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

Greetings, and welcome to the EDAP TMS Third Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeremy Feffer, Managing Director of Lifesci Advisors. You may begin.

Thank you, and good morning, and thank you for joining us for the EDAP TMS Third Quarter 2020 Financial and Operating Results Conference Call. On today's call, we will hear from Marc Oczachowski, Chief Executive Officer and Chairman of the Board; and François Dietsch, Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plan. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Factors that may cause such a difference include but are not limited to those described in the company's filings with the Securities and Exchange Commission. I would now like to turn the call over to EDAP's Chairman and Chief Executive Officer, Marc Oczachowski. Marc?

Thank you, Jeremy, and good morning, everyone. I will start with a brief operational update and then turn the call over to François Dietsch to review our financial performance. We are pleased with our third quarter results. While the calendar third quarter is seasonally our softest quarter of the year in terms of business volumes, this year, it was the strongest quarter so far. So while restrictions in Europe and elsewhere began to lift, we did see a gradual shift back to a normal. Obviously, these trusted procedures cannot be delayed indefinitely. Total revenue in the quarter was EUR 9.4 million or USD 11.2 million, as compared to EUR 9.3 million or $10.3 million in the second quarter of 2020. Another interesting sign was the fact that despite an 8% decrease in overall revenues in the third quarter this year compared to Q3 of last year, we generated a slightly higher amount of recurring treatment-driven revenues in our HIFU division, and we sold the same number of Focal One units. So following a difficult first half of the year, we are pleased with our third quarter performance. We announced just a few days ago that we entered into an agreement with ab medica, a leading distributor of medical technology in Italy. ab medica already distributes ExactVu, so they are already familiar with our product line. Italy is the fourth largest medical technology market in Europe, and we are pleased to be able to partner with a recognized leader and significantly expand access to our portfolio in this important European market. COVID infection rates are again climbing in many parts of the world, including most of the U.S., and we are carefully monitoring our key markets. We are again seeing a modest impact on procedure volumes as hospitals continue to focus on the pandemic. However, halfway through the fourth quarter, I can say that against this very challenging business environment, we continue to build our pipeline of Focal One and ExactVu sales prospects, while at the same time, advancing our development programs into new soft tissue indications that can potentially benefit from High-Intensity Focused Ultrasound, or HIFU. As we recently announced, the clinical value of Focal One was further validated by the number of successful sales in the third quarter despite the pandemic. This is a testament to the entire EDAP team that we were able to maintain our focus during these challenging times. During the third quarter, we announced 2 Focal One sales and one of which -- one of which, sorry, 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 of our conventional ultrasound. Similar to MRI, it allows urologists to visualize and look at suspicious regions within the process and target biopsies in real time. Using this technology, urologists can see detail that evade other imaging modalities. They can use the ExactVu system to perform targeted biopsy, whether transrectal or transperineal to confirm with the high success rate of suspicious lesions seen on the image. During the third quarter, we closed 8 ExactVu deals in different configurations, whether by a bundle deal such as the Focal One-ExactVu combo we sold to Mount Sinai Health System in New York or as a stand-alone solution to existing HIFU users or to new accounts and prospects. Prostate cancer diagnosis and treatment can only be delayed so long that ultimately must be addressed. Therefore, we remain optimistic that the short-term impact of COVID will not affect the long-term momentum of market adoption of HIFU and its numerous benefits for patients, most notably quality-of-life preservation. We continue to host virtual education sessions with urologists in the center. And in September, we hosted a key opinion leader call on Focal One and ExactVu, featuring Dr. Brian Miles from Houston Methodist and Dr. Laurence Klotz from Sunnybrook Health Sciences Centre. They spoke of the significant opportunity that exists between the current 2 extremes of prostate cancer treatment, radical prostatectomy on one side and active surveillance on the other side. With HIFU, suspected prostate tissue can be ablated while leaving the gland intact. These virtual outreach efforts have allowed us to stay in front of our key stakeholders. As noted, COVID infection rates are increasing, and we are tracking changes rather than other restrictions. To this point, we have stayed true to 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 position to ship systems as soon as we are able to safely do it. Regarding reimbursement, as indicated last quarter, we expect CMS to publish the final rule for 2021 by the end of this year. We continue to prepare for a Category 1 CPT code effective January 1 and will provide an additional update once the final rule is available. Turning to our endometriosis program. In August, we were granted full approval by French health authorities to initiate a Phase II clinical trial of HIFU for the treatment of deep invasive endometriosis. And we quickly completed the first patient treatment just a few weeks later. A total of 38 women will be enrolled in the study and treated at 5 major hospitals across France and assessed over a 6-month follow-up period. During the study, investigators will evaluate the safety and efficacy of HIFU for the pathology. To date, we have enrolled 6 patients and enrollment is continuing as we have scheduled an additional 3 patient treatments so far in December. And of course, should the results of this Phase II study be positive, we will work to efficiently initiate a Phase III program. The advancement of our endometriosis program is consistent with our strategic shift away from legacy lithotripsy business into our HIFU. Endometriosis is just one example of the 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 opportunities. We look forward to keeping you apprised of our R&D efforts exploring HIFU in other indications. Publications of clinical data are key to our ongoing sales efforts. During the third quarter, we published 2 papers in the procedures and peer review Journal of Urology. These studies represent the first U.S. publication detailing successful partial gland ablation using HIFU to treat prostate cancer patients since FDA cleared the technology in 2015. The studies 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 patients -- participants, and incontinence and impotence were avoided or quickly returned to baseline levels. These results here are what we have observed in prior European studies that involved larger patient cohorts and longer follow up studies. Seeing some of our prominent reference center already publishing data, demonstrating that our HIFU technology provides unmatched potency and accuracy marks another important milestone in our U.S. market penetration strategy. And now our CFO, François Dietsch, will provide some details of our financial results. François?

