that this potential change and look forward to progress later this year. Not withstanding the challenging CapEx environment during the second quarter, we continue to add to our robust pipeline of Focal One and ExactVu pipeline sales opportunities during the quarter, and we believe several of these --. Over the past few months, we have added tier healthcare institutions that are growing Focal One roster, including Cleveland Clinic and Mount Sinai in New York, among many others. These are not of all leading institutions in the treatment of prostate cancer and are increasingly becoming reference centers with teaching, research and case observations now available for pipeline accounts. We look forward to updating you on the growth and development of for Centers of Excellence for Focal One in the coming months. We believe that the eventual return of the hospital CapEx to more normalized trends, coupled with continued growth in treatment volumes, bodes well for the future for our company as well as the hundreds of 1000s of men around the world who could potentially benefit from this treatment. Turning now to other highlights from the quarter in June, we announced the hiring of med tech industry, veteran Ryan Rhodes to be Chief Executive Officer of a US subsidiary. Ryan brings a wealth of highly relevant experience, including 14 years of Intuitive Surgical, where he played a leading role in the global clinical extension of robotic surgery multiple specialties, including urology. The addition of Ryan reflects the continued execution of for US expansion plans; he will be instrumental in helping to drive continued growth and adoption of our technology. Ryan has already started assembling a world class team around him by adding medtech leaders that will be instrumental in building high production and utilization in the country. One of them is Mohan Nathan, who has an extensive background in the medical device industry including many years in global clinical and marketing leadership roles as Intuitive Surgical in TransEnterix. Mohan will play a major role at EDAP developing our clinical and marketing adoption program. To fund our growth initiatives in the US and elsewhere in April, we completed a successful financing that raise gross proceeds of approximately $28 million. Together with cash on hand, we ended the second quarter with a cash of more than $53 million. As we discussed last quarter, this financing was strategically important for several reasons. First, it brought a number of new high quality institutional healthcare investors into the fold. These investments procure only after a significant amount of due diligence has been done. And the investors who participated in this offering did so because the share our belief in the potential of HIFU not just as part of the prostate cancer continuum, but potentially other indications as well. We believe this validates our mission and our technology. The funds that we raise will support our US expansion plan specifically our efforts to expand market access and increase the HIFU adoption and utilization. We previously announced that we are working with leading US reimbursement consultancies MTP and argenta advisors to expand market access and coverage. And this reflects our broader commitment to establish ourselves as a leader in the US market making HIFU technology as broadly available to patients as possible. We also have sufficient capital to build out our clinical marketing and sales organizations. I believe that these initiatives together with the hospitals and KOLs, who are ready champion of technology on the ground, will present a new different approach designed to maximize awareness and access to our HIFU technology. I will provide a brief update on our Endometriosis program. As a reminder, this Phase II study will enroll a total of 38 women across five major hospitals in France will be assessed over a six month follow up period. Investigators will evaluate the safety and efficacy of HIFU for this fatality. Enrollment is tracking closely with our internal expectations. And we expect to treat the last patient by the end of this month, which is in two or three days. We also received authorization from the French Health authorities to continue enrolling patients after we achieve our initial enrollment targets of 38 patients to further strengthen this Phase II study and collect more safety and efficacy data. We believe the treatment of Endometriosis could be greatly improved as the application of less invasive procedures and the use of HIFU technology could offer an important minimally invasive treatment option for these patients. And now our CFO, Francois Dietsch will provide some details of our financial results. Francois?

Thank you, Marc, and good morning, everyone. Please note that all figures, except for percentages, are in euro. For conversion purposes, our average euro-dollar exchange rate was 1.2024 for the first second of 2021. Our total company revenue for the second quarter of 2021 was EUR 10.4 million, an 11.8% compared to the revenue of EUR9.3 million over the same period in 2020. Looking at the revenue by region, total revenue in the HIFU business for the second quarter of 2021 was EUR 2 million, a decline of 21.8% as compared to EUR 2.6 million for the second quarter of 2020. The decline was driven primarily by continued weakness mostly toward CapEx spending as much as -- did to earlier. Total revenue in the LITHO business for the second quarter 2021 was EUR 2.3 million, a decline of 22.6% from EUR 2.9 million for the second quarter of 2020. As for HIFU the decline was driven by continued weakness in hospital CapEx. Total revenue in the Distribution business for the second quarter of 2021 was EUR 6.1 million, a 61.6% increase compared to EUR 3.8 million for the second quarter of 2020. Same to the exact making and less of sales development. Gross profit for the second quarter of 2021 was EUR 4.2 million, compared to EUR 4.3 million for the year-ago period. Gross profit margin on net sales was 40.7% in the second quarter of 2021, compared to 46.8% in the year-ago period. The decrease in gross profit year-over-year was due to lower sales effect on fixed cost and HIFU business. Our operating expenses were EUR 4.6 million for the second quarter of 2021, compared to EUR 4.0 million for the same period in 2020. The operating loss for the second quarter of 2021 was EUR 0.4 million, compared to an operating profit of EUR 0.3 million in the second quarter of 2020. Net loss for the second quarter of 2021 was EUR 0.4 million, or EUR 0.01 per diluted share, as compared to a net loss of EUR 0.2 million, or EUR 0.01 per diluted share in the year-ago period. At the end of June 30, 2021, we had cash and cash equivalent of EUR 45 million or $53.3 as compared to EUR 24.7 million or $30.2 million as of December 31 of 2020. Including in our June 30 future finance is net proceeds of approximately $25.7 million from the secondary offering of ADS that we completed in -- reflecting the offerings the number of outstanding shares was approximately 33.4 million shares at the end of June 2021. And we now turn the call back to Marc.

