Earnings Call Transcript - EDAP Q3 2020

Operator, Operator

Greetings, and welcome to the EDAP TMS Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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. Thank you. You may begin.

Jeremy Feffer, Managing Director

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 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, 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 planned 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 towards normal. Obviously, these prostate procedures cannot be delayed in the period. Total revenue in the quarter was €9.4 million or $11.2 million as compared to €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 technologies in Italy. AB Medica already distributes ExactVu, so they are already familiar with the 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 a 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 positive 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 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 presence during these challenging times. During the third quarter, we announced two Focal One sales, one of which also included the ExactVu high-resolution micro-ultrasound solution that we are now marketing as a result of our partnership with Exact Imaging. Recall that this micro-ultrasound resolution is comparable to or better than MRI and represents a 300% improvement over conventional ultrasound. Similar to MRI, it allows urologists to visualize and look at suspicious regions within the prostate and target biopsies in real-time. Using this technology, urologists can see details that evade other imaging modalities. They can use the ExactVu system to perform targeted biopsies where the transrectal or transperineal consumes a high success rate in suspicious lesions seen on the image. During the third quarter, we closed eight ExactVu deals in different configurations, whether by a bundled deal such as the Focal One-ExactVu combo we sold to Mount Sinai Health System in New York or as a stand-alone solution through existing HIFU users of the new accounting process. Prostate cancer diagnosis and treatment can only be delayed so long. 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. We continue to host virtual education sessions with urologists and distributors, 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 two 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 glands intact. These visual outreach efforts have allowed us to stay in front of our key stakeholders. As noted, COVID’s infection rates are increasing and we are tracking the challenges and other restrictions. To this point, we have stayed true to our long-term mission: to make this technology available to the broadest possible patient population. We continue to build inventory so that we are in a position to ship systems as soon as we are able to ship them. Regarding reimbursements, 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 Category I CPT code effective January 1, and we 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 the Phase 2 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 five major hospitals across France and assessed over a six-month follow-up period. During the study, investigators will evaluate the safety and efficacy of HIFU for this pathology. To date, we have enrolled six patients and enrollment is continuing as we have scheduled an additional three patient treatments for December. And of course, should the results of this Phase 2 study be positive, we will work efficiently to initiate a Phase 3 program. The advancement of our endometriosis program is consistent with our strategic shift away from the legacy lithotripsy business and toward HIFU. Endometriosis is just one example of a condition that we believe can benefit from this non-invasive technology. So we see significant opportunities to expand our HIFU pipeline into a very large global market opportunity. We look forward to keeping you apprised of our R&D efforts in exploring HIFU in other indications. Publications of clinical data are key to our ongoing sales efforts. During the third quarter, we published two papers in the Procedures and Peer-Reviewed Journal of Urology. This study represents 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-ups of up to two years on the combined 152 patients. Importantly, radical surgery was avoided in a vast majority of study participants. And incontinence and impotence were avoided or quickly returned to baseline levels. These results mirror what we have observed in prior European studies that involve larger patient cohorts and longer follow-up periods. Seeing some of our prominent reference centers 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 further details of our financial results. François?

