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

Greetings, and welcome to EDAP TMS Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Glenn Garmont, Investor Relations. Thank you. You may begin.

Thanks very much, Laura. Good morning, everyone. Thank you for joining us for the EDAP TMS Second Quarter 2020 Financial and Operating Results Conference Call. On today's call, we'll hear from Marc Oczachowski, our Chairman and Chief Executive Officer; and François Dietsch, our Chief Financial Officer. Before we begin, I'd 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. With that, I'd like to now turn the call over to EDAP's Chairman and Chief Executive Officer, Marc Oczachowski. Marc?

Thank you, Glenn, 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 to review our financial performance. We made significant progress during the second quarter and subsequent period, further solidifying our position as a leader in the field of high-intensity focused ultrasound. I would like to begin my comments this morning with a review of our most recent news. As we first discussed last quarter and in line with our expectations, the COVID-19 pandemic did impact our ability to call on doctors and hospitals during the second quarter and reduced treatment volumes across our installed base as well, which affects our treatment-driven recurring revenue. Total revenue in the quarter was EUR 9.3 million or $10.3 million as compared to EUR 12.5 million or $14 million in the second quarter of 2019. The year-over-year decline was in part due to lower HIFU device sales. We sold 3 Focal One units and 2 Ablatherm units in the year ago period versus 2 Focal One units in the second quarter of this year. Sales of HIFU disposable also declined as we anticipated due to lower portfolio volumes during the quarter. Despite the negative impact in our revenue due to the challenging international business environment, we've carefully managed our expenses and delivered a profitable quarter on an operating basis. As we recently announced, the clinical value of Focal One was further validated by a number of sales successes late in the second quarter, despite the impact of the ongoing COVID-19 pandemic. This is a testament to the entire EDAP team that we were able to maintain our focus during these challenging times. We recently announced 4 Focal One sales, 3 of which also included the ExactVu high-resolution micro-ultrasound solution that we are now marketing as a result of our partnership with Exact Imaging. Recall that this micro-ultrasound resolution is comparable or better than MRI and represents a 300% improvement over conventional ultrasound. Similar to MRI, this allows urologists to visualize and look at suspicious regions within the prostate and target biopsies in real time. Using this technology, the urologist can see details that evade other imaging modalities. They can use the ExactVu system to perform targeted biopsies with a transrectal or transperineal to confirm with a high success rate the suspicious lesions seen on the image. During the second quarter, we added Edouard Herriot University Hospital in Lyon, France and Ochsner Medical Center in New Orleans, Louisiana to our roster of highly-regarded Focal One hospital customers. Early in the third quarter, we completed another build-on sale to Mount Sinai Health System in New York, a well-renowned cancer center and influential reference site for the company. Also earlier this quarter, we sold a Focal One system to Keck Medical Center of University of South California, USC. Keck Medicine of USC was the first institution to adopt our first-generation HIFU system Ablatherm when the technology was cleared by the FDA in 2015 and has decided to upgrade to the latest generation HIFU by acquiring Focal One. We also signed 3 stand-alone ExactVu purchase order. This sale confirmed that we are realizing the synergies that we envisioned when we announced the Exact Imaging partnership in May. Together, these solutions represent the first end-to-end urology solutions that can be used all the way from diagnostics to equipment. Our growing pipeline shows the value that urologists see in this combined offering and we look forward to announcing many more similar deals in the future. Prostate cancer diagnosis and treatment can only be delayed so long but ultimately must be addressed. Therefore, we remain optimistic that this short-term impact will not affect our long-term momentum of market adoption of HIFU and its numerous benefits for patients, most notably quality of life preservation. Last quarter, we told you about the numerous online webinars and online training sessions that we held with urologists, agents and distributors. These have allowed us to stay in front of these key stakeholders. We are carefully monitoring our key markets in the U.S. and elsewhere for signs of loosening of restrictions and to discount different countries at different levels of success. But I believe that none of this will affect our long-term mission, which is to make these technologies available to the broadest possible patient population. We continue to build inventories so that we are in a position to shift systems as soon as we are able to do safely. Turning now to reimbursement. You will recall last year, we announced that the American Medical Association's CPT editorial panel, at its May 2019 meeting, accepted our application to establish a new Category 1 CPT code that would facilitate reimbursement for the ablation of malignant prostate tissue with HIFU technology. On August 12, CMS released the proposed rules for hospital outpatient payment or OPPS and physician's fee for 