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

Greetings, and welcome to the EDAP TMS Third Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Fraunces, Managing Director, LifeSci Advisors. Thank you. You may begin.

Good morning, and thank you for joining us for the EDAP TMS Third Quarter 2022 Financial and Operating Results Conference Call. On today's call, we'll hear from Marc Oczachowski, Chief Executive Officer and Chairman of the Board; Ryan Rhodes, Chief Executive Officer of EDAP U.S.; and Francois Dietsch, Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plans. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause 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, John, and good morning, everyone. I will start by providing a brief operational update before turning the call over to Ryan Rhodes, our EDAP U.S. Chief Executive Officer; for a review of the U.S. business and strategy. And then Francois Dietsch, our CFO, will present our financial performance. Let me begin by recapping a few of the highlights. For the third quarter, we generated total revenue of EUR 12.2 million or $12.3 million, representing an increase of 29.7% over the third quarter of 2021. Through the 9 months of 2022, we generated total revenue of EUR 39.4 million or $41.7 million representing growth of nearly 31% over the comparable period in 2021. The increase in quarterly revenue was primarily driven by contribution from our HIFU segment in which we increased revenue nearly 81% over the third quarter of 2021. We sold 3 Focal One machines during the quarter as compared to 1 machine in the third quarter of last year. During the first 9 months of 2022, we experienced the same high growth of nearly 80% in our global HIFU revenues driven by a strong triple-digit growth in our U.S. HIFU revenues and a solid double-digit growth in our OUS HIFU revenues. We are very encouraged by this notable and global momentum of our HIFU technology. Our Distribution segment also performed very well during the third quarter. We sold 12 ExactVu units during the quarter as compared to 5 in the third quarter of 2021. This drove Distribution segment revenue to increase 30.9% year-over-year. During the quarter, positive changes were finalized for reimbursement in the United States. This is great news for access to our leading HIFU treatment, and we believe will be a very positive catalyst for our business. Ryan will speak in more details on these changes in a few moments. Our third quarter and year-to-date results together with this increase in reimbursement give us a high degree of confidence that our growth will continue as our HIFU technology is increasingly recognized as an essential platform in urology practices. At this point, I would like to provide an update on our pipeline expansion activities where we believe HIFU can have clinical utility and indications outside of prostate cancer. As a reminder, we are running a Phase II study evaluating HIFU using the Focal One robotic platform for the treatment of deep infiltrating endometriosis. All patient treatments for this study have been completed with the last patient follow-up visit finalized in October. We are now analyzing the database on safety, efficacy and pathology outcomes with the planning of presenting at a major medical meeting in early 2023. The current standard of care treatment of deep infiltrating endometriosis typically involves surgical resection of the bowel or rectum, which is a highly invasive procedure that presents risk to the patient along with significant recovery time. We believe the use of our Focal One robotic HIFU technology could greatly improve the treatment of complex endometriosis by offering patients a less invasive treatment option without the morbidity and possible side effects associated with surgery. We look forward to the results from this important study. On another clinical front, we continue enrolling patients in our BPH, benign prostatic hyperplasia feasibility study using our Focal One robotic HIFU platform. We have so far treated about 2/3 of the number of patients. We will keep you posted as we move forward in this study. In other activities, we strengthened our financial position during the quarter by raising gross proceeds of approximately $23 million through a secondary offering of American Depository Shares. This financing not only enabled us to strengthen our operational initiatives and further diversify our shareholder base, but also added to our research coverage, which we think will further increase the worthiness of EDAP going forward. With nearly EUR 67 million of cash, we are well financed to further expand and continue executing on our U.S. Focal One growth strategy while in parallel, exploring new indications and other development opportunities. At this point, I would like to turn the call over to Ryan Rhodes, CEO of EDAP U.S., for an update on our U.S. operations. Ryan?

