Edap Tms S.a. (EDAP) Q3 2023 Earnings Report, Transcript and Summary

Greetings and welcome to the Edap Tms third quarter 2023 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. It is now my pleasure to introduce your host, John Fraunces. I think, John, you may begin.

Good morning, and thank you for joining us for the Edap Tms third quarter 2023 financial and operating results conference call. Joining me on today's call are Ryan Rhodes, Chief Executive Officer, François Dietsch, Chief Financial Officer, and Ken Mobeck, Chief Financial Officer of the US Subsidiary. 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 Chief Executive Officer, Ryan Rhodes. Ryan?

Thank you, John, and good morning, everyone. I will start today's call by providing highlights from the third quarter of 2023, and then turn the call over to Ken Mobeck, our US CFO, who will then present the corresponding details of financial performance. I'm pleased to report through the last fiscal quarter, we've continue to see strong growth in U.S. Focal One HIFU procedures. We attribute this growth to HIFU becoming an important modality in the treatment of prostate cancer, with Focal One being selected as a platform of choice amongst urologists. It is also clear that the strategic investments we continue to make in our commercial and clinical teams are further helping to drive increased utilization. In Q3, we recorded a 150% year-over-year increase in U.S. procedure volumes as well as our fourth consecutive quarter of double-digit percentage procedure growth. The growing number of procedures across our install base provides the most compelling market-based evidence that Focal One is fast becoming an essential part of prostate cancer management. Focal One is the leading prostate focal therapy controlled by urologists. The advantages of Focal One HIFU are clear, as it is a noninvasive procedure demonstrating excellent oncological control, with minimal patient downtime while also avoiding the need for radical surgery or radiation. We are confident that these benefits, along with strong clinical outcomes will continue to drive procedure growth, as well as new Focal One placements. We placed two new Focal One systems in the third quarter of 2023. The first Focal One was sold to the University of Florida, which adds to the growing number of major academic medical centers which have adopted Focal One. The second system was placed at Cleveland Clinic, Abu Dhabi, the number one ranked hospital in the UAE in Newsweek World's Best Hospitals 2023. And now multiple sites within the Cleveland Clinic health system utilize Focal One. Importantly, two additional Focal One systems have already been placed early in the fourth quarter with the expectation of placing additional Focal One systems throughout the remainder of the fourth quarter. Our continuing education efforts and growing presence at major medical meetings are also helping to drive urologist demand for Focal One. A recent example of this was the partnered activity with Cleveland Clinic in conjunction with the Society of Urologic Oncology. Focal One was a proud sponsor of the first Society of Urologic Oncology approved fellows, focal therapy course hosted by Cleveland Clinic from September 21 through the 22. This two-day training program included lectures, hands-on simulations, and live procedures with the Focal One Robotic HIFU platform, which reflects the growing awareness of Focal One HIFU amongst top experts in the field of prostate cancer management. Focal One was also showcased at multiple regional, national, and international scientific meetings during the quarter, including poster and podium presentations, led by some of the most prominent specialists in the field of prostate cancer and focal therapy. In September, the Focal Therapy Society held its 13th international symposium on focal therapy in Washington, D.C., where Focal One was featured in the main scientific program as part of the dedicated hands-on simulation session led by experts, which included Dr. Cary Robertson, Associate Professor of Urology from Duke University. Additionally, Focal One Robotic HIFU techniques and clinical results were also shared and presented by prominent experts from the Cleveland Clinic, the University of Southern California, and Duke University. Of significant importance was a plenary presentation delivered by Professor Eduard Baco from Oslo University Hospital, which highlighted the updated results from the randomized controlled trial comparing Focal One Robotic HIFU ablation to robotic prostatectomy for patients with intermediate risk prostate cancer. Noting that all of the patients have reached at least one year of follow-up post treatment, Dr. Baco stated that one year post treatment that focal ablation achieved good oncological efficacy, preserved continence, and erectile function better, and resulted in significantly less Clavien 3 complications than radical prostatectomy. Another key development in the third quarter was reimbursement approval in Switzerland on July 1 for the use of HIFU in the treatment of prostate cancer. As a member of the DACH market region, including Germany, Austria and Switzerland, with over 100 million combined total inhabitants, Switzerland has many hospitals ranked amongst the best 250 in the world, including the University of Zurich -- an active and prominent Focal One site. The University of Zurich is also the leading innovation center for HIFU in Switzerland, and a member of the League of European Research Universities, placing it among Europe's most prestigious research institutions. Now, we'd like to spend a few minutes talking about developments and expanding into new clinical indications for use of Focal One Robotic HIFU. As noted, we continue to make solid progress in our endometriosis clinical program. In October, positive results from the Endo-HIFU-R1 Phase 2 study in deep infiltrating rectal endometriosis were presented by Professor Gil Dubernard of the Annual Congress of the European Society for Gynaecological Endoscopy held in Brussels, Belgium. As a reminder, we are currently enrolling patients in our Phase 3 comparative double-blind, randomized controlled trial. We are now 83% enrolled in this study and expect to complete enrollment by the end of 2023. If Phase 3 results are positive, Focal One HIFU could represent a less invasive first line treatment for deep infiltrating rectal endometriosis, while avoiding the considerable morbidity and complications often associated with surgical resection of the bowel and or rectum. As our Phase 3 study continues to advance, we are already underway, evaluating prospective next steps in preparation of a regulatory plan for engagement with the FDA and other competent authorities. I'm also pleased to announce that this morning Edap entered into a clinical research collaboration with the prestigious Icahn School of Medicine at Mount Sinai Department of Urology in New York, to accelerate the understanding of the role of immunotherapy treatment in conjunction with high intensity focused ultrasound -- HIFU -- in patients. with prostate cancer Focal therapy using HIFU delivers precise ablate of energy to a targeted prostate lesion, and existing research shows such treatment increases the immune response. The purpose of the collaboration is to understand that HIFU in combination with immunotherapy can generate measurable oncological results in patients with prostate cancer. The research is being supervised by an internationally recognized leader in the field, Professor Ashutosh Tewari, the Chairman of Urology at the Icahn School of Medicine at Mount Sinai Hospital. Looking out through the remainder of 2023 and considering our strong start to the fourth quarter, we expect the combination of continued procedure growth with our existing customers and placements of new Focal One systems to result in strong operating performance as we close out the year. With EUR47.7 million, or $50.5 million in cash and short term investments, we will continue to strategically invest across our commercial operations to drive productivity and support the growing demand for Focal One Robotic HIFU as a leading technology platform in the management of prostate cancer. With that, I'll turn the call over to Ken to review the third quarter financial performance. Ken?