Thank you, Marc. Good morning, everyone. Please note that all figures, except for percentages, are in euros. For conversion purposes, our average euro-dollar exchange rate was $1.1832 for the third quarter of 2020 and $1.1319 for the first 9 months of 2020. Total revenue for the third quarter of 2020 was EUR 9.4 million, a decrease of 8.5% compared to total revenue of EUR 10.3 million for the same period in 2019. Third quarter of 2020 revenue reflects the impact of the ongoing COVID-19 pandemic on equipment sales. Total revenue in the HIFU business for the third quarter of 2020 was EUR 2.6 million, a 7.9% decrease compared to EUR 2.8 million for the third quarter of 2019. During the quarter, we sold 2 Focal One versus 2 last year. Total revenue in the LITHO business for the third quarter of 2020 was EUR 2.4 million, a 27.6% decrease compared to EUR 3.3 million for the third quarter of 2019. Total revenue in the distribution business for Q3 2020 was EUR 4.4 million, a 6.4% increase compared to EUR 4.2 million for the third quarter of 2019, thanks to the Exact Imaging sales development. Gross profit for the third quarter of 2020 was EUR 4 million compared to EUR 4.7 million for the year-ago period. Gross profit margin and net sales was 42% in the third quarter of 2020 compared to 45.3% in the year-ago period. The decline in gross profit year-over-year was mainly due to the lower sales level as compared to the year-ago period, driven primarily by COVID-19. Operating loss for the third quarter of 2020 was EUR 0.3 million compared to an operating profit of EUR 0.3 million in the third quarter of 2019. Net loss for the third quarter of 2020 was EUR 1 million or EUR 0.03 per diluted share as compared to net income of EUR 0.8 million or EUR 0.03 per diluted share in the year-ago period. Turning to the 9 months of 2020. Total revenue for the first 9 months of 2020 was EUR 26.3 million, a decrease of 20.1% compared to total revenue of EUR 32.9 million for the same period in 2019. As mentioned, the first 9 months of 2020 revenue reflects the fact of the ongoing COVID-19 pandemic on the company's activities. Gross profit for the first 9 months of 2020 was EUR 11.4 million, compared to EUR 15.9 million for the year-ago period. Gross profit margin and net sales was 43.2% for the first 9 months of 2020, compared to 48.2% in the year-ago period. The decline in gross profit year-over-year was mainly due to lower sales in the HIFU business driven by COVID-19. Operating loss for the first 9 months of 2020 was EUR 1.5 million, compared to an operating profit of EUR 2.1 million for the same period of 2019. Net loss for the first 9 months of 2020 was EUR 2.5 million or EUR 0.09 per diluted share, as compared to a net income of EUR 2.5 million or EUR 0.08 per diluted share in the year-ago period. Finally, we finished the third quarter with a very strong cash balance. Cash and cash equivalents, including the short-term treasury investments, were EUR 19.9 million at the end of September 2020 or USD 23.4 million using a euro-dollar conversion rate of $1.1723. As announced earlier, we received during the third quarter, 2 COVID-related loans guaranteed by the French government totaling EUR 4 million. These loans carry very favorable terms, interest rate at 0.25% for the first year with a repayment term of 1 year, which can be extended to 5 years. These French loans added to other 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 another loan of EUR 0.4 million from a Japanese COVID-related assistance program, which carried an interest rate of 1.8% and is repayable beginning in 2 years. Let me now turn the call back to Marc.

Thank you, François. In closing, the third quarter was the strongest of the year thus far, despite the challenges caused by the ongoing COVID-19 pandemic. We believe that our strong cash position and efforts to grow our sales pipeline globally has positioned us well to seize 2020. 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.

