Earnings Call Transcript - EDAP Q4 2020

Operator, Operator

Greetings, and welcome to the EDAP TMS Fourth Quarter and Full Year 2020 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Jeremy Feffer. You may begin.

Jeremy Feffer, Host

Thank you, Shomoli. Good morning, and thank you for joining us for the EDAP TMS fourth 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 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, Jeremy, and good morning, everyone. I will start with a brief operational update, and then turn the call over to Francois Dietsch to review our financial performance. As we previously announced on January 20, we turned in record fourth quarter 2020 revenue, notwithstanding the continued effect of the pandemic. In fact, these results are all the more impressive given that COVID-19 case counts around the world began to rise again midway through the quarter. We generated total revenue of €15.4 million, or $18.3 million, driven by the sale of 8 HIFU devices during the quarter, including to such renowned institutions as University of California, San Francisco Medical Center and Cleveland Clinic. These are in addition to sales to Mount Sinai Health System in New York and Keck Medical Center at the University of South California that we reported during our third quarter report. These are highly regarded institutions and important reference sites for our technology. This represents growth in total revenue of 28% over the fourth quarter of 2019 and 51% growth in HIFU revenue over the same period. Notably, we generated a sequential increase in revenue every quarter throughout 2020, which, again, reflects the hard work of the entire EDAP team in successfully adjusting to the drastically altered work environment caused by the pandemic. So even as hospitals devoted to treating the many patients infected with COVID-19, interest in our Focal One and ExactVu solutions remained high. As you may have seen in our press release, resulting in the complete financial results for 2020 that we issued yesterday evening, we also managed to maintain high gross margin and continue to prudently manage our level of expenses during this difficult pandemic time. Thanks to our careful management of the business, we were successful in generating positive operating income for the full year. This is a great achievement for our company, particularly as it was achieved in such a complicated environment. This demonstrates the solid foundation that we have established here at EDAP and gives me great optimism for the future. We also managed to increase our cash position to more than €24 million or $30 million at the end of 2020 from €20 million at the end of 2019. During the fourth quarter, we received very positive news on the U.S. reimbursement front, with the publication of final U.S. 2021 reimbursement rules for HIFU, which went into effect on January 1 of this year. And while final rates were consistent with the proposed rule previously reported, it bears repeating. On the hospital payment side, the final rule maintains the HIFU procedure in the level 5 urology ambulatory payment classification, or APC. This translates into a payment for a hospital performing a HIFU procedure on a Medicare patient of around $4,500 as the national average, adjusted locally based on the wage index. This represents an increase of around 5% from the payment hospitals received from Medicare for a HIFU procedure in 2020 within the same context. However, the most exciting change occurred in the physician fee schedule. For the first time, CMS has established a payment to physicians performing a HIFU procedure on malignant prostate tissue in the U.S. Based on the relative value units set by CMS for physicians performing a HIFU procedure on Medicare patients in a facility setting, this translates to an average payment of $996. As a reference, comparable established minimally invasive therapies for prostate cancer, cryotherapy and brachytherapy yield average payments of $786 and $738, respectively, under the same setting and patient conditions. A radical prostatectomy would pay $1,188 or $1,464 if performed laparoscopically. This is a higher amount, though the average time of performing surgeries is much higher than doing a Focal One treatment and far more if it is done as a part of Focal treatments. So globally, and relative to time spent, it gives HIFU very competitive physician payments. We believe having established reimbursement, particularly on the physician side, will continue to be a catalyst towards more widespread adoption of our technology in 2021 and beyond. To further expand and accelerate both reimbursement and market access of the HIFU, we recently announced that we have increased our support by partnering with 2 leading reimbursement consultancies: MTP and Argenta Advisors. With their guidance, we will assist hospitals, physicians, and patients with securing coverage and reimbursement of HIFU, whether Medicare or commercially insured. In parallel, we will work with medical directors and other payer decision-makers toward the creation of universal automatic coverage policies. This is just one example of the investments that we are making to make HIFU as broadly available to patients as possible in our most important market. Outside of the U.S., we took a significant step forward through the signing of an exclusive distribution agreement with ab medica to distribute Focal One and ExactVu across Italy. Ab medica is widely regarded as a leading distributor of cutting-edge medical equipment, including robotic prostate surgery solutions, so they are a perfect fit for us. Italy is the fourth largest medical device market in Europe, and we look forward to a long and mutually beneficial partnership. The growing interest in HIFU as a viable alternative to radical surgery is further supported by a large and growing body of evidence, demonstrating the significant difference in efficacy in favor of HIFU versus radical prostatectomy. In January, we reported on the results of a study sponsored by the French Urology Association, or AFU, and supported by the French Ministry of Health. The results were presented at the AFU Congress in November 2020. The study was a multicenter, prospective, nonrandomized, comparative, and noninferiority study of HIFU versus radical prostatectomy in men with primary prostate cancer. Between 2016 and 2019, the study enrolled 3,364 patients in 42 public and private hospitals in France. 1,988 treated with HIFU and 1,876 with radical prostatectomy, the current standard of care surgical approach. In terms of cancer characteristics, the two groups are comparable with the majority of ISUP Grade 2 and equivalent median PSAs at baseline. The result of the interim analysis shows a significantly better 24-month recurrence-free survival defined as the rate of salvage treatment by external beam radiotherapy and/or hormone therapy for the patients treated with HIFU compared to the patients undergoing surgery. This significant superiority in efficacy was achieved with HIFU, despite the fact that the patients in the HIFU arm were more than 10 years older on average and, therefore, naturally more likely to suffer from these issues. Turning to our endometriosis program. Recall that in August 2020, we were granted full approval by the French health authority to initiate a Phase II clinical trial of HIFU for the treatment of deep invasive endometriosis, and we quickly completed the first patient treatment just a few weeks later. A total of 38 women will be enrolled in the study and treated at 5 major hospitals across France and assessed over a 6-month follow-up period. During this study, investigators will evaluate the safety and efficacy of HIFU for this pathology. To date, we have enrolled 10 patients at Croix-Rousse Hospital in Lyon by Professor Gil Dubernard, the lead investigator for this Phase II trial. Enrollment is continuing, and we are currently in the process of opening 4 additional trial sites to participate in the study. The advancement of our endometriosis program is consistent with our strategic shift towards HIFU, and endometriosis is just one example of a condition that we believe can benefit from these noninvasive technologies. We see significant opportunity to expand our HIFU pipeline into very large global market opportunities. We look forward to keeping you apprised of our R&D and clinical efforts exploring HIFU in other indications. And now our CFO, Francois Dietsch, will provide some details of our financial results.