Thank you, Marc. First, turning to the HIFU sales for the quarter. We had a particular active third quarter highlighted by 3 additional Focal One sales. These include, Morristown Medical Center in New Jersey, Northwell Huntington Hospital in New York and Willis-Knighton Health System in Louisiana. Morristown Medical Center is of notable importance as it represents our first Focal One sale in the state of New Jersey. Morristown is a leading health care provider that has been rated #1 in the state of New Jersey by U.S. News and World Report for 5 years in a row. We would anticipate, like many other highly regarded institutions that have incorporated Focal One into the urology practices, Morristown can become an important reference site for us in the tri-state area. Turning to Northwell Huntington Hospital. Northwell Health is New York's largest health care provider with 21 member hospitals. It has a very strong reputation as a leading health care provider with the ability now to offer Focal One robotic focal HIFU to many of its patients. Finally, Willis-Knighton Health System is the largest health care provider in Northwest Louisiana. And was ranked the best hospital in Louisiana by Newsweek in their publication, World's Best Hospitals 2022. These sales are particularly noteworthy as all 3 represent large community hospitals. We previously talked about the accelerating momentum we are seeing with community hospitals, which make up about 80% of all hospitals across the United States, and these sales further validate that dynamic growth. In parallel with these sales, we also continued to add to our ever-growing pipeline of prospects. With our U.S. team and infrastructure continuing to expand, we believe that we have set the stage for a very active 2023, during which we anticipate converting many of these prospects into Focal One sales and placements. As noted previously, the Focal One sales cycle can vary by institution and, in some cases, be quite long with the necessity of working through capital hospital budgetary cycles. We remain confident in the growing awareness of focal therapy led by HIFU as a viable treatment alternative for the management of prostate cancer. Many patients and urologists continue to explore effective noninvasive treatments beyond the traditional options of radical surgery and radiation. In the area of reimbursement, just a few weeks ago, we learned that the centers of Medicare and Medicaid Services, or CMS, published its final outpatient prospective payment system rule for calendar year 2023. The final rule increases reimbursement to a hospital performing an outpatient HIFU prostate ablation procedure on a Medicare patient to ambulatory payment classification level 6, up from level 5 currently. In dollar terms, this represents an increase on average of more than 90% to $8,558 per procedure adjusted locally based on the wage and labor index from $4,506 per procedure currently. This new increase goes into effect on January 1. Based on this increase, we believe facility payments will now cease to be a barrier for adoption of Focal One technology. One impact of the reimbursement changes, there have been facilities that have looked to upgrade their Focal therapy approach to be primarily robotic HIFU but had difficulty doing so in the past. We believe this change will help rectify that situation and significantly expand patient access to this procedure. Furthermore, higher Medicare reimbursement often translates into higher commercial reimbursement as many commercial payers follow CMS' lead on such decisions. As noted, we've been successful in driving adoption and sales growth under the existing reimbursement while delivering a positive financial return on investment for hospitals who purchased Focal One. We now believe the move to classification payment APC level 6 will allow others to acquire Focal One robotic Focal HIFU technology that's providing more patients access to these needed and valuable treatments. A recent article in the publication healthcare business highlighted the financial success hospitals have led by incorporating Focal One HIFU into their prostate cancer program. This article was authored by Dr. Laura Crocitto, Chief Medical Officer and Vice President of the Helen Diller Family Comprehensive Cancer Services at University of California, San Francisco, who is also a practicing urologic oncologist. UCSF is a world-class institution that is widely known for breakthrough clinical research and medical innovation. Here's how Dr. Crocitto described the decision to adopt Focal One in the article. I quote her. "Prior to joining UCSF, I had researched Focal HIFU, and I knew this would be a game changer for men with localized disease. It would also round out our cancer services. In fact, it would give UCSF a way to noninvasively treat localized prostate cancer while preserving patient's quality of life and giving him the greatest opportunity to treat their cancer while avoiding common side effects of sexual impotence and urinary incontinence, also associated with standard procedures, radical prostatectomy and radiation. Our proposal exceeded expectations, even though we projected a 2.1 year return on investment. The Focal HIFU device paid for itself in the first year. To this day, I considered the acquisition of Focal HIFU one of my major contributions to the Helen Diller Family Comprehensive Cancer Center and UCSF." This case study conveys a very powerful message on the favorable clinical and economic results of Focal One and has allowed our U.S. team to amplify its efforts. September was prostate cancer awareness month, and we participated in numerous events and partnerships with hospitals to raise awareness of Focal One robotic HIFU to more patients. We also presented at important medical meetings, such as the 2022 Society of Robotic Surgeons meeting in Orlando and the 2022 meeting of the Frontiers in Oncologic Prostate Care and Ablative Local Therapy or FOCAL 2022 in Los Angeles. Several speakers presented on Focal One robotic HIFU and their experience. In addition, a particularly significant event was urologist led webinar, led by Dr. Timothy Daskivich and Dr. Hyung Kim at Cedars-Sinai Medical Center in Los Angeles. They spoke live to colleagues from across the United States about their experience in adopting Focal One HIFU and presented numerous case studies to assist others in beginning a Focal HIFU practice. In September, we hosted a urology expert panel and live Focal One technology demonstration in New York City that was attended both in person and virtually by over 100 people representing major financial institutions and investors. In closing, the significant investments we have made in building our U.S. team and support infrastructure are paying dividends. With growing awareness and improved reimbursement for focal therapy, we are well positioned to lead this category of growth with the combination of the most advanced HIFU technology, increased validation with major medical centers and growing sales and clinical momentum. And now our CFO, Francois Dietsch, will provide some details of our financial results. Francois?

