EDAP TMS S.A. (EDAP) Earnings Call Transcript & Summary

Greetings, and welcome to the EDAP TMS Fourth Quarter and Fiscal Year 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Feffer. Thank you. You may begin.

Thank you, Michelle. Good morning, and thank you for joining us for the EDAP TMS Fourth Quarter 2019 Financial and Operating Results Conference call. On today's call, we will hear Marc Oczachowski, Chief Executive Officer and newly appointed, 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 thank you, everyone, for joining us today. On today's call, we will keep our comments related to fourth quarter and full year 2019 results, shorter than we normally would as we want to provide you with as much transparency and information as possible related to our actions and plans to manage EDAP TMS through the COVID-19 virus. This is a new challenge for all of us, and we want to do our part in protecting our employees and continuing to serve our customers as best as possible. But before turning to the results, I'd like to take a moment to express thanks on behalf of myself and the entire EDAP Board and leadership team to Philippe Chauveau. As we announced in our press release last night, Philippe is stepping down from our Board as part of a long-established transition plan and will remain a director until June 2020. Philippe has served on our Board since 1997 and over the years has provided invaluable guidance and insights that have been a major factor in what EDAP has become over the years, a widely recognized leader and innovator in the field of robotic therapeutic ultrasound. We wish Philippe well in whatever the future holds for him. Turning now to the results. We are proud of the successful year in 2019, where we generated record company revenues, expanded our gross margins to a record of 47% and were profitable and cash flow positive for the full year and maintained a very strong balance sheet. We grew our U.S. installed base by 53%, which was led by well-regarded new Focal One HIFU customers, including the Mayo Clinic, Houston Methodist, University of California Irvine and University of Chicago. We continued to grow our Focal One HIFU customer base outside of the U.S., including new customers Moscow State University of Medicine, a top urology center in Russia and a first in the region; and Farrer Park Hospital in Singapore, a first in Southeast Asia. We also saw continued momentum in Brazil, where we now have 5 installed Focal One devices. Importantly, many of the institutions that we added in 2019 are highly regarded hospitals that we can point to as reference sites. It is high-profile sales such as these in combination with a presence at important industry events such as American Urology Association annual meeting that enabled us to continue to build our sales pipeline and give us optimism for the future. Our fourth quarter results represented a modest slowdown related to our first 9 months' 2019 results, but most of this was due to a tough HIFU equipment comparison year-over-year. Recall that we sold 4 Focal One devices in the fourth quarter of 2018 as compared to 2 devices in the fourth quarter of 2019. We are confident that the opportunity in front of us for Focal One HIFU remains substantial. There are an estimated 680,000 newly diagnosed cases of localized prostate cancer annually, of which approximately 180,000 occur in the United States. We believe that this represents a multibillion-dollar market opportunity, a significant portion of which is comprised of recurring procedure-related disposable kit and device service contracts. The establishment in the U.S. of the new Category 1 CPT code that will facilitate reimbursement for the ablation of malignant prostate tissue with HIFU technology could represent a significant catalyst to further adoption of Focal One in the U.S. in 2021. Reimbursement is scheduled to begin on January 1, 2021, and could help to drive faster hospital decision-making as Focal One represents a meaningful capital investment and many facilities are awaiting this critical piece of information. Longer term, we are aiming to leverage our state-of-the-art ablation technology into new indications as well. For example, we are working with the French regulators to initiate a Phase II clinical trial to study Focal One HIFU to treat deep rectal endometriosis. In parallel, we are working on other new products such as our recently introduced ENDO-UP Endourology Platform. ENDO-UP is designed for the complete management of urinary stones by combining a fully dedicated endourology table with X-ray and ultrasound imaging systems, an integrated shockwave generator and Holmium laser source. We believe combining all the tools available to surgeons provide them with the ability to select the best approach or a combination of approaches depending on the patient and the stone. This represents a true breakthrough in urinary stone management and again reflects our robust research and development capability. We look forward to updating you on this and other growth initiatives as progress through 2020. Now I wish to focus my comments on how EDAP is responding to the COVID-19 virus that we are all facing as individuals, families and organizations. To start, we are taking this global threat very seriously. We are closely monitoring the impact of COVID-19 across our businesses and are seeing some modest early disruption to our activities. Of course, the severity of the operational and financial impact will depend on how long and widespread the disruption proves to be. We have implemented numerous precautions and protective measures to safeguard our employees and to ensure an uninterrupted supply of our devices, disposables and support services. Some of these steps include requiring the majority of our employees to work remotely, curtailing all business travels, following local regulations and guidelines and adjusting to the reality of delayed sales and canceled or postponed marketing events. We remain fully supportive of all of our hospital, medical center and clinic customers in the management of this pandemic. With most operating rooms having been rededicated to the management of COVID-19-related emergencies, all nonurgent procedures, including ESWL and HIFU treatments, may be postponed to free up resources for clinical teams to handle the most urgent virus cases. In the near term, we expect this global crisis to cause decreased treatment activity with cancellations of ESWL and HIFU treatments, and this is likely to have an impact on our recurring business in the near term. We also anticipate that device sales projects may be postponed as hospital purchase and investment decisions are put on hold. However, we want to be clear that our sales cycles are long. We expect that sales projects currently in process may be delayed but eventually completed. It is possible that this short-term impact might not affect the pipeline of projects nor the long-term momentum of market adoption of HIFU and its numerous benefits for patients, including quality of life preservation. We have an inventory of several devices and accessories that are ready to be shipped, so the company hopes to be 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 and solid cash position, which is expected to minimize disruption to the extent possible. In closing, I want to reiterate that EDAP will employ all necessary measures to contribute to fight the COVID-19 pandemic, and we will continue to fully support our employees and global customer clinical teams who are valiantly devoting their efforts to the care of patients. We will continue to communicate with you as the situation unfolds as it pertains to our business and the actions we are taking. And now our CFO, François Dietsch, will provide some further details of our financial results. François?