2021. Although these are proposed rules and CMS has the opportunity to make adjustments by December when they will release the final rule based on the comments they receive in the meantime, the proposed rule usually gives a fair indication where the payments will be the following year. On the hospital payment side, CMS proposes to maintain the HIFU procedure in the Level 5 urology APC in 2021. This translates into a payment for hospitals performing a HIFU procedure on a Medicare patient of around $4,500 at the national average, adjusted locally based on the wage index. This represents an increase of $256 or 6% from the payment hospitals get today from Medicare for a HIFU cluster. In the physician fee schedule proposed rule, CMS set, for the first time, a payment for physicians performing a HIFU procedure in the U.S. In the proposed rule, CMS has set the physician's work relative value units or RVUs for performing HIFU at 17.73, which is slightly below the recommendation of 20 units made by the experts from the AMA's RUC process. These proposed 17.73 units translates to an average payment of $940 for urologists performing a HIFU procedure on a patient under the Medicare program. As a reference, a comparable established therapy for prostate cancer, cryotherapy, yields 13.6 work RVUs, which translates to $730 for the urologist under the same patient condition. A radical prostatectomy would grant the urologist 21.36 work RVUs for Medicare payments of $1,096 or 26.8 RVUs and $1,350 if performed laparoscopically with or without robotic assistance. In summary, according to this proposed rule, a physician performing a HIFU procedure after January 1, 2021, will obtain reimbursement that is slightly lower relative to radical surgery, but around 30% higher than when performing cryotherapy. This is a very important development as this gives hospitals and neurologists line of sight to reimbursement of procedures conducted with Focal One and will, therefore, be a significant catalyst to further adoption of the technology in the U.S. Turning to our endometriosis program, we have now been granted full approval by French health authorities to initiate a Phase II clinical trial of HIFU for the treatment of deep invasive endometriosis. This form of endometriosis is painful and debilitating, and the current standard of care is surgical resection to remove either a part of the uterus or scar tissue that may be obstructing it. We previously ran a Phase I study in this indication and found that 20 women treated with our HIFU technology benefited greatly. The detailed results were published in December of last year in ultrasound in obstetrician gynecology journal. Needless to say, we are moving quickly into the next development phase. The trial is being run by Professor Gil Dubernard of the Croix-Rousse University Hospital in Lyon and will expand to additional sites in France. The advancement of our endometriosis program is also consistent with a recent strategic shift away from our legacy lithotripsy business and toward HIFU. Endometriosis is just one example of a condition that we believe can benefit from this noninvasive technology, so we see significant opportunity to expand our HIFU pipeline into very large global market opportunity. This trial will commence next month and we look forward to keeping you apprised of our progress. In the meantime, we continue our R&D efforts exploring HIFU for other applications. Our sales efforts are complemented by clinical papers that demonstrate the efficacy and safety of HIFU relative to other treatment options. Just last week, we announced that 2 papers have been accepted for publication in the prestigious and peer-reviewed Journal of Urology. The study is conducted at USC and the University of Miami report on outcomes and follow-up of up to 2 years on the combined 152 patients. Importantly, radical surgery was avoided in a vast majority of study participants and in confluence and importance were avoided or quickly returned to baseline levels. These were the first published U.S. studies and the results here are what had -- what we have observed in prior European studies that involve larger patient calls and longer follow-up periods. To further support our growth initiatives, we recently made key additions to our team on board. We recently announced the appointment of Marie Meynadier to our Board of Directors. Marie brings more than 20 years of experience in medical technology operations and leadership and most recently served as Chief Executive Officer of EOS imaging. And earlier in the quarter, we announced that Frank Van Hyfte as President of Global Sales and Marketing for ExactVu brand of products. Frank joined us from Exact Imaging and is playing a key role in the integration of our sales spot. These additions round out what I consider to be a world-class team and Board firmly capable of achieving our operational and financial goals. Lastly, I want to comment briefly on our balance sheet before turning the call over to François. We ended the second quarter with cash and cash equivalents of EUR 15.7 million or $17.6 million, subsequent to June 30, we received an additional EUR 4 million in COVID-related assistance from French regulators. As François will explain, this amount adds to COVID-related funds already received during Q2 from several jurisdictions in which we operate. These funds carry favorable terms, and needless to say, we were very pleased to have received this non-dilutive funding, which will help us achieve our clinical and commercial objectives. And now our CFO, François Dietsch, will provide some further details of our financial results. François?

