Earnings Call Transcript - EDAP Q4 2022

Operator, Operator

Ladies and gentlemen, greetings, and welcome to the EDAP TMS Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Fraunces, Managing Director of Life Advisors. Please go ahead.

John Fraunces, Managing Director of Life Advisors

Good morning. Thank you for joining us for the EDAP TMS fourth quarter and full year 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 EWS; 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?

Marc Oczachowski, CEO

Thank you, John, and good morning, everyone. I'll start by providing some operational highlights of our fiscal year 2022 and then turn the call over to Ryan Rhodes, our EDAP U.S. Chief Executive Officer; who will review our U.S. business and strategy. Our Chief Financial Officer, Francois Dietsch, will then present our financial performance. Thanks to the continued hard work of our dedicated employees and the growing acceptance of our technology, 2022 was a great year for setting new records at EDAP. During the fourth quarter, we generated record revenue of €15.7 million or $16.2 million for the year. And we announced record revenue of €55.1 million or $58 million, representing year-over-year growth of over 25%. Without question, our strong top line performance was driven by our high intensity focused ultrasound, or HIFU, segment that grew by 58% compared to 2021. The HIFU growth was particularly strong in the U.S. as Ryan and his team continued to execute by expanding the number of medical centers that are now using our therapeutic ultrasound solutions Focal One Robotic Focal HIFU. As the global leader in therapeutics HIFU, EDAP enjoys a significant technology advantage in the marketplace. And with continued strong market execution, we anticipate momentum in the form of increased placements and utilization will continue throughout 2023. Our Distribution segment also performed very well during the fourth quarter. We sold 11 ExactVu units during the quarter as compared to nine in the fourth quarter of 2021. This concludes a strong year for the ExactVu business as we doubled our system sales compared to 2021. I'd now like to provide an update on our pipeline, where we continue to make significant progress in demonstrating the utility of therapeutics HIFU beyond prostate cancer. In January, we announced positive clinical results from the end of HIFU Phase 2 study, evaluating the safety of therapeutics HIFU for the treatment of rectal endometriosis. Results from the trial serve to validate the safety of Focal One HIFU treatment in this difficult and challenging endometriosis population. The study enrolled 60 patients across four centers in France between August 2020 and March '22. And the results were based upon the six months follow-up evaluation post-HIFU treatment. Study coordinator Professor, Gil Dubernard, of Croix-Rousse University Hospital in Lyon, France presented results from the study on January 27 at the Paris Santé Femmes French Congress in Lille, France. As previously announced, treatment with Focal One resulted in significant improvements in endometriosis symptoms and quality of life. In addition, the treatment had a very positive safety profile with 96.7% of patients with no or non-significant adverse events. Finally, the study also blindly evaluated the evolution of nodule volume via MRI, and a significant reduction of the volume of lesions was observed at six months. Based on these positive safety and preliminary efficacy data, we intend to complete the efficacy of Focal One HIFU treatment in rectal endometriosis by initiating a Phase 3 study in the second quarter of '23. As a Level 1 study, this trial will be a multi-center, double-blind, randomized, controlled clinical trial that will enroll 60 subjects across eight centers in France with 30 subjects randomized to each group. The primary efficacy endpoint is acute pelvic pain three months post-procedure. If successful, this reversely designed study will provide strong clinical evidence to date, demonstrating the utility of parabolic HIFU to address this painful and debilitating condition. As a reminder, the 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 risks to the patients 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. As we execute on our commercial strategy and grow our pipeline, we are doing so from a position of increasing financial strength. We ended the year with $67.5 million in cash, which is practically unchanged from the prior quarter. As our business continues to grow, both with respect to increased system placements and higher utilization, we expect to maintain a strong balance sheet while making an appropriate level of investment to further drive top line growth and expand operating margins. As announced earlier today via our press release, the Board of Directors has decided to change the leadership of the Company to further develop EDAP's global growth strategy focusing particularly on its continued expansion in the United States and in the rest of the world market. The Board has therefore appointed Ryan Rhodes, Chief Executive Officer of EDAP TMS, effective May 1, 2023, to lead, strengthen, and accelerate this important global commercialization strategy. The Company has now reached an important inflection point in its growth trajectory and needs a strong, focused and aggressive strategy to execute. The Board of Directors and I are confident that Ryan has the capability, experience, and skills to lead this new and higher state of development for EDAP and HIFU adoption. I am pleased and committed to continuing to serve as Chairman of the Board of the Company. At this point, I would like to turn the call over to Ryan Rhodes for an update on our U.S. operations and activities. Ryan?

