Earnings Call Transcript - EDAP Q3 2023

Operator, Operator

Greetings and welcome to the Edap Tms third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Fraunces. I think, John, you may begin.

John Fraunces, Host

Good morning, and thank you for joining us for the Edap Tms third quarter 2023 financial and operating results conference call. Joining me on today's call are Ryan Rhodes, Chief Executive Officer, François Dietsch, Chief Financial Officer, and Ken Mobeck, Chief Financial Officer of the US Subsidiary. 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 Chief Executive Officer, Ryan Rhodes. Ryan?

Ryan Rhodes, CEO

Thank you, John, and good morning, everyone. I will begin today's call by highlighting our third quarter of 2023, and then I will hand it over to Ken Mobeck, our U.S. CFO, to present the financial performance details. I'm pleased to announce that in the last fiscal quarter, we have continued to see strong growth in U.S. Focal One HIFU procedures. This growth is attributed to HIFU becoming a preferred treatment option for prostate cancer, with Focal One being favored among urologists. Our strategic investments in our commercial and clinical teams are further enhancing utilization. In the third quarter, we experienced a 150% year-over-year increase in U.S. procedure volumes, marking our fourth consecutive quarter of double-digit procedure growth. The rise in procedures across our installed base is compelling evidence that Focal One is increasingly vital in managing prostate cancer. Focal One is the leading platform for prostate focal therapy used by urologists. The advantages of Focal One HIFU are evident, as it is a non-invasive procedure offering excellent oncological control, minimal patient downtime, and avoids the need for radical surgery or radiation. We are confident that these benefits, along with strong clinical outcomes, will continue to drive procedure growth and new placements of Focal One systems. We placed two new Focal One systems in the third quarter of 2023. The first was sold to the University of Florida, contributing to the number of major academic medical centers adopting Focal One. The second system was installed at Cleveland Clinic, Abu Dhabi, ranked as the top hospital in the UAE by Newsweek World's Best Hospitals 2023. Now, multiple sites within the Cleveland Clinic health system are utilizing Focal One. Additionally, two more Focal One systems have already been placed early in the fourth quarter, with expectations for further placements throughout the remainder of the quarter. Our continuing education efforts and increased presence at major medical meetings are also boosting urologist demand for Focal One. A notable recent activity was our partnership with Cleveland Clinic and the Society of Urologic Oncology. Focal One sponsored the first Society of Urologic Oncology approved fellows focal therapy course hosted by Cleveland Clinic from September 21 to 22. This two-day training program featured lectures, hands-on simulations, and live procedures using the Focal One Robotic HIFU platform, demonstrating the growing recognition of Focal One HIFU among leading experts in prostate cancer management. Focal One was also highlighted at various regional, national, and international scientific meetings during the quarter, including poster and podium presentations by prominent specialists in prostate cancer and focal therapy. In September, the Focal Therapy Society hosted its 13th international symposium on focal therapy in Washington, D.C., where Focal One was part of the main scientific program, including a dedicated hands-on simulation session led by experts like Dr. Cary Robertson, Associate Professor of Urology from Duke University. Significant results were shared by leading experts from Cleveland Clinic, the University of Southern California, and Duke University. A key plenary presentation by Professor Eduard Baco from Oslo University Hospital highlighted updated results from a randomized controlled trial comparing Focal One Robotic HIFU ablation with robotic prostatectomy for patients with intermediate risk prostate cancer. Dr. Baco noted that after at least one year of follow-up, focal ablation provided good oncological efficacy, better preservation of continence and erectile function, and resulted in significantly fewer Clavien 3 complications compared to radical prostatectomy. Another important development in the third quarter was reimbursement approval in Switzerland on July 1 for using HIFU in prostate cancer treatment. Switzerland, part of the DACH market region containing Germany, Austria, and Switzerland with over 100 million total inhabitants, has many hospitals ranked among the best 250 in the world, including the University of Zurich, an active and significant Focal One site. The University of Zurich is the leading innovation center for HIFU in Switzerland and is a member of the League of European Research Universities, placing it among Europe's most esteemed research institutions. Now, I'd like to discuss our developments in expanding into new clinical indications for Focal One Robotic HIFU. We continue to progress in our endometriosis clinical program. Positive results from the Endo-HIFU-R1 Phase 2 study in deep infiltrating rectal endometriosis were presented by Professor Gil Dubernard at the Annual Congress of the European Society for Gynaecological Endoscopy in Brussels, Belgium, in October. We are currently enrolling patients in our Phase 3 comparative double-blind, randomized controlled trial, and we are 83% enrolled, expecting to complete enrollment by the end of 2023. If Phase 3 results are positive, Focal One HIFU could offer a less invasive first-line treatment for deep infiltrating rectal endometriosis while avoiding the significant morbidity and complications often associated with surgical bowel and/or rectum resection. As our Phase 3 study advances, we are preparing for regulatory engagement with the FDA and other authorities. I'm also pleased to announce that today, Edap has entered into a clinical research collaboration with the Icahn School of Medicine at Mount Sinai Department of Urology in New York to enhance the understanding of immunotherapy treatment alongside HIFU in prostate cancer patients. Focal therapy with HIFU delivers targeted energy ablation to a prostate lesion, and existing research indicates that this treatment boosts the immune response. The goal of the collaboration is to explore whether HIFU combined with immunotherapy can yield measurable oncological outcomes in prostate cancer patients. This research is overseen by Professor Ashutosh Tewari, a recognized leader in the field and Chair of Urology at the Icahn School of Medicine at Mount Sinai Hospital. As we look ahead through the remainder of 2023 and considering our strong start to the fourth quarter, we anticipate that continued procedure growth with our current customers and new Focal One system placements will lead to robust operating performance as we approach year's end. With EUR 47.7 million, or $50.5 million in cash and short-term investments, we will keep strategically investing in our commercial operations to enhance productivity and support the growing demand for Focal One Robotic HIFU as a leading technology platform in prostate cancer management. I will now turn the call over to Ken to review the third quarter financial performance. Ken?