Thank you, Marc, and good morning, everyone. Before getting into the numbers, I would like to comment on our new reporting structure that we are initiating this quarter. Recall that we recently announced a solid mid shift in both our research and development efforts and commercial initiatives towards HIFU and away from lithotripsy. As a result of this shift as well as our exclusive distribution agreements with Exact Imaging, in effect, we needed to refine our reporting segments to better reflect how we view our businesses internally and how we measure our progress. Going forward, we will report in 3 distinct segments: first, HIFU, which includes sales of Focal One, Ablatherm and related consumables and services; second, lithotripsy, which includes revenue generated from the existing Sonolith brand; and third, distribution, which includes the sale of complementary products such as lasers and micro-ultrasound systems and products from third parties. Now turning to the results. Note that all figures except for percentages are in euros. For conversion purposes, however, our average euro-dollar exchange rate was $1.1093 for the second quarter of 2020 and $1.1063 for the first half of 2020. Total revenue for Q2 2020 was EUR 9.3 million, a 25.9% decrease compared to total revenue of EUR 12.5 million for the same period in 2019. Second 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 second quarter of 2020 was EUR 2.6 million, a 44.2% decrease compared to EUR 4.6 million for the second quarter of 2019. During the quarter, we sold 2 Focal One versus 5 HIFU devices right there. Total revenue in the LITHO business for the second quarter of 2020 was EUR 2.9 million, a 22.8% decrease -- 22.8% decrease compared to EUR 3.8 million for the second quarter of 2019. And total revenue in the distribution business for Q2 2020 was EUR 3.8 million, an 8.3% decrease compared to EUR 4.1 million for the second quarter of 2019. Gross profit for Q2 2020 was EUR 4.3 million compared to EUR 6.3 million for the year-ago period. Gross profit margin and net sales was 46.8% in the second quarter of 2020 compared to 50.7% in the year-ago period. The decline in gross profit year-over-year was mainly due to lower surge in HIFU business, driven primarily by COVID-19. Operating profits for the second quarter of 2020 was EUR 0.3 million compared to an operating profit of EUR 1.7 million in the second quarter of 2019. In spite of the impact of the COVID-19 pandemic, we are pleased to report a profitable quarter. Net loss for the second quarter of 2020 was EUR 0.2 million or EUR 0.01 per diluted share as compared to a net loss of EUR 1.4 million or EUR 0.05 per diluted share in the year-ago period. Turning to the first half for 2020. Total revenue for the first 6 months of 2020 was EUR 16.9 million, a 25.4% decrease compared to total revenue of EUR 22.6 million for the same period in 2019. As mentioned, first half of 2020 revenue reflects the impact of the ongoing COVID-19 pandemic on the company's activities. Gross profit for the first 6 months of 2020 was EUR 7.4 million compared to EUR 11.2 million for the year-ago period. Gross profit margin and net sales was 43.9% for the first 6 months of 2020 compared to 49.5% in the year-ago period. The decline in gross profit year-over-year was mainly due to lower sales in HIFU business driven by COVID-19. Operating loss for the first 6 months of 2020 was EUR 1.2 million compared to an operating profit of EUR 1.9 million for the same period of 2019. Net loss for the first 6 months of 2020 was EUR 1.5 million or EUR 0.05 per diluted share as compared to a net income of EUR 1.7 million or EUR 0.06 per diluted share in the year-ago period. Finally, we finished the second quarter with a very strong cash balance. Cash and cash equivalents, including short-term tertiary investments were EUR 15.7 million or $17.7 million, using a euro-dollar conversion rate of $1.1237. As Marc indicated and subsequent to June 30, we received 2 COVID-related loans guaranteed by French government totaling EUR 4 million. These loans carry very favorable terms and interest rates ranging from 0.25% to 1% with a repayment term between 1 and 5 years. This French loan added towards the COVID-related assistance already received during the second quarter, we received EUR 0.2 million from the U.S. Paycheck Protection Program that, as you probably know, is forgivable if certain conditions are met, and we received an original loan of EUR 0.4 million from a Japanese COVID-related assistance program, which carries an interest rate of 1.8% and is repayable beginning in 2 years. As a result, our Q1 pro forma cash balance is EUR 19.7 million. And we now return the call back to Marc.