Ryan Rhodes, CEO of EDAP U.S.

Thank you, Marc. I would like to express my gratitude to both Marc and the EDAP Board members for their trust in my leadership as the global CEO of EDAP. As mentioned, we are focused on significant growth initiatives in both U.S. and international markets. I take great pride in leading our global teams as we work collaboratively to strengthen EDAP's market position. As a leader in therapeutic HIFU, it is evident that our technology, product offerings, customer support, and distribution capabilities are gaining recognition for Focal One Robotic HIFU as a leading non-invasive treatment for men with prostate cancer. Consequently, we are experiencing strong market momentum in our U.S. operations. The fourth quarter of 2022 showcased this momentum with a record of nine Focal One transactions, consisting of six unit sales and three operating leases. As we highlight our technological leadership in therapeutic HIFU, we anticipate benefiting from increased reimbursement for Focal One procedures. Last year, the Centers for Medicare and Medicaid Services released the outpatient prospective payment system final rule, confirming the upgrade of Medicare hospital payment for prostate HIFU to Ambulatory Payment Classification Level 6, resulting in an average reimbursement increase to about $8,558 per procedure. This reimbursement increase took effect on January 1, 2023, enhancing the value assessment for centers that offer Focal One procedures. It is important to note that higher Medicare reimbursement often leads to increased reimbursement from commercial payers who typically follow CMS's lead. As the global leader in therapeutic HIFU, we are actively engaged in educating clinicians, patients, and providers on the advantages of our technology. Participation in major medical meetings, publishing peer-reviewed clinical data, and hosting webinars and symposiums are vital aspects of our strategy. In the fourth quarter, we attended significant events such as the Society of Urologic Oncology meeting in San Diego, where we presented hands-on treatment simulations demonstrating Focal One Robotic HIFU. In clinical publications, researchers from the University of Turin published a paper detailing successful outcomes from 100 patients treated with Focal One Robotic HIFU, highlighting an 82% negative biopsy rate one year post-treatment and average procedural times of 55 minutes. Additionally, we hosted influential peer-to-peer webinars featuring top urologists discussing targeted prostate biopsy and the role of Focal One technology in managing prostate cancer. We are also organizing a live-stream broadcast of a Focal One Robotic HIFU procedure on April 18. Important upcoming events include our participation in the American Urological Association meeting in Chicago from April 28 to May 1, where we will showcase our technology. Looking ahead, I am optimistic about our sales pipeline and our team's execution capabilities as we approach the end of the first quarter. We are experiencing positive momentum with customer engagement and interest in Focal One Robotic HIFU. In conclusion, I believe EDAP will continue its success throughout 2023. Now, I will turn the call over to CFO Francois Dietsch for details on our financial results.