François Dietsch, CFO

Thank you, Marc, 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 1.1832 for the third quarter of 2020 and 1.1319 for the first nine months of 2020. Total revenue for the third quarter of 2020 was €9.4 million, a decrease of 8.5% compared to total revenue of €10.3 million for the same period in 2019. Third quarter 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 €2.6 million, a 7.9% decrease compared to €2.8 million for the third quarter of 2019. During the quarter, we sold two Focal One units versus two last year. Total revenue in the LITHO business for the third quarter of 2020 was €2.4 million, a 27.6% decrease compared to €3.3 million for the third quarter of 2019. Total revenue in the distribution business for Q3 2020 was €4.4 million, a 6.4% increase compared to €4.2 million for the third quarter of 2019, thanks to the executive management sales development. Gross profit for the third quarter of 2020 was €4.0 million compared to €4.7 million for the year-ago period. Gross profit margin on 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 in HIFU compared to the year-ago period driven primarily by COVID-19. Operating loss for the third quarter of 2020 was €0.3 million compared to an operating profit of €0.3 million in the third quarter of 2019. Net loss for the third quarter of 2020 was €1 million or €0.03 per diluted share as compared to net income of €0.8 million or €0.03 per diluted share in the year-ago period. Turning to the first nine months of 2020. Total revenue for the first nine months of 2020 was €26.3 million, a decrease of 20.1% compared to total revenue of €32.9 million for the same period in 2019. As mentioned, the first nine months of 2020 revenue reflects the impact of the ongoing COVID-19 pandemic on the company’s activities. Gross profit for the first nine months of 2020 was €11.4 million compared to €15.9 million for the year-ago period. Gross profit margin on net sales was 43.2% for the first nine 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 nine months of 2020 was €1.5 million compared to an operating profit of €2.1 million for the same period of 2019. Net loss for the first nine months of 2020 was €2.5 million or €0.09 per diluted share as compared to a net income of €2.5 million or €0.09 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 short-term treasury investments, were €19.9 million at the end of September 2020 or $23.4 million using a euro-dollar conversion rate of $1.1723. As announced earlier, we received during the third quarter two COVID-related loans granted by the French government totaling €4 million. These loans carry very favorable terms and interest rates at 0.25% for the first year with a repayment term of one year which can be extended to 12 years. This French loan added towards our COVID-related assistance already received during the second quarter. We received €0.2 million from the U.S. Paycheck Protection Program that, as you probably know, is forgivable, and we received another loan of €0.4 million from a Japanese COVID-related assistance program, which carries an interest rate of 1.8% and is repayable beginning in two years. Let me now turn the call back to Marc.

Marc Oczachowski, CEO

Thank you, François. In closing, the third quarter was the strongest of the year thus far, despite the challenges posed by the ongoing COVID-19 pandemic. We believe that our strong cash position and efforts to grow our sales pipeline globally have positioned us well in 2020. We will now open the call to your questions. Operator?

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Brooks O’Neil with Lake Street Capital Markets. Please proceed with your question.

Brooks O’Neil, Analyst

Good morning, guys. I hope things are not too difficult in Lyon for you during the COVID crisis.

Marc Oczachowski, CEO

Good morning, Brooks. Well, it's not the busiest, but we're managing and navigating through it. Thanks for asking.

Brooks O’Neil, Analyst

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?

Marc Oczachowski, CEO

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, we continue to do a lot of educational sessions using webinars 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 to all our users, prospects, leads, and also by our distributors. So that's one of the positive parts of that is that again, most of those doctors not really involved directly in the management of COVID have more time for discussion, training, or education and also on new technology. So as a result of that, we've seen 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?

Brooks O’Neil, Analyst

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?

Marc Oczachowski, CEO

Well, we are very pleased with it. Again, everything as we had anticipated in terms of synergies between the products is really here. It's really helping as 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 offerings, like vendor deals or these kinds of things. We were very happy. And, like we said, we sold three machines during the second quarter as we got started in June, and another eight during the third quarter, which is good and it's probably our expectations.

Brooks O’Neil, Analyst

That's great. So you mentioned, Marc, the expectation for the Category I 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 timeframe of dollar figures sometime here in December probably, and then going live in January?

Marc Oczachowski, CEO

So that's following the normal process. Usually, the final rule is released by CMS somewhere around December. We expect some delays this year as it was for the proposed rules. So probably somewhere in December, we might have all the final numbers for next year.

Brooks O’Neil, Analyst

Great. And then

Marc Oczachowski, CEO

And again, we’ll keep you guys updated once we have some news.

Brooks O’Neil, Analyst

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’d get through all of that and maybe be able to have an indication for endometriosis? And I think you alluded to HIFU for other indications even beyond endometriosis. I'm curious if you could even – I don't need the specifics, but I'm curious if you can give an example of one or two additional areas where you think HIFU might have applicability?

Marc Oczachowski, CEO

Sure. Now we are also working on earlier stage research and development programs for other indications and that includes pancreas, pancreatic cancer, liver metastasis. So these are earlier stage developments and we are not yet in terms of patient treatments.

Brooks O’Neil, Analyst

Sure. And what is the timing on endometriosis?

Marc Oczachowski, CEO

Sorry, can you say that again?

Brooks O’Neil, Analyst

What's the timing for the Phase 2? And then how long would a Phase 3 trial for endometriosis be?

Marc Oczachowski, CEO

So the Phase 2 – as I said, we have 38 patients to treat in five institutions in France. We've already been – we got started in September and we've already enrolled and treated six patients. We have another three that are planned to be treated in December. So we'll be probably around 10 patients by the end of the year. Then the uncertainty on conducting clinical studies in the environment makes it difficult to really anticipate the exact time of completing the enrollment. But the good news also on the protocol that was approved by the French Health Authorities is that the follow-up period is only six months. So overall, it should be a pretty short study from an enrollment and follow-up perspective. And then again, based on what we achieve on the Phase 2, we will certainly conduct a Phase 3.