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 $1.1133 for the fourth quarter of 2019 and $1.1184 for the full year of 2019. Total revenues for 2019 were EUR 44.9 million or 14.6% increase compared to the same period of 2018 and a new record level for a full year for EDAP. The growth was driven by a 28.1% HIFU increase and a 9.3% growth in UDS revenue. Gross margin for 2019 were 46.8%, an increase of 3.6 percentage points as compared to 2018. This growth was driven mainly by the increase in the percentage of HIFU revenue to overall revenue. As a reminder, our HIFU business carries higher gross margin, and as HIFU revenue continues to increase as a percentage of our overall revenue, we would expect to see overall gross margins continue to expand nicely. Operating profit for 2019 was EUR 2.2 million compared to an operating loss of EUR 1.3 million in 2018. Net income for 2019 was EUR 1.5 million or earnings of EUR 0.05 per diluted share as compared to a net loss of EUR 0.3 million or a loss of EUR 0.01 per diluted share in the year-ago period. Turning to the fourth quarter of 2019. Total revenue for the fourth quarter was EUR 12 million, a decrease of 9.8% versus EUR 13.3 million in Q4 2018. The main driver of the revenue decline was the sale of 2 HIFU devices in Q4 2019 versus 4 units sold in Q4 2018. Total revenue for the UDS division was EUR 9.1 million in Q4 2019, a 1.6% increase versus EUR 1.9 million (sic) [ EUR 8.9 million ] in Q4 2018. Gross profit for the fourth quarter of 2019 was EUR 5.1 million compared to EUR 6 million for the year ago period. Gross profit margin on net sales was 43% in the fourth quarter of 2019 compared to 45% in the year ago period. The year-over-year decline is due to the lower HIFU unit sales. Operating profit for the fourth quarter of 2019 was EUR 0.1 million compared to an operating profit of EUR 0.8 million in the fourth quarter of 2018. We are very proud to report our fifth consecutive profitable quarter. Net loss for the fourth quarter of 2019 was EUR 1 million or a loss of EUR 0.03 per diluted share mainly due to a noncash currency exchange loss and an income tax impact as compared to a net income of EUR 1 million or EUR 0.04 per diluted share in the year ago period. Lastly, we finished the fourth quarter of 2019 with a strong cash balance of EUR 20.9 million or USD 23.5 million, using euro-dollar conversion rate of $1.1227. This represents a EUR 1.4 million positive cash flow generated over the full year of 2019. And we now turn the call back to Marc.