Thank you, François. In closing, the second quarter was a challenging one against the backlog of COVID-19, but we were able to maintain our focus and continued to build our HIFU pipeline while also advancing development of new indications. We will now open the call to your questions. Operator?

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

Glad to hear everybody sounds well. Just a couple of quick ones for me. We ran a series of channel checks and that indicated as the second quarter was coming to a close and just into the beginning of the third quarter, procedure volumes were approaching pre-pandemic levels, at least in certain regions. And I was curious if that was aligning with what you're seeing across your segments effectively as the second quarter was coming to an end and into the third quarter? Were you seeing volumes kind of snap back to pre-pandemic levels?

Andy, good to talk to you. Actually, we saw definitely more activity, I mean, more close to normal activity in the third quarter than we had during the second quarter, where in a lot of countries, confinement was observed. So at the same time, as you know, at least in Europe, but also a little bit in the U.S., the summer -- I mean, the month of July and August in the middle of summer are not the most active time in terms of treatments and business activity. But at least, we've seen here, we've seen that some -- I mean, more normal activity -- more close to normal Q3 activity after the end of the second quarter.

Okay. That's good to hear. And could you repeat what the facility fee was for HIFU? And was it APC Level 5 or Level 6 payment? And just because the timing is a little bit off as it relates to most years in the past, we should still assume that the reimbursement will be in place starting January 1, 2021, correct?

Yes, absolutely, absolutely. And as I explained today, what we got is the proposed rule, which is again only a proposed rule and that may change. But as I said and usually as we see, it gives a fair indication of what will be the level of reimbursement for the next year. And as I said as well, on the technical part of the reimbursement, the proposed rule maintains the Level 5 that we had this year and last year for HIFU reimbursement. The real new thing that we got this year on the proposal is because we are turning to a CPT code next year from a C code this year is that we got that physician fee and the RVU associated to that sedation fee, which actually is a little bit below what was the recommendation given by the American Medical Association RUC panel, which is where they give the recommendation on the values. And -- but it was pretty well positioned, and again, as I said, 30% higher than what cryosurgery and other established minimal-invasive therapy for prostate cancer has in the U.S. And it's a little bit below what surgery -- what radical surgery can be usually. So this now definitely will be -- the reimbursement will be in execution next year on January 1. But now this needs to be confirmed by the final rule, and usually, they give the final rule somewhere in November, but we've seen some delays in the proposed rule this year. So we might expect some delays as well in the final rule because there is a time frame during which there could be some comment, questions, requests from the proposal. So we are expecting to get the final rule somewhere in December.

Perfect. And have there been any discussions with commercial payers yet? Or is that going to be starting subsequent to the final rules being implemented?

I mean, of course, we're trying to maintain some discussion, but real discussion about payments will certainly happen when the CPT code will be more final in terms of the rule. And also, the -- we've not been given yet the code, the number of the codes for the CPT and that should happen probably in September, October. So once we have the value, the final rule and the code, then we can really get started into negotiations with the commercial payer.