Thank you, Ryan, 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 USD1.0814 for the third quarter of 2023. Total revenue for the third quarter of 2023 was EUR11.7 million, a decrease of 4.1% as compared to total revenue of EUR12.2 million for the same period in 2022. The decrease in revenue was due to lower sales of Focal One and ExactVu units versus the prior year period. Looking at revenue by division, total revenue in the HIFU business for the third quarter of 2023 was EUR3 million as compared to EUR3.5 million for the third quarter of 2022. The decrease was driven by one Focal One system sold in the third quarter of 2023, versus three systems sold in the third quarter of 2022. As Ryan mentioned, our pipeline continues to grow, but we did see a delayed closing of deals in the third quarter. Two of the deals have already closed in the fourth quarter. Despite the modest decrease in overall HIFU sales, we are very encouraged to see a 49.2% year-over-year growth in disposable revenue, reflecting strong procedure demand. Total revenue in the LITHO business for the third quarter of 2023 was EUR2.7 million, as compared to EUR2.2 million for the third quarter of 2022. The increase in LITHO revenue was driven by seven lithotripsy units sold in the third quarter of 2023 as compared to two units sold in the third quarter of 2022. Total revenue in the distribution business for the third quarter of 2023 was EUR6 million as compared to EUR6.6 million for the third quarter of 2022. The decline in distribution revenue was driven primarily by nine ExactVu units sold during the third quarter of 2023, as compared to 12 units sold during the third quarter of 2022. Gross profit for the third quarter of 2023 was EUR4.2 million compared to EUR5 million for the year ago period. Gross profit margin on net sales was 35.5% in the third quarter of 2023, compared to 41% in the year ago period. The decrease in gross profit margin year-over-year was primarily due to three main factors -- the adverse impact from delayed sales of U.S. Focal One systems in the quarter; higher mix of distribution product with lower gross margin; and the continued investments we are making in our U.S. field service and clinical application organizations to further support HIFU adoption and long-term revenue growth. Operating expenses were EUR9.7 million for the third quarter compared to EUR7.2 million for the same period in 2022. The increase in operating expenses was primarily due to the continued strategic planned build-out of the U.S. team and commercial infrastructure as well as increased marketing activities. Operating loss for the third quarter of 2023 was EUR5.6 million compared to an operating loss of EUR2.1 million in the third quarter of 2022. Excluding the impact of noncash share-based compensation, operating loss for the third quarter would have been EUR4.2 million compared to an operating loss of EUR1.7 million in Q3 of 2022. Net loss for the third quarter of 2023 was EUR3.9 million or EUR0.11 per diluted share as compared to net income of EUR0 in the year ago period. Inventory increased to EUR15.3 million in Q3 as compared to EUR13.3 million at the end of Q2 2023. This higher than average inventory level was driven by two key elements. First, finished goods inventory was high due to low Focal One and ExactVu system sales in the quarter. Second, the purchase of raw materials for key system components increased to meet future demand. Total cash and cash equivalents at the end of Q3 was EUR47.7 million as compared to EUR51.3 million at the end of Q2 2023. This EUR3.6 million cash decrease was driven primarily by the cash used in operating activities and capital expenditures. We continue to monitor our cash flow closely, prudently balancing investment in long-term business growth with short term financial performance to manage our overall cash reserves while being mindful of what is happening with macroeconomic factors around the globe. Those are our key financial highlights for the third quarter of 2023. And with that, I would like to turn the call back to Ryan.