Thank you, François. Again, we are very proud of our team for a very successful 2019 and excited about the opportunity to drive significant commercial adoption of the Focal One HIFU device. We are mindful of the potential short-term disruption that the COVID-19 virus may present to our business, but we hope to manage through the pandemic with a plan in place and to be well positioned once the public health crisis is mitigated. 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 May. We will now open the call to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

Marc and François, can you hear me okay?

We hear you very well.

Okay. Great. So as an international company and as a company that's had really nice success beginning to penetrate the large academic medical centers, I'm curious if you could just amplify a little bit about what you're seeing right now particular outside the U.S. and in particular also within those large medical centers, both in the U.S. and around the world, in terms of just how distracted they are with C-19 situation, whether you think they will continue to be open to reviewing Focal One and the positive impact it can have in treating patients that are affected with the conditions you treat.

Yes. Well, like I said before, we see, obviously, a huge focus on emergencies related to C-19 virus situation. So most of nonurgent or non-very urgent procedures are now canceled. So we are seeing most of the treatments on both ESWL and HIFU are being postponed and canceled. The thing is that the majority of these treatments as well not only are not emergency treatments but also can be scheduled. So we strongly expect that those patients that are not being treated now would be treated later. So that's why we also are explaining that we are making everything so that we can be prepared when the situation goes back to normal. We might have a -- more business and more work than usual as people will be lining up or getting treated. But the situation today in most hospitals over the world are really to keep the most space possible to the current crisis and the COVID-19 virus. In terms of administration, it is the same. They are focusing their efforts and investments in providing medical care and providing medical consumables and devices to help fighting against the virus more than anything else.

Okay. I get that. That makes a lot of sense. I'm curious if you have any thoughts about any impact of the current crisis and a timetable related to the review of reimbursement, which I think is mostly planned to come into place in 2021. But any thoughts there?

Well, it shouldn't have any impact on that as it is a pretty well-organized process, as you understood as well a long-lasting process because things were decided last year. They are in place this year to be executed next year. So we don't -- but again, we have to be cautious there. We don't anticipate any delay in that particular project of reimbursement and CPT1 put in place next year. But again, it will also depend on how long the crisis lasts for and how disruptive it becomes to be, not only for hospitals but also for administrations. So, so far, we've got no feedback. And again, we don't believe it may be impacted by that.

Okay. That's great. And then one last one. And I forgot to say congratulations on becoming Chairman of the Board. But I was curious with Philippe stepping down as Chairman and then ultimately leaving the Board in June. Would you expect him to continue to be involved with the work with endometriosis? Or do you think he's going to move on to other things down the road?

Well, I don't get your question actually. Is the question about why is Philippe leaving the Board in June? Or what exactly is the question?

No. I'm sorry. My question is do you expect him to continue to work -- do research in endometriosis. Or do you think he's going to move on to things that are not really related to the work you guys are doing at EDAP?

No. Actually, as we explained, and Philippe just stepped down from being the Chairman of the Board, and he will leave the Board of Directors in June but certainly will remain in close contact with the company and myself personally to work on several strategic and high-level projects with the company not being in the Board.

Our next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright.

This is RK from H.C. Wainwright. Congratulations.

Thank you.

Well, I know you're coming off from a great year, but this is not a year which you really wanted. I get that. We all get that. But as you're getting through this tough period, how is your commercial team maintaining their relationships? And how are they maintaining their conversations that they might have started or in the middle of a sales cycle so that they can take it from get-go when things get back to normalcy?

Yes. Actually, the sales team, of course, that is -- most of the guys are confined home and working from home as visiting hospitals for a sales guy is not the right time now and not the right place to be. So the interesting thing as well is as, again, all of our doctors contacts, I mean, all of the key opinion leaders and the key decision-makers at the hospital are urologists. So they're not completely involved even though a lot of them are trying to help the other departments involved in the management of COVID-19, but they had to leave also a number of their programs in the operating theater or in the hospital. And they have more free time, so we can see a lot of discussions, a lot of conversation via the phone between our sales guys and the urologists. So that really helps keeping on the momentum, the interest and also the clinical discussions between our teams and the urology departments and teams in different hospitals on which we have machines, equipment but also projects and leads going on. So the contact is maintained with the urology people. It's a bit more difficult to keep on the relationship and the discussion with the administration. Like -- as I said, they are very focused in finding resources to fight against COVID-19. But definitely, the key contacts in the hospital for our HIFU, he's the real project is definitely the urologist, and they have time to keep contact with us and keep on the discussions.