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 $1.0017 for the third quarter of 2022. Total revenue for the third quarter of 2022 was EUR 12.2 million, a 29.7% increase as compared to total revenue of EUR 9.4 million in Q3 2021. Looking at revenue by division. Total revenue in the HIFU business for the third quarter of 2022 was EUR 3.5 million as compared to EUR 1.9 million for the third quarter of 2021, an increase of nearly 81%. We sold 3 Focal One units in the third quarter of 2022 and 1 unit in the third quarter of 2021. Total revenue in the LITHO business for the third quarter of 2022 was EUR 2.2 million as compared to EUR 2.5 million for the third quarter of 2021. We sold 2 lithotripter devices during the third quarter of 2022 versus 3 in the year ago period. Total revenue in the Distribution business for the third quarter of 2022 was EUR 6.6 million as compared to EUR 5 million for the third quarter of 2021. The 30.9% increase was primarily driven by 12 ExactVu units sold during the third quarter of 2022 as compared to 5 units sold during the third quarter 2021. Gross profit for the third quarter of 2022 was EUR 5 million compared to EUR 3.6 million for the year ago period. Gross profit margin and net sales was 41% in the third quarter of 2022 compared to 38.4% in the year ago period. Increase in gross profit year-over-year was driven by the higher sales effect on fixed costs. Operating expenses were EUR 7.2 million for the third quarter of 2022 compared to EUR 5.5 million for the same period in 2021. The increase was primarily driven by the ongoing build-out of the U.S. team and commercial infrastructure and included EUR 0.4 million of noncash impact related to share-based compensation programs. Operating loss for the third quarter of 2022 was EUR 2.1 million compared to an operating loss of EUR 1.9 million in the third quarter of 2021. Excluding the impact of the noncash share based compensation, operating loss for Q3 2022 would have been EUR 1.7 million compared to an operating loss of EUR 0.9 million in Q3 2021. Net income for the third quarter of 2022 was breakeven or EUR 0.00 per diluted share as compared to a net loss of EUR 1 million or EUR 0.03 per diluted share in the year ago period. As of September 30, 2022, the company held cash, cash equivalents and short-term treasury investments of EUR 68.3 million or USD 66.8 million as compared to EUR 47.2 million or USD 53.4 million as of December 31, 2021. In September, realized gross proceeds of $23 million through a secondary offering of American Depository Shares. And I will now turn the call back to Marc.

Thank you, Francois. In summary, we are very pleased with our performance in the third quarter and year-to-date, and I believe this sets up very -- sorry, for a very strong end of the year. Both U.S. capital placements, treatment volumes and pipeline growth continue to reflect the efforts of Ryan and his team, and I believe the increase in reimbursements will significantly amplify the efforts. We will now open the call to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Michael Sarcone with Jefferies.

So the first one was just on the finalized Medicare reimbursement. Ryan had briefly mentioned continuing to add to the funnel. I was hoping you could just talk about what kind of impact that finalization has had on your conversations with customers and how they're thinking about system adoption? And any kind of quantitative color you could provide just on what that sales funnel looks like and how you think conversion to placements could play out over the course of 2023?