As you can see in closing despite experiencing delays in HIFU sales in the quarter, our core pipeline remains very strong across a wide breadth of both academic and community urology practices. Moreover, the continued robust year-over-year growth in procedure volumes provides us with the strongest market-based evidence to date that robotic HIFU, and Focal One in particular, is becoming an essential treatment in the management of prostate cancer. As the global leader in robotic HIFU therapy, Edap remains well positioned to capitalize on the growing acceptance of Focal One HIFU as a market leading technology platform. We anticipate a strong finish to the year based on accelerating trends in utilization and additional placements of Focal One systems. I will now turn it back over to the operator for questions. Operator?

[Operator Instructions]. Our first question comes from Michael Sarcone from Jefferies.

Thanks for taking my questions. Just wanted to start on the capital equipment environment. I know last quarter, you had mentioned that higher rates have elongated the sales cycle somewhat. I was hoping you could just give us an update on how customers are thinking about capital equipment purchases, and any further impact on rates that it might have bled into 3Q?

Yes, Michael, we've said before, I think we are positioned and positioned strongly. In terms of capital, we are a strategic investment for a hospital. We're part of a clinically necessary revenue-enhancing service line that brings strategic value. So we fall into that category versus, say, operational capital. And even though we're in a we're in a good position, we saw some slowing down in the process. We're still engaged with many, many hospitals in our pipeline. You know, our pipeline is very strong. And as we move forward, we anticipate closing more of those sales in Q4. But I think answering your question, I think hospitals are certainly being prudent in determining what investments they're making. And with that, they're taking more time through that process.

Got it. That's really helpful. And I guess, also last quarter, you know, you sounded pretty positive on the funnel as you do today. You had mentioned you felt pretty confident in exceeding the number of placements that you had seen in the first half. I think that number was 11. Is it still the same today where you feel confident in exceeding that number? Or has anything changed on that front?

Yes, Michael, good morning. This is Ken. So regarding second half performance, we still see a very good Q4 picture lining up. You know, as we've mentioned, we had a couple of deals that came down to the very end of the quarter. We've closed two of those deals already, and we have good expectations here for the second quarter to be at or above first half.

Okay, great. Thank you.

Our next question comes from Sean Lee from H.C. Wainwright.

Hi, so thanks for taking my questions. My first question is the number of HIFU procedures. You mentioned there was a strong growth in that. And I was wondering whether you can provide a bit more color on what are some of the pushes and pulls on that number? And how does the new equipment sales translate into procedure growth? Does it take these new users some time to get up to speed? Or are they starting off running?

Yes, so we obviously track our procedures it at each installed Focal One placement. For accounts that are just starting their program, there's certainly a training period and onboarding period, and a ramp of their cases. We see that, and that's very typical. However, as we've also seen, many of the newer accounts that are engaging, want to move fast through that onboarding process to start contributing cases early. And that is one of the metrics we obviously look at. I will say that the evidence in terms of supporting the role of focal therapy, and what we've seen at both international, national, and regional urology meetings, focal therapy is a hot discussion. And within the category, we are the common discussions in terms of what's best-in-class technology. And our technology is getting a lot of praise and visibility. With that said, I think more centers are eager to be able to offer focal therapy to their prostate cancer patients. And I think all this, and the fact that we're making progress too with our clinical teams. As mentioned, we have a clinical sales team that is helping to drive the utilization at the facility level. So I think it's all of these things coming together, building more programs, a stronger migration to a better technology -- Focal One -- and the ability to ramp and onboard the clinical users in a timely manner through the help of our clinical commercial teams.

Great. Thank you for that. And then my second question is on, I think in the prepared remarks, you mentioned that one of the machines sold last quarter was in Abu Dhabi. And I was wondering whether the Middle East can become a geographic interest for you guys?