Francois Dietsch, CFO

Thank you, Marc, and good morning, everyone. Please note that on figures, except for percentages, are in euros. For conversion purposes, our average euro-dollar exchange rate was €1.1942 for the fourth quarter of 2020 and €1.1424 for the full year of 2020. Total revenue for the fourth quarter was €15.4 million, an increase of 28.2%, versus €12 million in Q4 2019, reaching a new record level for our fourth quarter revenue, despite the ongoing impact of COVID-19 on our treatment revenue. Total revenue in the HIFU business for the fourth quarter of 2020 was €4.4 million, a 50.8% increase compared to €2.9 million for Q4 2019. During the quarter, we sold 6 Focal Ones and 2 Ablatherm versus 2 Focal Ones during the same period last year. Total revenue in the LITHO business for the fourth quarter of 2020 was €4.6 million, a 10.6% increase compared to €4.2 million for the fourth quarter of 2019. We sold 16 lithotripsy devices in the quarter versus 9 in the same period last year. Lastly, total revenue in the Distribution business for the fourth quarter of 2020 was €6.4 million, a 29.7% increase compared to €4.9 million for the fourth quarter of 2019, thanks primarily to the Exact Imaging license and distribution agreement. Gross profit for the fourth quarter of 2020 was €7 million compared to €5.1 million from the year-ago period. Gross profit margin on net sales was 45.8% in the fourth quarter of 2020 compared to 43% in the year-ago period. The year-over-year improvement is due to the higher HIFU sales. Operating profit for the fourth quarter of 2020 was €1.7 million compared to an operating profit of €0.1 million in the fourth quarter of 2019. Net income for the fourth quarter of 2020 was €0.8 million, an income of €0.03 per diluted share, including mainly a noncash currency exchange loss on U.S. dollar and regular tax impact, as compared to a net loss of €1 million or €0.03 per diluted share in the year-ago period. Turning to the full year 2020. Total revenues were €41.7 million, a 7.2% decrease compared to 2019. As Marc mentioned, the full year of 2020 revenue reflects the impact of the ongoing COVID-19 pandemic on the company's activities. Gross profit for 2020 was €18.4 million compared to €21 million for the year-ago period. Gross profit margin on net sales was 44.1% for 2020 compared to 46.8% in 2019. The decline in gross profit was mainly due to lower sales in the HIFU business driven by COVID-19. Operating profits for 2020 was €0.3 million compared to an operating profit of €2.2 million for 2019. As Marc mentioned, in this very competitive environment due to COVID-19, we are pleased to report a profitable year on an operating basis. Net loss for 2020 was €1.7 million or €0.06 per diluted share as compared to a net income of €1.5 million or €0.05 per diluted share in the year-ago period. Lastly, we finished the fourth quarter of 2020 with a strong cash balance of €24.7 million or USD 30.2 million, using a euro-dollar conversion rate of €1.2229. This represents €3.8 million of positive cash flow generated over the full year of 2020, reflecting very strong cash management and monitoring as well as COVID-related loans from French, U.S. and Japanese institutions. These loans were mainly received during the second and third quarter of 2020. Let me now turn the call back to Marc.