Thank you, Francois. In summary, we are pleased with our second quarter results against a difficult hospital CapEx environment. Through the first six months of the year, we increase revenue 22.5% over the comparable period in 2020, demonstrating that we are successfully navigating through this crisis. In addition, we carefully and successfully managed our gross margin and operating expenses to keep the company near breakeven. At the same time, we continue to build our US pipeline and we remain optimistic that we will announce additional sales and key placement very soon. We also anticipate the treatment revenue growth will accelerate, as we saw with the positive momentum utilization during the first half of the year, and this should be strengthened by a new US --and resources. The most important leading indicator US treatment volume increased 79% year-over-year reflecting growing awareness of HIFU as well as the positive impact of the new reimbursement rules that went into effect in January. Finally, we are very, very excited about the results of this week's meeting of the CMS HOP panel and positive and favorable recommendation towards the upgrade from APC level five to level six of HIFU reimbursement $4,500 to $8,500. Again, and if reimbursement for HIFU is upgraded to level six next year, this will represent a significant increase in dollars to hospitals performing Focal One procedures. And we believe drive accelerated machine placement in the future. All-in-all, I believe we are very well positioned to establish ourselves as the leader in the non invasive and focal ablation of prostate tissue. I would like to thank you for your interest and support. We will now open the call for your questions. Operator?

[Operator Instructions] Your first question comes from line of Frank Takkinen with Lake Street Capital Markets.

Great, thanks for taking my questions. Couple for me this morning. I wanted to start with the reimbursement change. I was just hoping you could give us a little bit more background and why it was previously categorized into level five. And the more specific justification to get it to a level six. And then although I am very excited and can completely appreciate the jump up here. Is there opportunity to increase the reimbursement even more from the level six reimbursement level in future years?

Hi, Frank. Well, thanks for the question. Well, actually, the level five reimbursements were given by Medicare some years ago after it was studied on with -- on the level of six. And then after the first claims that were made by users of the HIFU technology one year or two years after they decided to put it to level five based on the average amount claimed. So that's why we spoke about that in today's call. We also initiated some programs in educating hospitals and users to properly claim their HIFU treatment to Medicare. And we have significantly increased and improved that average amount to be claimed. That will also be a justification of upgrading the APC from level five to level six. And that's what we've been discussing with CMS as well as the HOP panel at the beginning of the week.

Got it, okay. That's helpful, wanting to move over to capital budgets a little bit more. Heard your comments about potentially announcing some key placements very soon. I was curious if you want it -- if you could help us understand how conversations are going as of recently, I know there was an expectation for a second half bolus of placements similar to what happened last year. Do you still think that that's something that could be occurring this year? Or do you feel there's maybe a little bit more conservatism cautiousness, whatever you want to call it in CapEx budgets right now?

I think we're about in the same situation as last year where although seasonality of this type of business has been even increased, because of the current lack of visibility in the COVID context. And we really hope that like last year, a lot of people who will like to spend budgets anyway before the end of the cycle, which is the end of the year for the majority of hospitals. And as far as the discussions are going I mean, we are being very, very regular frequent discussions with administration's purchasing departments and legal department, in a significant number of leading hospitals in the US with the goal of finalizing and closing deals before the end of the year. That's why I was telling earlier that we have good hope and confidence that we might be able to announce and close the key placement and sales soon and most probably before the end of the year.

Got it. Okay, last one for me. So our distribution had a pretty solid quarter. I'm assuming this was related to ExactVu. One, can you confirm if that's correct? And two, can you give us a little bit more color on the sale of the ExactVu systems? How many you had this quarter as well as rough estimate on the installed base?