Yes. So the way I would answer that, a few things. Notably, we work with hospitals commonly with some pro forma analysis. And we've done that historically with the current reimbursement APC Level 5. So now we have an opportunity to revisit those analysis. And obviously, this looks much more favorable at the facility level. So I think it really does help us -- helps us a lot in the community hospital setting. I think what we do have to be aware of is we normally go through a buying process. Hospitals have those buying processes in place. The question is do we expedite through that process? I wouldn't say that at this point, but I would say that we look favorable when they do the analysis, and they look at reimbursement at a facility level. And I think this does open up more opportunity for us to have more conversations and, of course, go back and revisit customers we spoke to months ago or a year ago and look at the numbers again, it helps us in that area. It also helps us in other areas of the company to also include our recruiting efforts. I think this is a great story on all fronts, but most importantly, allows for more patient access to this very important procedure.

Great. That's really helpful. And just my follow-up question. Can you just give us an update on where you stand in terms of the U.S. commercial organization build-out, whether that be head count and how you're thinking about that and how you expect to ramp that or if you need to ramp that through 2023?

Yes. We've made an ongoing effort to add a new head count and talent in our commercial structure. That is part of our growth plan as we exit the year. We'll continue on that process but also continue on that process throughout 2023 as we scale up our business. So we've notably added a number of high-talent individuals to the team, and we'll continue to do that as we exit the year and embark on 2023 to take advantage of this new opportunity.

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

Maybe just a follow-up there on the reimbursement update and some discussions that were made there in the prepared remarks. I mean what's the right way to think about the very positive update on the reimbursement front? But balance that against conversion cycles that are maybe taking a little bit longer for hospital CapEx items, there are a lot of hospital CapEx items out there. Are you seeing that the effects of the macro when you go in and try to close these Focal One sales? Or is this just one of those cases where unique technology, really good reimbursement update and you're almost going to proceed almost unaffected?

Yes. So a very good question. I think the way to look at it is, first of all, buying patterns certainly vary by institution, by region, et cetera. And we see that commonly. I think when we look at our story and we look at the story of Focal therapy, most physicians or urologists, in this case, would certainly say that this is a necessity to have a Focal therapy treatment program or offering and that, in consideration of looking at what the options are, HIFU now being called out in the reimbursement, is a notable option. So again, I think this certainly is helpful in this process and will help us as we look into 2023. But I would also say that when senior executives in a hospital think of Focal therapy and they think of HIFU, it is a strategic offering for the institution. If you think of men with say, intermediate risk disease, what are the best options for that? Well, many will argue that Focal therapy is -- should be a consideration. So if you don't have a Focal therapy option in your treatment paradigm, you may have a gap. And I think we fulfill that gap with Focal therapy, but importantly with Focal One robotic Focal HIFU. So we're excited about this change in reimbursement. And again, I think it benefits certainly a lot of patients out there who want access to these types of procedures.

And then maybe over on the some clinical pipeline items here on first on the rectal endometriosis indication. I really looking forward to seeing that data next year. Can you remind us what we should be prepared to see when that data is presented at the major medical meeting and then what are the next steps that you're contemplating for that indication, whether it be in Europe or the U.S.?

So yes. I mean we're looking at evaluating with this study the safety and the efficacy of the treatment on those deep rectal endometriosis nodules. That's what we are expecting to show as the results and the endpoint of that study. Next steps will certainly work on -- starting a Phase III trial as well as on working on the regulatory path in both Europe based on the new MDR regulatory environment as well as in the U.S. with the FDA. So that study should open up some doors to get started in more concrete regulatory paths.

Okay. And then any sense on when that study or when that study might kick off just given kind of the time lines we have in place on the Phase II and the presentation of that and working through the -- and preparing all the study protocols and then any early sizing -- patient enrollment sizing on that study? I'm assuming that would be a kind of a multinational RCT study. Just any clarification on any of those items.

Yes. We're still working on that and also working with the authorities in Europe to validate and work, build the protocol. So we're not yet there, but we'll keep the market posted.

Okay. All right. Great. And then maybe one final point, similar question actually on the BPH study. Any time line on when that study should close? I heard the 2/3 enrollment point, but -- which is a great update. But any -- trying to put a bow on some of the time lines here on these items.

Yes. It's always difficult to give timing and such information. I mean, you know most of the -- those people are running a number of clinical studies. So that makes always, as usual, a bit of a challenge to get patient. But we -- again, it's going well. So we're confident that we might be closing that potential, I mean the enrollment at least potentially by the end of this year, if not early next year.