Okay. Perfect. And just last question for me, just a couple of balance sheet items. Could you just let me know how much debt you had outstanding at the end of the quarter? And as far as the EUR 4 million that you received subsequent to the second quarter, is that forgivable or do you expect to have to pay that back?

Well, let me -- let François check for you the debt at the end of June. But as far as for the loan that we got, the EUR 4 million loan that we got guaranteed by French government, these are loans so they are not forgivable. But as François said, it's a very favorable conditions and terms as we will start repaying them only within a year from now, and we have the choice in paying them back from 1 year to 5 years period with an interest rates between 0.25% to 1% annual rate. So it's very favorable.

Okay. Perfect. Wonderful -- go ahead.

Yes. Just François will just give you the level of debt that we had at the end of June.

Yes. Just our financial debt remains low at the end of June, around -- between EUR 2 million and EUR 3 million. And on top of that, we have then this EUR 4 million.

And it's mainly -- I mean, the debt we have at the end of June is like usual, mainly operational, nothing much.

Okay. So it actually went down from the end of last year, the financial debt that you had?

Yes.

Yes.

Our next question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

I hope you guys are safe and well over there in France.

Hey Brooks, yes, we're doing good. I hope you are good, too.

Yes. So far, so good. Everything's fine. I appreciate your asking. I wanted to follow on with Andy's last -- well, not last question, almost last question about the commercial payers. I'm just curious what you both expect and hope for from the commercial payers as it relates to reimbursement for the hospitals as well as reimbursement for the doctors. Is it -- I mean, specifically, is it reasonable to expect that commercial payers might pay more than Medicare? Or would you expect commercial payers to pay less?

That's a very good question and I would love to have the accurate answer on that, but the usual game is that commercial payer will pay more. They will usually use a coefficient on the basis of the CMS payment value and then multiply. Then it's very variable from one payer to the other and even from one region for the others -- from the others. So it's very difficult. I think the most important thing is to get registered and to get into the program of those commercial payers. And then again, like I said, usually, there is a notification coefficient that is used by the commercial payers. So usually, it's more.

Sure. That's good. And just sort of thinking along the same lines, obviously, the Medicare, the traditional Medicare program is big here in the United States. Have you got any feel for the Medicare Advantage payers? I mean, obviously, same basic population, elderly people, relatively high problem with prostate cancer. Do you think -- do you see any indication that any of the big Medicare Advantage guys are -- see this as a really important development?

I'm not sure I get your question. But yes, indeed, I mean, Medicare patients are usually patients over 65 so there is a strong population with prostate cancer, at least concerned and in need of treatments.

Sure. Okay. Let me just switch gears for a second and say I'm not as aware of the reimbursement for the ExactVu. Can you just give us a quick sense for where you're at in terms of reimbursement there?

Absolutely. So today, there is no specific reimbursement for the ExactVu and the micro-ultrasound application itself, but the ExactVu machine can apply for the same reimbursement level as the targeted biopsy devices. So we are using that and at the same time, I mean, we're working on -- as you know, we just got started with that technology in May and June. And we will definitely also work in trying to continue using that targeted biopsy reimbursement level, but also build a specific reimbursement for the micro ultrasound diagnostics itself. It's going to take -- it might take them some time to get there.

Sure. Of course. So all of that's good. Obviously, we're very interested in your progress on the prostate side, but I'm also pretty interested in the endometriosis. What do you think is timing as it relates to the next few key milestones in endometriosis? Are we thinking we might see some significant progress with the trial in 2021 or is that going to take longer?