Ken Mobeck, CFO of US Subsidiary

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 USD1.0814 for the third quarter of 2023. Total revenue for the third quarter of 2023 was EUR11.7 million, a decrease of 4.1% as compared to total revenue of EUR12.2 million for the same period in 2022. The decrease in revenue was due to lower sales of Focal One and ExactVu units versus the prior year period. Looking at revenue by division, total revenue in the HIFU business for the third quarter of 2023 was EUR3 million as compared to EUR3.5 million for the third quarter of 2022. The decrease was driven by one Focal One system sold in the third quarter of 2023 versus three systems sold in the third quarter of 2022. As Ryan mentioned, our pipeline continues to grow, but we did see a delayed closing of deals in the third quarter. Two of the deals have already closed in the fourth quarter. Despite the modest decrease in overall HIFU sales, we are very encouraged to see a 49.2% year-over-year growth in disposable revenue, reflecting strong procedure demand. Total revenue in the LITHO business for the third quarter of 2023 was EUR2.7 million, as compared to EUR2.2 million for the third quarter of 2022. The increase in LITHO revenue was driven by seven lithotripsy units sold in the third quarter of 2023 as compared to two units sold in the third quarter of 2022. Total revenue in the distribution business for the third quarter of 2023 was EUR6 million as compared to EUR6.6 million for the third quarter of 2022. The decline in distribution revenue was driven primarily by nine ExactVu units sold during the third quarter of 2023, as compared to 12 units sold during the third quarter of 2022. Gross profit for the third quarter of 2023 was EUR4.2 million compared to EUR5 million for the year-ago period. Gross profit margin on net sales was 35.5% in the third quarter of 2023, compared to 41% in the year-ago period. The decrease in gross profit margin year-over-year was primarily due to three main factors: the adverse impact from delayed sales of U.S. Focal One systems in the quarter; a higher mix of distribution products with lower gross margin; and the continued investments we are making in our U.S. field service and clinical application organizations to further support HIFU adoption and long-term revenue growth. Operating expenses were EUR9.7 million for the third quarter compared to EUR7.2 million for the same period in 2022. The increase in operating expenses was primarily due to the continued strategic planned build-out of the U.S. team and commercial infrastructure as well as increased marketing activities. Operating loss for the third quarter of 2023 was EUR5.6 million compared to an operating loss of EUR2.1 million in the third quarter of 2022. Excluding the impact of noncash share-based compensation, operating loss for the third quarter would have been EUR4.2 million compared to an operating loss of EUR1.7 million in Q3 of 2022. Net loss for the third quarter of 2023 was EUR3.9 million or EUR0.11 per diluted share as compared to net income of EUR0 in the year-ago period. Inventory increased to EUR15.3 million in Q3 as compared to EUR13.3 million at the end of Q2 2023. This higher than average inventory level was driven by two key elements. First, finished goods inventory was high due to low Focal One and ExactVu system sales in the quarter. Second, the purchase of raw materials for key system components increased to meet future demand. Total cash and cash equivalents at the end of Q3 was EUR47.7 million as compared to EUR51.3 million at the end of Q2 2023. This EUR3.6 million cash decrease was driven primarily by the cash used in operating activities and capital expenditures. We continue to monitor our cash flow closely, prudently balancing investment in long-term business growth with short-term financial performance to manage our overall cash reserves while being mindful of what is happening with macroeconomic factors around the globe. Those are our key financial highlights for the third quarter of 2023. And with that, I would like to turn the call back to Ryan.