Brooks O’Neil, Analyst

Sure. Thank you very much. Congratulations. I know it's a difficult environment. But it sounds like you're making tremendous progress.

Marc Oczachowski, CEO

Thank you, Brooks.

Operator, Operator

Thank you. Our next question comes from the line of Andrew D’Silva with B. Riley Securities. Please proceed with your question.

Andrew D’Silva, Analyst

Hi. Yes. Good morning. Thanks very much for taking my questions and congrats on the progress.

Marc Oczachowski, CEO

Good morning, Andy.

Andrew D’Silva, Analyst

Good morning. Thank you very much. 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 compensation 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?

Marc Oczachowski, CEO

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

Andrew D’Silva, Analyst

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

Marc Oczachowski, CEO

François will address the stock-based compensation. Regarding unit placements, as mentioned earlier in the call, we sold two Focal One units during the quarter, which is the same number as last year.

François Dietsch, CFO

In the middle of this year we sold four devices.

Andrew D’Silva, Analyst

Okay. And Ablatherm – there was no Ablatherm systems placed?

François Dietsch, CFO

No.

Andrew D’Silva, Analyst

Okay, perfect. And are you able to find the stock-based compensation or do you need a little more time?

Marc Oczachowski, CEO

Maybe if you had another question.

Andrew D’Silva, Analyst

Also curious just what engagements have been like with potential customers since the proposed reimbursement came out? And have there been any discussions with private payers since the proposed reimbursement came out? Maybe give a little sense of what it has historically been like from previous experiences; does it typically start to mature or evolve with customers and private payers while the proposed reimbursement is out there, or do you have to actually wait and see what the finalized reimbursement is to get that kind of traction?

Marc Oczachowski, CEO

No. Usually the process is that we get the code enforced and used, and then that will be in January when the final rule will be released and then the CPT will be enforced next year. Then when you start using it, you start getting the coverage and getting the claims submitted to the different MAX of CMS around the country. That's when you get to the point that you can start lobbying and discussing with the commercial payers and various insurances. So it was temporary, but we – within six weeks from now, we'll be able to get started on all those kinds of actions.

Andrew D’Silva, Analyst

Okay, very useful. And my last question is just related to the cadence in the fourth quarter. Can you maybe give a little bit of color around that? Are you seeing any change in traction from equipment sales quarter-over-quarter, or is the fourth quarter a situation where you expect much of the heavy lifting as it relates to revenue recognition to take place in the last couple of weeks? I know that's the trend typically, but with the holidays in the fourth quarter, I wasn't sure if placements come in earlier than typically seen in the quarter?

Marc Oczachowski, CEO

Well, again, the fourth quarter is usually the strongest and is very critical in terms of the yearly results. We see them – of course, there is a lot of excitement. Of course, there is a lot of pressure as well to get deals done by the end of the year, and everything will – again, the most important month of the quarter is December. So everything will be – a lot of things will be done during the month of December. And it will go until the end of the month, as usual. So there is more traction. There is a lot of excitement. We've also been working on making very aggressive offers as well to help in terms of – not only in terms of conditions but also in terms of financings and working with partners to offer our customers very interesting conditions in the context so that they can make decisions and close deals before the end of the year. So we're – and everybody's on the field trying to close deals. Again, we'll see the results of that in the next six weeks.

Andrew D’Silva, Analyst

But just anecdotally as it looks with the pipeline and engagement with customers, would you believe that that same quarterly trend seasonality will continue this year as far as the fourth quarter most likely being the strongest quarter of the year, or anecdotally speaking do you feel like that isn't the case?

Marc Oczachowski, CEO

Anecdotally speaking, it’s a fourth quarter of a COVID-19 year which makes it completely different or unpredictable. To answer your question, there are two things. One is that our pipeline of projects and leads has never been that big. So we have plenty of projects to work on. Now the uncertainty is the ability to close deals and the ability for the hospital or the healthcare system to navigate normal business activity within the current environment. So as I said, we're trying to be creative and have a lot of initiatives to kind of help those hospitals and healthcare systems to make the right decision and get the purchases done despite the environment. So that will be the real challenge and the unpredictable and unknown situation that we're facing within the context of COVID-19. But again, we're doing our best to probably come up with solutions.