Francois Dietsch, CFO

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 1.02 for the fourth quarter of 2022. Total revenue for the fourth quarter of 2022 was €15.7 million, a 12.5% increase compared to total revenue of €40 million in Q4 2021. Looking at revenue by division, total revenue in the HIFU business for the fourth quarter of 2022 was €5.4 million compared to €4.2 million for the fourth quarter of 2021, an increase of nearly 28%. We sold seven Focal One units in the fourth quarter of 2022 versus five in the fourth quarter of 2021. Total revenue in the LITHO business for the fourth quarter of 2022 was €3.6 million compared to €3.3 million for the first quarter of 2021, a 7.5% increase year-over-year. We sold 11 lithotripsy devices during the first quarter of 2022 versus nine in the year-ago period. Total revenue in the Distribution business for the fourth quarter of 2022 was €6.7 million compared to €6.4 million for the first quarter of 2021. The 5% increase was primarily driven by 11 ExactVu sold during the first quarter of 2022 as compared to nine units sold during the first quarter of 2021. Gross profit for the first quarter of 2022 was €7.2 million compared to €6.2 million for the year-ago period. Gross profit margin on net sales was 45.9% in the fourth quarter of 2022 compared to 44.5% in the year-ago period. The improvement in gross profit year-over-year was driven by the higher sales effect and fixed costs and the development of the HIFU division, which has better margins. Operating expenses were €8.9 million for the fourth quarter of 2022 compared to €5.8 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. Operating loss for the first quarter of 2022 was €1.6 million compared to an operating income of €0.5 million in the first quarter of 2021. Excluding the impact of the non-cash share-based compensation, operating loss for Q4 2022 would have been €0.8 million compared to an operating income of €1.2 million in Q4 2021. Net loss for the fourth quarter of 2022 was €5.1 million or €0.15 per diluted share compared to a net income of €1.4 million or €0.04 per diluted share in the year-ago period. As of December 31, 2022, the Company had cash and cash equivalents of €63.1 million or $67.5 million compared to €47.2 million or $53.4 million as of December 23, 2021.

Marc Oczachowski, CEO

Thank you, Francois. In summary, our strong fourth quarter results reflect increasing demand for our leading therapeutic HIFU solution, which addresses early intermittent state prostate cancer patients. This dynamic, coupled with significant improvement for reimbursement from CMS, will support our continued growth and expansion throughout 2023, as Ryan's team continues to introduce Focal One to an increasing number of urology practices and cancer treatment centers in the U.S. I'm glad the Company is now embarking on a new era of leadership, which I am confident will bring its development and the adoption of HIFU to the next level. We will now open the call to your questions.

Operator, Operator

Ladies and gentlemen, we will now begin our question-and-answer session. Our first question comes from Michael Sarcone from Jefferies. Please go ahead.

Michael Sarcone, Analyst

First, I'd say, Marc, congrats on many years of successful execution, and Ryan, congrats on the new role.

Ryan Rhodes, CEO of EDAP U.S.

Great. Thank you.

Michael Sarcone, Analyst

You're welcome. I guess just to start, for Ryan, as you think about transitioning to the new role, can you just give us an update on how you think about strategy, where the Company is now and what you will reinforce versus where you might change course?

Ryan Rhodes, CEO of EDAP U.S.

Yes. I think from the strategy standpoint, obviously, looking at our playbook in the U.S. and our momentum and strategy there and does it cross-pollinate into outside U.S. markets, so I think looking at how we can bridge some of that success and bring it to regional markets outside the U.S. Obviously, a high focus is where we don't have current distribution or approval yet to sell our flagship product, Focal One, that will be a high priority in those markets. Equally, our distribution business continues to perform well for us. And I'm excited when I look at our micro ultrasound product, ExactVu, and where it can grow in various country markets where we're starting to distribute and/or sell that product. So I think a lot of it, in closing, is going to be taking kind of lessons learned from our markets in the U.S. and seeing where we can make an appropriate fit in outside U.S. markets and work closely with our teams broadly on driving a plan of success.

Michael Sarcone, Analyst

Got it. Okay. And just one on the sales funnel in the U.S., can you talk about how that's shaping up so far? You mentioned customers continue to indicate strong interest. I was just curious if you could elaborate a little more on that, the different types of accounts, maybe the size of those customers expressing interest and how you're thinking about system placements in 2023?