No. That's good. That's good. What percent do you think of the pending sales were basically waiting for this reimbursement dollar amount to be announced so that they can procure the mission in the second half of the year and get ready for 2021 when the reimbursement opens up?

Well, it's a complicated answer to give here, RK, because we don't -- they don't express exactly, I mean, the different [ comparison ] that make them wait or make them want to accelerate the process. But we definitely know, as we see our pipeline of projects, for them to continue to grow, having more and more hospitals and institutions in the U.S. being in the process, in the -- I would say in the purchasing process from scratch on trying to acquire Focal One, we see that momentum growing as we move forward closely to the reimbursement time. So I think that definitely helps people to get the motivation and to get the capability as well to invest in the technology.

Okay. That's good. A couple more questions. When we think about the total number of machines that were installed in the U.S., is there a way for you to give us what is the total number of machines that are installed as of today in the United States? And what part of your services and OEM sales revenue make up for the revenue that is coming from the U.S. hospitals that are -- that have already installed these machines? I don't know if you can break that down for us.

Going down to that level of details, it might not be. But I can certainly give you a trend. And as we said, again, we increased last year our installed base of equipment by 53%, which means we have around 20, 25 machines now in operation in the U.S. And as you know, those machines are sold with a 1-year warranty program, which means at the end of that year of warranty, they will go into a full-service contract, which will generate additional revenue on a yearly basis. So because the installed base increases significantly, that level of revenue from the U.S. will also increase significantly.

Perfect. And then one last question. Could we expect any publications or case study reports from the U.S. or from outside, the ex U.S. institutes, during 2020 and 2021? Do you know of anything which are in the cards?

Yes. We know that the number of our key users are working in publishing and trying to publish papers. So we might have some publication, but it all depends on which journal will review and accept them, and it certainly takes some time. But we know that a lot of -- I mean, as you know, most -- I mean, most if not all of our Focal One users in the U.S., for example, are big academic centers and institutions. They're just got started, so they need probably more time to generate more cases and more follow-ups to get started on publications. But in the rest of the world, we also have the majority of academic centers and university hospitals, and they all work on making publications. So yes, that -- we may have some good probability of getting some papers out this year and next.

Marc, Congratulations.

[Operator Instructions] Our next question comes from the line of Andrew D'Silva with B. Riley FBR.

I'm glad to hear everyone is sounding healthy today. So to start, and just to get the COVID-19 questions out of the way, as you look at your installed base and the potential capacity that exists from an ability to handle a significant bolus or uptick of patients in a particular quarter, assuming everything related to COVID-19 smooths over in a given period, how large or what's possible in a given quarter as it relates to your reoccurring business from how many times larger could it be relative to a standard quarter?

You mean when it will restart or right now? I didn't get the point exactly there.

Yes. Basically, from your reoccurring business as it relates to the impact in COVID-19, how many times larger is the potential capacity of that reoccurring business, say, if there is a large uptick in a particular quarter down the road once COVID-19 is more resolved in the regions that you're strong in? Effectively how many more procedures can be done than are typically done across your systems that are installed?

Yes. I got your point. And that's a difficult question to answer because it will really depend on in what condition the hospitals will be after the end of the crisis. You know that it's -- at least in Europe, most hospitals are very crowded and they are overworking and we don't exactly know how long that's going to last and in what condition the employees of the hospital will be at the end of the crisis and in what capacity they will be to work hard again to get back on the business. So we don't know. But I think the longer the crisis, the longer the way to get back on a high level of pace will be possible. So it might take some time.

Well, that's fair. That's a fair enough answer. And then next question is just as it relates to Focal One and the potential investigator-initiated studies or case series that you referenced in a previous question. Do you expect those studies or are you aware if they're looking at hemi-HIFU ablation (sic) [ HIFU hemiablation ] or even ablation at a lesion-specific level for T1 through T2b localized prostate cancer? Or do you have any sort of granularity as it relates to it actually being a focal ablation?