Andrew D’Silva, Analyst

Great. Thank you very much. If you don’t have the stock-based comp, I can just take it offline.

Marc Oczachowski, CEO

We do. François is ready to answer that.

François Dietsch, CFO

Yes. The impact on the quarter is €30,000.

Andrew D’Silva, Analyst

Could you repeat that one more time?

François Dietsch, CFO

On the quarter, it is €30,000.

Andrew D’Silva, Analyst

Okay. Thank you very much. Best of luck this year. And congrats on the progress during the third quarter.

Marc Oczachowski, CEO

Thanks, Andy.

Operator, Operator

Thank you. Our next question comes from the line of Swayampakula Ramakanth with H.C. Wainwright. Please proceed with your question.

Swayampakula Ramakanth, Analyst

Thank you. This is RK from H.C. Wainwright.

Marc Oczachowski, CEO

Hello, RK.

Swayampakula Ramakanth, Analyst

Hi. Good afternoon, Marc and François. Within the HIFU sales, we see sales from leases and RPPs either being stable or actually growing. And as you were talking about trying to become creative in terms of how to generate revenues, do you think with all the budgetary constraints due to COVID and also from trying to be careful how much money these different organizations are able to outlay, do you think it's much easier to go the leasing route rather than an outright sale, especially for a device like HIFU? What's the appetite for that? And also how are you able to navigate those uncomfortable conversations with the organizations out there?

Marc Oczachowski, CEO

Actually, this is part of the options that we’re offering and we also have been able to design with a number of leading companies for long-term lease or even short-term lease capital operationally. So we have all the options. This really depends from one hospital to the other, from one project to the other. But again, the idea for us is really to have the broadest potential offering in terms of financing so we can answer most of the needs.

Swayampakula Ramakanth, Analyst

Perfect. And talking about distribution, congratulations on the Italian distribution collaboration that you just announced recently. Also looking into the distribution part of the revenue line, it certainly has been growing and I would think ExactVu is adding to it. So when you look at your leads out there for not only the fourth quarter but also later, how much of that synergy is really working to your benefit? And also do you see that part of the revenue line becoming more of an important growth item within your revenues, not only for '21 but also beyond?

Marc Oczachowski, CEO

Yes. I think the – again, what works very well is the synergy between the usual – the product we have in distribution and the products we manufacture ourselves. That is really the idea to grow both types of equipment and business sales. It did pretty well. ExactVu really works well with Focal One, first of all, because it's a good complement, but also because it really gives us a unique offering on the management of prostate cancer using a focal approach, which is again the big growing strategy of treating prostate cancer, and thus making a lot of sales. Both types of businesses, distribution and manufacturing products, are really working in the same direction. The way we choose and the way we decide to implement new distribution products is really to help sort of upgrade our global business but also assist in bringing our homegrown technology like HIFU and Focal One.

Swayampakula Ramakanth, Analyst

Great. Then the last question for me is on endometriosis. You stated that you have six women in the trial at this point. Do you plan to wait for all the 38 women to go through the six-month follow-up before you announce the data from this study, or would we be able to see some data in the interim without waiting for the complete study to come to completion?

Marc Oczachowski, CEO

We’ll see. It will really depend on the pace of recruitment and enrollment we have. If we're able to continue on that base, which again is really depending on the context, as you know most of the clinical studies are on hold now and we've been very lucky to be able to do that. We are very happy to have the confirmation of the slots for the treatment of three other patients in December. If we're able to recruit quickly, we might not need to wait for interim results. If it takes us some time to recruit the entire 38 women for the trial, then we may want to give interim results. It will depend on the speed of enrollment and treatments. And again, we are making our best efforts to do that as quickly as possible. Because the follow-up is only six months, so it's a very short period. We might not need to get some interim results.

Swayampakula Ramakanth, Analyst

Thank you. Congratulations on what you have achieved so far, especially with the difficult COVID situation going on. Good luck for the fourth quarter and beyond. Thanks.

Marc Oczachowski, CEO

Thank you, RK.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll now hand things back over to Mr. Oczachowski for any final comments.

Marc Oczachowski, CEO

Thank you, operator. Again, thank you everyone for joining us today. Stay safe and we are looking forward to updating you very soon as we’re making progress. You all have a nice day and stay safe. Bye-bye.

Operator, Operator

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