Ryan Rhodes, CEO

As you can see in closing, despite experiencing delays in HIFU sales in the quarter, our core pipeline remains very strong across a wide breadth of both academic and community urology practices. Moreover, the continued robust year-over-year growth in procedure volumes provides us with the strongest market-based evidence to date that robotic HIFU, and Focal One in particular, is becoming an essential treatment in the management of prostate cancer. As the global leader in robotic HIFU therapy, Edap remains well positioned to capitalize on the growing acceptance of Focal One HIFU as a market-leading technology platform. We anticipate a strong finish to the year based on accelerating trends in utilization and additional placements of Focal One systems. I will now turn it back over to the operator for questions.

Operator, Operator

Our first question comes from Michael Sarcone from Jefferies.

Michael Sarcone, Analyst

Thanks for taking my questions. Just wanted to start on the capital equipment environment. I know last quarter, you had mentioned that higher rates have elongated the sales cycle somewhat. I was hoping you could just give us an update on how customers are thinking about capital equipment purchases, and any further impact on rates that it might have bled into 3Q?

Ryan Rhodes, CEO

Yes, Michael, we've said before, I think we are positioned and positioned strongly. In terms of capital, we are a strategic investment for a hospital. We're part of a clinically necessary revenue-enhancing service line that brings strategic value. So we fall into that category versus, say, operational capital. And even though we're in a good position, we saw some slowing down in the process. We're still engaged with many hospitals in our pipeline. You know, our pipeline is very strong. And as we move forward, we anticipate closing more of those sales in Q4. But I think answering your question, I think hospitals are certainly being prudent in determining what investments they're making. And with that, they're taking more time through that process.

Michael Sarcone, Analyst

Got it. That's really helpful. And I guess, also last quarter, you know, you sounded pretty positive on the funnel as you do today. You had mentioned you felt pretty confident in exceeding the number of placements that you had seen in the first half. I think that number was 11. Is it still the same today where you feel confident in exceeding that number? Or has anything changed on that front?

Ken Mobeck, CFO of US Subsidiary

Yes, Michael, good morning. This is Ken. So regarding second half performance, we still see a very good Q4 picture lining up. You know, as we've mentioned, we had a couple of deals that came down to the very end of the quarter. We've closed two of those deals already, and we have good expectations here for the second quarter to be at or above first half.

Michael Sarcone, Analyst

Okay, great. Thank you.

Operator, Operator

Our next question comes from Sean Lee from H.C. Wainwright.

Sean Lee, Analyst

Hi, so thanks for taking my questions. My first question is the number of HIFU procedures. You mentioned there was a strong growth in that. And I was wondering whether you can provide a bit more color on what are some of the pushes and pulls on that number? And how does the new equipment sales translate into procedure growth? Does it take these new users some time to get up to speed? Or are they starting off running?

Ryan Rhodes, CEO

We keep track of our procedures for each Focal One installation. For accounts just beginning their program, there is a necessary training and onboarding phase, along with a gradual buildup of cases. This is quite common. However, we have noticed that many new accounts are eager to expedite their onboarding process to start contributing cases promptly, which is an important metric for us. The evidence supporting the role of focal therapy has been strong, as seen in discussions at international, national, and regional urology meetings where focal therapy is a popular topic. Our technology has been frequently highlighted as best-in-class and has received significant recognition. More centers are showing interest in offering focal therapy to prostate cancer patients, which is encouraging. Additionally, our clinical sales team is actively working to enhance utilization at the facility level. All these factors combined are contributing to the development of more programs, a transition to better technology with Focal One, and an efficient onboarding process for clinical users supported by our commercial teams.

Sean Lee, Analyst

Great. Thank you for that. And then my second question is on, I think in the prepared remarks, you mentioned that one of the machines sold last quarter was in Abu Dhabi. And I was wondering whether the Middle East can become a geographic interest for you guys?

Ryan Rhodes, CEO

Yes, we were excited about the placement at Cleveland Clinic Abu Dhabi. In fact, they've already performed cases. And so that program has already launched, and we're excited to see for it and look out through the Middle East for other areas of opportunity. But the Cleveland Clinic Abu Dhabi facility has a very strong reputation in the Middle East. And I think it's a clear validation. When they looked at technology, they chose Focal One. So we're, again, looking outward for other opportunities throughout the Middle East.