Yes, you're exactly right. As you remember, on the first half of last year of 2020, we didn't have yet the distribution rights, for ExactVu, were actually initiated at the end of the second quarter last year, so we only had a few sales last year. And this year, we were already commercializing it since a month so we were full speed in commercialization, at least in the US and big part of Europe. And we've done nine sales of ExactVu during the quarter this year, as opposed to only three last year because again, we just got started in the month of June. And so that has been tremendously indeed helping to grow the global number of for distribution business, as well as some good momentum and good deals in later in France and Asia. And this is made a bit easier to sell as the capital expenditure is much lower than what could be for Focal One. So that's also why we've been able to navigate a bit easier on that environment.

Your next question comes from the line of Jason Bednar with Piper Sandler.

Hello, hope everyone's well, two questions from our side. Hey there, just a couple of to follow up your first and those prior questions. Firstly, Marc, I wanted to start to see if you could expand maybe a bit further and what you're hearing just on the ground, your discussions of hospitals, I know, you mentioned the kind of the COVID dynamic, but are you getting the sense that like that budgets are still tight? Is it the technology education and sales negotiation process, that it's challenging in the COVID environment where access may still be limited? Or are there may be some other external factors that have been holding back demand from hospitals?

Well, I think it's a mix of all these, actually. And it's true that the access is a bit more difficult to focus as well on expenditure from hospitals is a little bit different than could be usual, priorities are different. And when you speak about the amount of money and again, like I just said, if it's small capital equipment, like stone lasers, or even the ExactVu device, the visitation or priorities is less difficult to achieve if you start speaking about a 700 or more thousand -- $700,000 investment for the hospital. So it's just a little bit more time and also a question of priority. And that's probably why a lot of things will happen towards the end of the year when they don't have any more time to wait. So they have to make the decision. It doesn't matter.

Okay, that's helpful. And then moving over to the update from the HOP panel that is really encouraging news and congrats on that update. As you mentioned that this would put HIFU on a more level playing field with cryo and radical prostatectomy. Could you elaborate on how influential you believe the payment increase could be influencing Focal One purchases if it goes into effect, and it seemed like it has the potential to be much more impactful than the physician fee schedule update for this year in terms of just driving future or system adoption. But I guess we'd love to hear if you agree, and whether you have any additional color, you can provide on how this might ultimately maybe influence commercial payers down the road.

That will definitely influence first, I mean, that will help again, hospital getting into the technology faster, because when you almost doubled the level of payment the hospital will get for the same technology that really changes the performance in favor of the technology. So that will definitely help accelerating and boosting the sales and also the use of the technology so it's on both sides, not only on the CapEx, it's also on the disposable side. For the private payers and in for the insurances as again, they usually base their reimbursement level on Medicare reimbursement levels, so that will also insurance the private payers, and again, the private payers, the more adoption, the more utilization, the faster you're able to enroll private payers and have the technology and the policies.

Okay, I guess just maybe a follow up just on one point there just to clarify, and maybe how this might drive some better hospital adoption, or when you go out and try and sell Focal One, I guess how much of pushback you run into simply because the ROI or the economics aren't as favorable as the hospitals, anyone would like them to meet.

Not much, because already again, like we said, the ROI or the breakeven point. And again, remember that the CMS payment is only for Medicare patients. So you have to account as well with private pay patients that are also contributing to the ROI. So the pro forma is good already, it will be just excellent if we move into level six, so we don't have too much of blockades or whatever today as level five, it's just that it will be much better at level six.

Okay, all right, great. And then just one final, squeezing one final for myself. And appreciate the update on just how Ryan's already building out his team. Sorry, if I miss heard, are there any targets we should have in mind with respect to the number or roles that number folks or roles that Ryan plans to fill? And by winning, hoping to have that desired talent in place?

No, actually I mean, for obvious reasons, we won't disclose the complete plan and strategy and all that. I mean, we also had to take care of other than competitions and the environment. But the idea is really to build a global and strong and highly performance team of clinical marketing and sales people to really again spread the technology; educate the users in the market, as well as the patient community. So and again, Ryan, with his expertise and extremely long term and successful experience in building programs to penetrate the market as disruptive technology has a very broad network of -- in the medical field, and particularly in urology, and I'm very confident he will continue to bring on board a number of talents that will help us to really get very aggressively into the market and accelerate the penetration of HIFU, as well as the digitization of our current phase.

Next question comes from line of Andrew D'Silva with B. Riley.

Hey, good morning. Thanks for taking my questions. And just a few quick ones for me, to start can you let us know just how many Focal One and ESWL systems were replaced during the quarter and were there any Ablatherm installed during the quarter?

No, we had no Ablatherm and we're going to get less and less of Ablatherm in the future, of course, as Focal One has re-taken over HIFU, we've got one Focal One sold during the quarter, and in terms of lithotripsy per renewal we had about three units sold during the quarter.