Yes. Most of current studies performed, I mean, the one we know well performed in several centers across the world are indeed on the focal treatment and focal ablation of prostate cancer. And we have a number of randomized clinical trials comparing focal ablation with HIFU and Focal One, whether comparing it to surgery or to active surveillance. So it's -- mainly today, most of the studies again are mainly on the early-stage, low-risk intermediate patients on a focal approach.

Okay. Great. And so when you were referencing a focal approach, you're actually seeing potential treatments being applied at a lesion-specific level, even more granular than at a hemiablation level?

Some of them are hemiablation and some of them are more -- a bit more focused on hemiablation but still taking into account the guidances and guidelines for margins.

Okay. Okay, perfect. And then last question just as it relates to the Medicare reimbursement. Is there a way that we can extrapolate the Level 5 versus Level 6 pricing transition that took place last year with the C code when we start thinking about your CPT code? After then CPT code gets issued, what's an appropriate coefficient multiplier for us to contemplate on that for U.S. private payers?

That's really depending on each and every private payer. So there's no real rule on that. So that will be a negotiation that we will have to have with commercial and private payers.

Okay. But when you're looking at maybe other treatments such as cryoablation when it's reimbursed by CMS at around $8,000, have you -- can you maybe discuss some of the ranges you're seeing with the private payers?

Sure. Absolutely.

Okay. Do you know what the ranges are, though?

Again, it depends from one payer to the other, but I would say from 1.5 to 3x. It's really -- it's variable as well.

Our next question comes from the line of Matthew Pilkington with Round Top Capital.

Marc, congrats.

Thanks.

I think we all -- we keep on going on about prostate cancer, but could you just list all the things that you believe this could be useful for without tying you down to some promises, say, going out 10 years? I mean we talk a lot about the prospect that you're doing all this other work, which seems to be forgotten about in the sort of general excitement about the prostate cancer therapy.

Excuse me, Matt, but I don't really understand what your question is. What -- do you want me to talk about the other programs?

Yes. Yes, the other programs. It's just that -- I mean, I know you're doing endometriosis. I see you're doing some stuff on kidney cancer.

No.

Liver?

So we -- mainly today, outside of prostate, I mean, beyond prostate, we're mainly focusing our operation, clinical operation, I would say, in research on deep rectal endometriosis. And as I said earlier in the call, that we are still under negotiation, and that -- again, that might have some delay because of the current crisis, to discuss with the regulators in France so that we can get our protocol approved to get started on Phase II clinical trial for the treatment of rectal endometriosis. And more on the early-stage research and development programs, I mean, we have a number of application that -- actually not including kidney cancer but including liver metastasis, including pancreatic cancer and including a number of other applications on which we're working, but it's more -- it's much more early stage than what is endometriosis. And we obviously are continuing those investigation today, and that's probably a more longer-term research stage.

What's the addressable market on endometriosis?

It's huge. Today, we know that about 10% of women are affected by endometriosis, and deep rectal endometriosis is about 20% of this 10%. So that's definitely a huge potential and a huge opportunity.

Okay. And my last question is, are you seeing any competition on the HIFU front from other companies that -- at all? Or this -- are you still really the only major player in this space?

Yes. Well, in endometriosis or in HIFU in general?

HIFU in general.

Okay. In endometriosis, I mean, we -- as far as we know, we're the only HIFU company working on that program. And there are a number of companies working on HIFU developments for a number of different applications. And as I have pointed out in a number of conference call, there is a society called ISTU, which is International Society of Therapeutic Ultrasound (sic) [ International Symposium on Therapeutic Ultrasound ], where we can see and, each year when the society meets, I mean, we can exchange on different programs for HIFU treatment of different pathologies than different applications. So we're not the only one. There is a very strong momentum in terms of research and development and clinical application with HIFU. We certainly are the leading company in terms of number of cases done with HIFU and number of publications as well. So we keep on leading the HIFU sector. But there is a lot of company, which is a good signal as well on the ability of HIFU to be a good treatment for ablation of different tissues.

There are no further questions at this time. I'd like to turn the call back over to Mr. Oczachowski for any closing remarks.

Well, again, thank you very much for joining us today. I look forward to keeping in touch with you and in updating you on our different programs and progress. We'll definitely talk again in May for the Q1 results. In the meantime, I wish you all the best. Take care and stay safe. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.