Yes, we were excited about the placement it up at Abu Dhabi Cleveland Clinic. In fact, they've already performed cases. And so that program has already launched, and we're excited to see for it and look out through the Middle East for other areas of opportunity. But the Cleveland Clinic Abu Dhabi facility has a very strong reputation in the Middle East. And I think it's a clear validation. When they looked at technology, they chose Focal One. So we're, again, looking outward for other opportunities throughout the Middle East.

Great. My last question is on the ExactVu sales. So I was looking at that, I was wondering whether you can give us some color on what exactly drives those sales?

Well those, again, ExactVu is used at time of biopsy. So again, further upstream, right, patient goes in for a biopsy. And as we know, micro ultrasound, 29 megahertz, has a measurable improvement in terms of visual acuity to look at prostate tissue and specifically better target regions of interest for placing biopsy needles. So I think the combination, either as a standalone technology, or combined with use of imaging from an MRI, hospitals realize that, wow, we can see better. And if we can see better, we can be more precise in terms of where we target and perform biopsy mapping and delivery within the prostate gland. So again, I think the evidence is strong. We have a large number of growing academic centers that have adopted this technology, and more to come. We have also, as a recent, added a dedicated clinical sales team and capital team specific to ExactVu. So looking out, we're excited for the momentum and building more momentum around this product.

That's great to hear. That's all I have, and thanks again for taking my questions.

Thank you.

Our next question comes from Frank Takkinen with Lake Street Capital Markets.

Alright. Thanks for taking the question. Ryan, was hoping you could talk a little bit about the purchase model versus a less capital intensive adoption model, whether that's a lease, or a bridge to buy, or something similar to that. What are you hearing in the field? And do you have any prediction for where this mix might start to shake out in Q4 and into 2024, as we are in a little tougher macro-environment?

Yes, Frank, we continue to focus on direct cash sales. And we've shown success in doing that. We have other options available -- operational leases as such, bridge to buy, and or other. So I think we're well-covered with various options at our disposal to be able to use with customers. And if we find that customers may need a different solution, we typically sit down with them and we would work out through the process to get them into the technology. They want our technology, and we want to get the program started, and we build programs. So if it matters to launch the program sooner, we can activate on various -- call it -- purchasing models, encompassing operational leases, bridge to buy, and or other. But again, we still remain successful in our ability to sell capital directly, and work closely with our hospitals as partners.

Okay. That's helpful. And then maybe one on the sales team. I know I think at the beginning of the year, you were targeting roughly doubling that organization with different variables across a direct selling rep or clinical support specialists. But maybe just talk to where that US-based HIFU sales team sits, and how you're thinking about further investments into Q4 if you haven't already gotten to where you anticipated getting to this year?

Yes. So Frank, this is Ken. Good question. Right now, our team is 15 people in the US. As Ryan mentioned, we've got a dedicated team of ExactVu now of four people, and that's split. So when you look at the four people against the 15, that leaves us 11 people focused now on HIFU sales. And we are going to continue to invest on the capital front, for capital sales, as we move into next year. We'll continue to to beef up the headcount.

Okay. That's helpful. And maybe just the last one for me. Excited to hear the update on endometriosis. Can you just drop the time line? What that might look like if you do achieve that enrollment completion by the end of this year? When could we see a readout? And then maybe it's too early to speak specifically to commercial strategy, but maybe broad strokes, how you're thinking about that market commercially, assuming everything goes to plan with the clinical trial?

Yes, so we're excited about the study in particular, and the fact that we're through a lot of the enrollment already. As mentioned, we want to finish enrollment by the end of the year. There will be some analysis and follow-up, of course, on the patients. And I would say sometime later next year, we would be in a position to use that data, or have that data presented, in the form of as submitted a manuscript to a major journal. But equally, we are working through the process to get ready for getting in front of the FDA. We've got some very compelling data. Remember that this is the Phase 3 study. There was a safety study, the Phase 2 study, and that data was around was reflective of 60 patients treated. And that study included, and we're looking to get that data out sometime probably in the early second quarter of next year. So we've got lots of great data that's coming out. We're excited to close the remaining study, the randomized controlled trial, and again, post-closing patient follow-up statistical analysis. And we'll move forward with that data in the form of a submission. So again, we're bringing our best people together to make sure we get this closed out and we look forward to being able to share the data and outcomes in the broader community.

Great. Thanks for taking the questions.

This concludes our question and answer session. I would like to turn the floor back over to Ryan Rhodes for closing comments.

I want to again thank everyone that joined us for today's call. If you are unable to join us in New York at either Morgan Stanley or H.C. Wainwright investment conferences, in September, we will be participating in the Jefferies Global Healthcare Conference in London, or Piper Sandler's Conference in New York City in November. We look forward to updating everyone on our fourth quarter and full year 2023 results early next year. Thank you.

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