Ryan Rhodes, CEO of EDAP U.S.

Yes. So again, we see continued interest. Our pipeline is growing. And we see interest not only in the academic centers, and we've shown that we can sell effectively in those centers. But equally, we see the uptick in interest in community-based hospitals. So, we've worked them both categorically. And whether large or small, we look for early adopters that want to take advantage of the market momentum building around focal therapy. And again, we continue to add salespeople to our ranks. Our numbers are going up on the sales side, at least in terms of sales executives and as well as our pipeline growing. We're winding down the first quarter. And I can say we're delivering on the promise, meaning that we are delivering on the momentum we would expect to see as we embark on a strong 2023. We will continue to drive the market and take advantage also of the new reimbursement that went into place January 1.

Michael Sarcone, Analyst

Great. One last question from me. It doesn't seem like you're noticing this, but do you have any hospital customers, large or small, who are hesitant about spending on capital equipment? I'm trying to understand if you're observing any hospital margin pressures and reluctance to invest in significant items.

Ryan Rhodes, CEO of EDAP U.S.

Yes. Well, I think all hospitals will do their due diligence in terms of the economics. I think, again, as we've done in the past, we've been effective selling our technology to hospitals even with the older reimbursement. With the new reimbursement that went into place January 1, with the pro forma analysis done correctly, adding Focal One Robotic HIFU, they can show an immediate return on investment. And so, we behave differently, I think, in the capital equipment space. First of all, it's a clinical necessity today to be considering focal therapy as an offering for men diagnosed with prostate cancer. Equally, the advantages with our technology and making the investment in the equipment, specifically HIFU, can generate new incremental patients to that individual hospital catchment market and are well paid for the provider that is the hospital as well as the physician. So, if there are market pressures, and I can't comment really on those, I can comment that our economic return is pretty much immediate. And we've shown that even with the prior study that was done by the University of California, San Francisco, where they were able to pay back their system in the first year after obtaining it. So again, we work closely with hospitals to do these analyses, but we have not seen anything particular in terms of a broad hesitation to purchase disruptive capital equipment.

Operator, Operator

Thank you. Our next question comes from Joseph from Piper Sandler.

Unidentified Analyst, Analyst

I'm on for Jason today. Congrats, Ryan, on the transition. First, starting with guidance, I know you guys didn't provide formal guidance for 2023, but there is modeling around 15% revenue growth for the year. Is that a level you guys are comfortable with for the full year?

Ryan Rhodes, CEO of EDAP U.S.

Yes, I don’t think we’ve provided any guidance. Specifically, I am referring to the U.S. side. We continue to see market momentum, build our pipeline, add salespeople, and execute with high discipline. We are following the playbook and roadmap we've established for the U.S. I don’t believe anything is changing abnormally in the outside U.S. market.

Marc Oczachowski, CEO

Yes, absolutely, yes.

Unidentified Analyst, Analyst

Great. And then just moving to gross margin here, staying on the 2023 track. So, forecasting gross margin has been a bit of a challenge given the lumpiness that comes with Focal One sales. How would you have us think about the trajectory for gross margins in the HIFU segment as you look over the next one to three years? And how much opportunity do you see for gross margins to move higher? And are you able to give us a sense of what the incremental margins are in each Focal One unit that might be sold in a given quarter?

Marc Oczachowski, CEO

Well, actually, we don't provide numbers by equipment sales. But as we explained several times, the overall gross margin of the Company will continue to increase as we increase our level of sales of Focal One and HIFU activity, in particular, as it generates the highest rate of margin for the Company. And again, we saw that this year with a strong increase in our HIFU business revenue that has helped to increase the gross margin. So that will certainly continue the trend as we continue to grow the business of HIFU worldwide.

Unidentified Analyst, Analyst

Understood. Just one more from us. On the commercial reimbursement side, what's the reasonable timeline in which we could expect commercial payers to follow suit and bump their payment rates on prostate cancer treatments with HIFU? I guess, generally, is this a 2023 dynamic? Or do we have to wait here until around 2024 or beyond?