I hope things are not too difficult in Lyon for you during the COVID crisis?

Brooks, well, it's not the easiest, but we're managing and navigating through it. Thanks for asking.

Yes, good for you guys. So obviously, it's a challenging environment to sell systems. But I'm curious if you're able to find ways to continue generating physician interest in the HIFU for prostate? And if you have any comments on how that's going?

Yes. Actually, it's true that it's difficult to generate equipment revenue or even activity in the hospital as everything is pretty much focused on the COVID-19 management. But as we explained, I mean we continued to do a lot of educational sessions using webinar and also taking the opportunity of more time available from the urologists. So we continue to do a lot of marketing and a lot of communication towards our users, our prospects, leads, and also by our distributors. So that's one of the positive part of that is that, again, most of those doctors not really involved directly in the management of COVID have more time for discussion, or for training, or for education also on new technologies. So that's -- as a result of that, we've seen an increase -- a continued increase in our pipeline of projects and leads, which is good. Now the question is, will we be able to access management, purchasing department, legal in the hospital so that we can bring those new prospects to deals.

Right. That's the $800 question for everybody. It sounds like the partnership with ExactVu is going well. Are you pleased with that? Is it more or less on schedule? Or would you say it's even going better than you had hoped?

Well, we're very pleased with it. I mean, again, the -- everything that we have -- we had anticipated in terms of synergies between the product is really here. It's really helping us well to drive the pipeline of projects and to get the attention from urologists and from the hospitals. It has also allowed us to kind of build some very aggressive offering of -- like the bundled deals or these kind of things. And no, we're very happy. And like we said, we've sold 3 machines during the second quarter as we got started in June and another 8 during the second quarter (sic) [ third quarter ], which is good, and it's probably over our expectation.

That's great. So you mentioned, Marc, the expectations for the Category 1 CPT code. My feeling is that's going to be a big deal for you guys. Is there anything specific that you've heard from FDA or the reimbursement folks in terms of that code? Or is it just sort of the expected time frame of dollar figure sometime here in December probably and then going live in January?

No, that's following the normal process in -- again, usually, the final rule is released by CMS somewhere around Thanksgiving. We expect some delay this year as it was for the proposed rule. So probably somewhere in December we might have all the final numbers for next year. And again, we'll keep you guys updated once we have some news.

Yes, that will be a big deal for you guys, I think. So can you just -- you talked about the endometriosis trial, but sort of when are you thinking you get through all of that, maybe be able to have an indication for endometriosis, and I think you alluded to HIFU for other indications even beyond endometriosis. And I'm curious if you could even -- I mean I don't need the specifics, but I'm curious if you can give an example of 1 or 2 additional areas where you think HIFU might have applicability?

Sure. No, we're also working on earlier stage research and development programs for other indications, and that includes pancreas -- pancreatic cancer, liver metastasis. But these are earlier stage developments, and we are not yet in terms of patient treatments.

Sure. And what's the timing on endometriosis?

Sorry, can you repeat that again?

What's the timing for the Phase II? And then how long would a Phase III trial for endometriosis be?

So the Phase II, I mean, as I said, we have 38 patients to treat in 5 institutions in France. We've already -- I mean we got started in September, and we've already enrolled and treated 6 patients and we have another 3 that are planned to be treated in December. So we'll be probably around 10 patients by the end of the year. We -- then we -- the uncertainty on conducting clinical studies in the environment gives -- I mean makes it difficult to really anticipate the exact time of the -- of completing the enrollment. But the good news as well on the protocol that was approved by the French health authorities is that the follow-up period is only 6 months. So overall, it should be a pretty short study from, I mean, enrollment and follow-up. And then again, based on what we achieved on the Phase II, we'll certainly conduct a Phase III.

Congratulations. I know it's a difficult environment, but it sounds like you're making tremendous progress.

Our next question comes from the line of Andrew D'Silva with B. Riley Securities.

Congrats on the progress. So just to start, and I very much appreciate the additional financial information you provided this quarter. Could you just let us know, if possible, what stock-based comp was during the quarter? And then I was also curious if you could let me know what ESWL and HIFU systems placements were during the quarter if possible.

Can you repeat the beginning of the question, Andrew? Sorry, I didn't hear you well.

No worries. Stock-based compensation, if you have that figure for the quarter? I'm just curious what it was. And then if you could just also let me now know what ESWL and HIFU system placements were during the quarter?

So François will answer you on the stock-based compensation. As far as the unit placement, as we said earlier in the call, we sold 2 Focal One units during the quarter, similar -- same number as last year. And in lithotripsy, we sold, I think...

In lithotripsy, we sold 4 devices this quarter versus 7 last year.