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

I wanted to kind of follow up on some of the previous questions that were asked. Obviously, the reimbursement doesn't go into effect until the start of the year, but I was just curious if you expect any pull forward into Q4, given your comment around buying patterns in Q4 typically being the strongest quarter for cap placements.

Yes. We're certainly socializing this with hospitals that were currently in our pipeline and those that may be further distant out. As noted, Q4 tends to be a stronger quarter. We're obviously guarded optimistic in terms of where we land end of the year. But I think it's really allowed us to go back, as I mentioned earlier, to speak with hospitals that we spoke to maybe months and months earlier in the year or even dating back to last year when we did some pro forma analysis, especially in community hospitals looking at reengagement. And if you combine the facility payment with the professional fee, it's really attractive on the economic front. Certainly, the clinical merits of the treatment, the procedure, the outcomes and all that are mission-critical. But I think it really does help us, and we're going to take advantage of it where we can as we exit 2022 in March into next year. So we're well versed at our talk tracks. And again, we're having those conversations currently with our customer base.

Okay. That's helpful. And then maybe one on the commercial side. Obviously, commercial normally follows CMS' lead. But maybe could you just talk to how we should be thinking about commercial reimbursement for HIFU and when some of these reimbursement changes could come into effect on the commercial side?

Yes. So we're -- again, until that goes into effect on January 1, we'll be doing our best to make sure that the commercial payers are educated. We have a team that helps run a process for any claims that come through. They sit outside the company. They help hospitals. There's an 800 number in the team that helps with that. Again, we'll see probably more of that coming online as we get into the new year. But we are still very active supporting hospitals indirectly on reimbursement-related issues and make -- in helping where we can. But again, I think you'll see more of this as we move into next year 2023.

Okay. And then last one, more of a housekeeping question. Can you refresh us around how many Focal Ones are installed in the U.S. market today?

Yes. Based on our installed base, we're nearly 30 placements, and we added the 3 here. So it's 27 placements.

Our next question comes from the line of Sean Lee with H.C. Wainwright.

Most of my top questions have been answered already, but I just wanted to have a bit of a follow-up on some of your programs. So first, for the U.S. commercial side, do you -- would you say there are still any major geographies or medical systems that you have yet to penetrate? Or is it more of going back to hospitals that you've targeted before and trying to getting them to see the benefits of HIFU now it's a more established therapy?

Well, I think it's both. We're working all the appropriate geographies, the largest MSAs across the country, obviously, looking at all appropriate markets. We're doing that in our expansion strategy with our commercial team. Additionally, any hospitals, again, we've had a conversation with in the past, we have made it a priority to get back in front of them and update them on this looming change here coming with reimbursement, that's important. And that allows us to reengage with them, whether it's a pure economic discussion or a combined economic discussion with the clinical value and merits of robotic Focal HIFU. So we're excited. It gives us another opportunity to not only look forward to new markets as we're already focused on but also go back and retroactively look at accounts we've spoken to in the past.

Great. My second question is on the clinical front. With the rectal endometriosis study, I was wondering, since previously, for the prostate cancer, it took a while for Ablatherm and then HIFU -- then Focal One be approved because regulators wanted to see longer-term response and longer-term durability data. Is that something that you think they would also be concerned with, with rectal endometriosis?

Well, rectal endometriosis, in general, is a very symptomatic disease as opposed to prostate cancer that's not as symptomatic as in the endometriosis, and that's more also a slow evolving disease. So we might need to get less time of follow-up. And actually, as we previously explained, the Phase II trial as a 6-month period only a follow-up, so which makes it much more -- much faster than what it was in the prostate cancer environment. So of course, we need to bring clinical evidence. And as you know, the MDR regulation in Europe has strengthened the clinical part of the regulatory process, but again, here because we are speaking of a very symptomatic disease, we might be able to give and to get conclusion and follow-ups on the much shorter period.

I see. For the potential Phase III that's coming up, do you feel like a 6 months follow-up will be sufficient then?

So this is -- as I said just before, I mean, this is part of the discussions that we are having with the health authorities in Europe to build and get a protocol approved. So we are not yet there.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Oczachowski for any final comments.

Thank you, operator. Well, that's concluding our call this morning. Thank you again for your interest and support, and I look forward to our next quarterly update. I wish you all a good day. Bye-bye.

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