Ryan Rhodes, CEO of EDAP U.S.

So, we do have commercial payers today paying for HIFU treatments. We track that and work closely with our customers and the payers. Currently, we have a plan, certainly, as we do more procedures and grow the visibility that we're looking for new guideline changes, and we had notable change in language last year from the American Urological Association. And that kind of momentum in their language change is very helpful. But I think looking outward, we will continue to see data coming out supporting the efficacy of HIFU for men diagnosed with prostate cancer. And equally, looking for coverage policies from some of the larger payers over time, it's really hard to pinpoint an exact time frame, but we have a roadmap in front of us and it affects us as well as others in the market. But we're cautious and very optimistic that, over time, we'll see improvements in terms of new guidelines as well as extending coverage policies across some of the largest payers.

Operator, Operator

Thank you. Our next question comes from the line of Frank Takkinen from Lake Street Capital Markets. Please go ahead.

Frank Takkinen, Analyst

I'll also echo my congratulations. Maybe to start with one more on the comment you made about continued momentum through the first quarter of the year. I think last year in the first quarter of 2022, you had something like three transactions. You had nine transactions in the fourth quarter of 2022. Can you maybe speak directionally versus those metrics, how you're feeling the placements could shake out in the first quarter of this year?

Ryan Rhodes, CEO of EDAP U.S.

Yes. So Frank, usually, Q4 obviously is a strong quarter for most companies, inclusive of us. So we finished the year strong. There is the seasonality coming off the end of the year and then kind of ramping your growth throughout the following year. So, I think we're off to a very good start for 2023. We're still a few days away from closing the quarter. But I think, directionally, we're heading in the right direction. We have a good playbook and plan we're executing on. The team is working hard. So again, we would continue to kind of follow the patterns of growth that we would have probably seen early on last year. And again, we still got a couple more days here before the quarter ends, and we're working hard to close every sale.

Frank Takkinen, Analyst

I understand. That's helpful information. I’d like to ask about your comments on the positive momentum in U.S. society guidelines regarding focal ablation mentioned in the press release. You touched on this during the call today, but could you elaborate further and discuss the impact of the recent data released a couple of weeks ago and how it might affect those guideline decisions and discussions?

Ryan Rhodes, CEO of EDAP U.S.

Yes. We are seeing more data emerging, particularly from the HIFU study authorized by Professor Rishman, which demonstrates impressive oncologic control results compared to surgery. Additionally, we have ongoing studies and a randomized clinical trial in Norway that also show efficacy and positive outcomes regarding oncologic control. We are optimistic about these studies, as they are conducted with great rigor, and we anticipate that these results will be consistently observed in the market. In terms of developing guidelines, we have a solid base of leading cancer centers, and we aim to collaborate with them to leverage the data they collect to influence and establish new guideline changes. Furthermore, aspects like reimbursement on the commercial side will be affected as the number of procedures rises, and we are actively working to increase our procedure volume. This serves as another data point for potential changes in guidelines and reimbursement at a commercial level.

Frank Takkinen, Analyst

Okay. And then last one, I was hoping you could comment on any utilization trends you're experiencing year-to-date since the implementation of the new reimbursement regime? And then if you could also touch on expected ASP changes specifically within the consumable piece of the sale.

Ryan Rhodes, CEO of EDAP U.S.

Yes. Can you repeat that question again?

Frank Takkinen, Analyst

Just the utilization trends of the systems are significant. Yes, and under the new reimbursement that started at the beginning of this year, I am curious if there has been any ability to increase prices on disposables.

Ryan Rhodes, CEO of EDAP U.S.