Okay, thank you for that. And then could you just, I know you touched on this because I just want a quick recap on what next steps for EDAP are from a commercial reimbursement standpoint? What should we be monitoring on our side, and then with the move to level six, and its alignment with cryo ablation? The increase from $4,500 to $8,500, is that just the facility fee? Or is that also include the Physician Fee as well?

No, that's just the facility fee; the physician fee is a separate integrity.

Okay, so all in if you get to level six, we should be thinking of something around close to $10,000.

Yes. I mean, for both fees, yes because we have one that is close to $1,000. And the other one would be around $8,500.

Okay, perfect. And this is from the next steps as it relates to the commercial reimbursement standpoint, what should we be charging?

Can you say that again, sorry?

From obtaining commercial reimbursement, what should we be charging going forward to kind of see how you're progressing?

You mean from private payers? Or is that a question?

Yes.

We're working on, I mean, as I said in the past calls, I mean, we're actively working on that. And we will continue to work on that with different private payers as well as the insurances. And that's a long process. So, again, the idea is to as quick as we can start getting some of these companies offering the treatment in their policies. And again, there's -- so it's a long process, and we are very actively working in investing in that direction. So we'll keep you posted as far as we have material information on that.

But if it tracking to your expectations, right now, is there been any delays or things moving actually ahead of schedule?

Actually we are executing your plan as anticipated. So we're on track in terms of delivering the actions, meetings and plans.

Okay. And just last question for me. How indicative of your future OpEx was the second quarter? Or could you just kind of give us a sense of the second quarter what should be kind of model increase in OpEx, given the expansion in the US infrastructure?

I'm not sure I'm getting your question, Andy, there. What would you want to know exactly? I'm dragging?

You are using the second quarter as a baseline, what percent do you think your OpEx will need to increase for you to properly establish the US infrastructure that you're trying to deal with Ryan?

Oh, I mean, I won't be able to give you an exact percentage. But yes, we have to expect significant increase in our OpEx in the US as again, we want to build that complete global marketing clinical and sales organization. So and we will start seeing the impact of that on the second half of the year as again, Ryan joined the company in June only, so and is working very hard on building that team of talents. Again, that will bring the company to the next level. So yes, we'll see the impact of that in the coming quarters.

Your next question comes from Swayampakula Ramakanth with H.C. Wainwright.

Thank you. Good morning, Mark and Francois. This is RK from H C Wainwright. In the opening remarks, you stated that you've been seeing growth in terms of treatment volumes. Could you give us a little bit more color, either in terms of percentage or total number of treatments being done using HIFU?

Yes, the overall percentage I gave it, compared to last year we did about 79% to 80% growth, then it's pretty well spread among most of our sites, we can really see a momentum and utilization most of our existing reference sites. So that's a common kind of trend, which is very encouraging. Again people are getting more and more confident, and more and more see benefits for the patients. So the volume of patient is increasing in most of our key opinion centers.

Perfect. And then also in terms of what Ryan and his team would be working on. Do you think they would also, not only on trying to meet with additional hospitals and oncology centers would there, first be also in terms of messaging more about the utility of HIFU And in that same vein are you trying to get any additional publications out? So that it helps in Ryan's work.

Absolutely. And we're continuing to follow some studies here and there to get notification on HIFU. And, again, the focus Ryan and his team and the way he is building the team to really push utilization. Not only I mean to improve HIFU equipment to spread the technology to more key hospitals and key opinion leaders in the country, but it's also to work on programs with the hospitals in terms of clinical utilization and adoption and again, further increases the use it to the utilization of the technology in the existing hospitals.

Okay. You probably answered this question earlier, but I'm just want to make sure I get this correctly. When you are saying, when you're talking about how the reimbursement could get approved at the APC level six does -- is that the same level as what Cryotherapy and radical prostatectomy. Is getting reimbursed that or would this be a slightly better than those therapies.

And as I said, during the call is that it'll be in the same level as cryo surgery, radical mastectomy and another classification. So we can compare that, but it will be yes, in the same level as cryo surgery.

Perfect. And then the last question from me --

And as I said, it has to be completed on that RK. So that's against as MG was clarifying. That's for the technical, that's for the hospital fee only. We will still have a much higher reimbursement than prior surgeries. So all-in-all, it will be much more favorable for HIFU and cryo.

Perfect. That will be good. The last question for me is when we -- when I look across the UDS division, the sales in the second quarter seem to have dipped quite a bit compared to the last six quarters. So what's changing in that commercialization? Is there something in the market or is there something that you need to kind of correct that within the firm?

I'm not sure RK because I mean, we don't speak about UDS anymore. I mean, I do remember some quarters; we have spread UDS between the ESWL and distribution because it was not making any more sense to add them together. So do you speak about ESWL or distribution?

I'm just looking at the UDS division revenue. But we can take that offline.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And this does conclude today's conference. You may disconnect your lines at this time. Thank you all for your participation.