Sean Lee, Analyst

Great. My last question is on the ExactVu sales. So I was looking at that, I was wondering whether you can give us some color on what exactly drives those sales?

Ryan Rhodes, CEO

Well, those, again, ExactVu is used at the time of biopsy. So again, further upstream, right, patients go in for a biopsy. And as we know, micro ultrasound, 29 megahertz, has a measurable improvement in terms of visual acuity to look at prostate tissue and specifically better target regions of interest for placing biopsy needles. So I think the combination, either as a standalone technology or combined with the use of imaging from an MRI, hospitals realize that, wow, we can see better. And if we can see better, we can be more precise in terms of where we target and perform biopsy mapping and delivery within the prostate gland. So again, I think the evidence is strong. We have a large number of growing academic centers that have adopted this technology, and more to come. We have also, as a recent, added a dedicated clinical sales team and capital team specific to ExactVu. So looking out, we're excited for the momentum and building more momentum around this product.

Sean Lee, Analyst

That's great to hear. That's all I have, and thanks again for taking my questions.

Ryan Rhodes, CEO

Thank you.

Operator, Operator

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

Frank Takkinen, Analyst

Alright. Thanks for taking the question. Ryan, was hoping you could talk a little bit about the purchase model versus a less capital intensive adoption model, whether that's a lease, or a bridge to buy, or something similar to that. What are you hearing in the field? And do you have any prediction for where this mix might start to shake out in Q4 and into 2024, as we are in a little tougher macro-environment?

Ryan Rhodes, CEO

Yes, we are continuing to prioritize direct cash sales and have seen success in that area. We also have various options available, such as operational leases and bridge-to-buy options. This means we can effectively meet the needs of our customers. If customers require an alternative solution, we typically engage with them directly to ensure they can access the technology they desire. Our goal is to initiate programs promptly, and we are flexible in utilizing different purchasing models, including operational leases and bridge-to-buy arrangements. However, we remain confident in our capacity to sell capital directly and maintain strong partnerships with our hospitals.

Frank Takkinen, Analyst

Okay. That's helpful. And then maybe one on the sales team. I know I think at the beginning of the year, you were targeting roughly doubling that organization with different variables across a direct selling rep or clinical support specialists. But maybe just talk to where that US-based HIFU sales team sits, and how you're thinking about further investments into Q4 if you haven't already gotten to where you anticipated getting to this year?

Ken Mobeck, CFO of US Subsidiary

Yes. So Frank, this is Ken. Good question. Right now, our team is 15 people in the US. As Ryan mentioned, we've got a dedicated team of ExactVu now of four people, and that's split. So when you look at the four people against the 15, that leaves us 11 people focused now on HIFU sales. And we are going to continue to invest on the capital front, for capital sales, as we move into next year. We'll continue to beef up the headcount.

Frank Takkinen, Analyst

Okay. That's helpful. And maybe just the last one for me. Excited to hear the update on endometriosis. Can you just drop the timeline? What that might look like if you do achieve that enrollment completion by the end of this year? When could we see a readout? And then maybe it's too early to speak specifically to commercial strategy, but maybe broad strokes, how you're thinking about that market commercially, assuming everything goes to plan with the clinical trial?

Ryan Rhodes, CEO

Yes, so we're excited about the study in particular, and the fact that we're through a lot of the enrollment already. As mentioned, we want to finish enrollment by the end of the year. There will be some analysis and follow-up, of course, on the patients. And I would say sometime later next year, we would be in a position to use that data, or have that data presented, in the form of a manuscript to a major journal. But equally, we are working through the process to get ready for getting in front of the FDA. We've got some very compelling data. Remember that this is the Phase 3 study. There was a safety study, the Phase 2 study, and that data was reflective of 60 patients treated. And that study included, and we're looking to get that data out sometime probably in the early second quarter of next year. So we've got lots of great data that's coming out. We're excited to close the remaining study, the randomized controlled trial, and again, post-closing patient follow-up statistical analysis. And we'll move forward with that data in the form of a submission. So again, we're bringing our best people together to make sure we get this closed out and we look forward to being able to share the data and outcomes in the broader community.

Frank Takkinen, Analyst

Great. Thanks for taking the questions.

Operator, Operator

This concludes our question and answer session. I would like to turn the floor back over to Ryan Rhodes for closing comments.

Ryan Rhodes, CEO

I want to again thank everyone that joined us for today's call. If you are unable to join us in New York at either Morgan Stanley or H.C. Wainwright investment conferences in September, we will be participating in the Jefferies Global Healthcare Conference in London, or Piper Sandler's Conference in New York City in November. We look forward to updating everyone on our fourth quarter and full-year 2023 results early next year. Thank you.

Operator, Operator

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