Yes. No. I mean we've been on a track record of looking at our individual ASP on our disposables and that ASP has been trending upwards, and that's just because we've raised our prices in accordance with market dynamics. But again, we would see that trend to continue. Utilization continues to grow. And I think we are seeing some of the impact of the reimbursement increase that went into effect on January 1. I can't give you an exact number. But directionally, we're heading in the right direction. And again, utilization continues to grow accordingly.

Operator, Operator

Thank you. Our next question comes from the line of Swayampakula Ramakanth from H.C. Wainright. Please go ahead.

Swayampakula Ramakanth, Analyst

Congratulations, Marc. I've been watching you and EDAP for about eight years, and you brought this company to a place that I'm sure you are very proud of. And congratulations to Ryan for building up the U.S. operation for the last two years and getting into a place where you can kind of see tremendous growth from here, at least from my seat. Having said that, Ryan, in terms of what you have been seeing at the ground level in the U.S., and I'm sure there are some learnings from running the operation here, as you move into the worldwide role, how do you see trying to replicate some of the ideas here in other geographies so that you can grow ex-U.S. sales as much as you have been doing in the U.S.?

Ryan Rhodes, CEO of EDAP U.S.

Yes. So when we look at the outside U.S., again, you got to look by region and by market. And each strategy may have some similarities across regions. But some markets, we may not be distributing products yet or selling those products, specifically Focal One Robotic HIFU, but we're working through a process in a channel to get those approvals. Equally, though, markets are built and driven. And my background at Intuitive, I spent a good part of my career building markets. And a lot goes into that recipe, activities being one, but more clinical data, working with the new centers, further developing techniques as you use the technology. I mean there are a lot of different things that are important here. We are looking at those things very closely, and I think we're seeing some of the benefits in the U.S. I think some of it does cross-pollinate again into outside U.S. markets. And I think today, as we lead more adoption in the U.S., it will have an influence on markets. It's a validation point. And just like surgery or robotic surgery emerged as a standard of care for a treatment category of men diagnosed with prostate cancer, I believe focal therapy has a defined role for an appropriate mix of men diagnosed with prostate cancer. So, we're applying kind of the general strategies that we use in the U.S., and we'll apply more of those strategies now in my expanded role. And I'm really excited to work with these different regions and subsidiaries because I've done a lot of this in my prior career, and I look forward to it. I think, again, we have great things to do as we build and drive these markets.

Swayampakula Ramakanth, Analyst

Yes. The last question for me because most of my questions have been asked earlier, just looking at the HIFU division, when we look at the SG&A spend during '22, which was, I believe, about 65% higher than the previous year. Do you feel the sales force is in the right place at this point for growth from here onwards in '23 and beyond in the U.S.?

Ryan Rhodes, CEO of EDAP U.S.

That's an excellent question. In 2021, we had a very small team, almost nonexistent. We began building that team at the end of 2021 and entered 2022 focused on ramping up and hiring experienced sales executives. Throughout 2022, we have continued to build that team, which has more than doubled by the end of the year. We expect to nearly double the team size again by the end of 2023. This is a crucial investment for us as we work to establish our market presence. As a leader in focal therapy, we have significant opportunities and a lot of ground to cover. Therefore, having a team of high-caliber executives collaborating to drive the business is essential. Additionally, we have a bifurcated sales force: one team focuses on capital, while the other concentrates on utilization at each hospital we serve. Once we onboard and train those accounts, they have specific roles to enhance utilization. Both teams work closely together, and we anticipate both teams will nearly double in size by the end of 2023. We are excited about building the market and enhancing our capabilities and resources.

Operator, Operator

Thank you. Since there are no further questions, I will now hand over the conference to management for any closing comments.

Marc Oczachowski, CEO

Thank you, operator, and thank you, everyone, for attending the call today and for your continued support. We're looking forward to our next earnings call for the results of Q1 2023. Have a great day.

Operator, Operator

Thank you. The conference of EDAP TMS has now concluded. Thank you for your participation. You may now disconnect your lines.