Yes. Well, the next milestone is really to conclude the inclusion of patients. And as I said just earlier, we will get started in treating the first patient next month, which is almost next week. And again, I mean, there is a lot of enthusiasm from the clinical team led by Professor Dubernard and again, a lot of enthusiasm based on the results of the feedback we got from the patient from the Phase I trial. So we have strong expectation that we might be able to go quick in recruiting. Though, as I said also, we will start with Professor Dubernard, who will be the Chairman of Gynecology in Croix-Rousse, and then we'll extend the trial to other sites in France, so there will be some training needed as well. So it might take some time. But again, we expect to be extremely active and working hard and fast in recruiting and treating patients by the end of 2020 and in 2021 as well, so that we can go quick into the follow-up case.

Great. Keep up the work. I know it's a strange time, but just keep the pedal to the metal.

Thank you very much.

[Operator Instructions] Our next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright.

This is RK from H.C. Wainwright. Marc and François, hope you guys are doing fine and staying healthy.

Sure. Thank you, RK.

Yes. A couple of questions. So now that you have Exact Imaging's product ExactVu and you're commercializing that along with your Focal One, are you seeing any increase in leads or previous leads converting into clients because now that you have a better mousetrap and it's an end-to-end solution?

Yes. Actually, we can feel that it's definitely helping us to get into new prospects. And in both aspects, people doing Exact Imaging -- existing customer from Exact Imaging, are definitely interested into Focal treatment, so we can really bring them a solution with Focal One. And also in -- it helps like we did and we saw that it was a great success in the 4 machines we sold lately, 3 of them were bundle deals. So people getting our urology department or a hospital that really wants to get started into a new prostate cancer Focal program really needs to get -- if you want to be full speed on that, you need to get the 2 devices to be complete and really to manage the patient from scratch to the end. So that's -- I mean, we can see that, that brings more interest or that increasing interest and motivation to get the deals done. So I mean, we can really feel the added value of getting the 2 products together.

Okay. And then also with the CMS proposing a dollar reimbursement both for the HIFU procedure and the urologists. So there are 2 questions. One is like what percentage of eligible patients who could go through your procedure have been waiting for such an announcement, in the sense, trying to get a good feel for the reimbursement? And also for the doctors, do you see some of these doctors becoming more enthusiastic now that they can also dip into this and at a little better dollar number than what they would get with cryosurgery or other things? Whether it is anecdotal information or real, how are you sensing their enthusiasm, if there is any, from the hospitals and also from the doctors itself?

It's difficult. And again, I mean, the proposal was just announced less than 2 weeks ago so it's pretty new and it's a proposed rule still, so it's not reality. It's proposition. So we have to wait until the final rule. But certainly, it will at least give a clear path to both the patients and the urologists in terms of the dollar amount to be spent or to be received for the procedure. So it will really give a frame to the treatment that will sort of normalize it or [ promodise ] it and that will definitely help adoption. And at the same time, like we discussed with Andy, that will also help us to get started when it's the right time into commercial payer negotiation, which again might interest a lot of patients.

Okay. And then if we can talk a little bit about the indication expansion, endometriosis. So 2 questions there. One is what is the potential development time line for this indication? And number two, obviously, this is a different -- a little bit of a different organ compared to prostate. So do you need to do any tweaks to your machine or to the probe? Or to both?

So for the time line, it's very difficult. And it's usually difficult because it's very related to the inclusion of the patient to the way the training of the new centers and all that. And in the current context, it's very difficult to have any expectation or any view on the timing. I mean, if we get back to some sort of confinement, I mean, hospitals just start clinical studies. So it's very difficult. But like I said before, I mean, we have a leader on the clinical study, Professor Gil Dubernard who is extremely motivated and enthusiastic. He knows the technology well because he has run the Phase I trial. And we also have among the best centers in France that are joining the trial and everybody really see it as a growth opportunity. So there is strong motivation to make things moving forward fast. But now it's difficult to give some real time line expectation. And your second question was on the technology. To date, the study was approved to be performed with the Focal One. That's the exact same machine as we use for prostate so there is no technical development to be done so far.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn this call back over to Mr. Marc Oczachowski for closing remarks.

Well, again, thank you for joining us today. Stay safe and we hope to give you updates on our development very soon. Again, stay safe and thank you for joining us today. Have a good day. Bye-bye.

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