Marc Oczachowski, CEO

Thank you, François. Before turning the call back to the operator to start our question-and-answer session, I would like to highlight again the fact that, despite the challenges posed by the pandemic, the full year 2020 turned out to be extremely positive and constructive for our company. We sustained our operating profitability. We strengthened our cash position, increasing it to €24.7 million, and we successfully achieved significant milestones in key strategic projects, such as reimbursement of HIFU in the U.S. and the advancement of our endometriosis HIFU clinical program. Even if the pandemic continues to significantly impact the global economy this year, we feel well positioned to continue achieving great milestones in our clinical sales and marketing programs in 2021. We will now open the call to your questions. Operator?

Operator, Operator

Our first question is from Frank Takkinen with Lake Street Capital Markets.

Frank Takkinen, Analyst

Congrats on such a great year in such an uncertain environment.

Marc Oczachowski, CEO

Hey, Frank.

Frank Takkinen, Analyst

A couple from me today. Starting with placements, you guys had such a solid quarter with 8 HIFU placements in the fourth quarter. I was hoping you guys could speak towards your expectations for 2021 in regard to placements. How should we be thinking about trends throughout 2021 given COVID is starting to abate and that reimbursement trends are looking more positive?

Marc Oczachowski, CEO

Thank you for the question, Frank. As you know, we typically don’t provide extensive guidance or forward-looking statements. As I mentioned earlier, we believe the company is in a strong position. We have a robust pipeline of projects, we are experiencing momentum, and we achieved significant milestones in 2020 that set us up well for 2021. However, we are not ready to share any information for 2021 just yet, and we will do so during our call in May.

Frank Takkinen, Analyst

Okay. That makes sense. In regard to the consultancies, MTP and Argenta, could you take us a little bit deeper into some of your expectations for what those could bring in 2021? And more specifically, do you believe we could start to see some commercial organizations issuing policies?

Marc Oczachowski, CEO

So actually, as I explained earlier in the previous communication, we increased our support, and we have worked with MTP in the past. MTP was supporting us and working with us in getting the C-code and then the CPT code. Now we have increased investment in supporting reimbursement and coverage by getting Argenta Advisors on board. The idea is really to work on different aspects of market access and coverage, working on providing good and strong support to existing sites or new sites in placing their claims to Medicare, along with working with the private payers and the max to get automatic positive coverage from both Medicare institutions and the different private payers. So we have very strong expectations, and we really want to, again, support the market and get better coverage, thereby increasing the coverage. The goal is to get more policies and more coverage from the max at Medicare and from commercial insurances.

Frank Takkinen, Analyst

Perfect. I have one more higher-level question regarding the commercial organization. I understand that you've taken a more cautious approach in the U.S. with the rollout of Focal One, focusing only on Tier 1 centers. Considering the recent developments in reimbursement and the MTP and Argenta advancements, should we anticipate that you will allocate more significant resources to the commercial organization in order to pursue the next wave of Tier 2 or Tier 3 institutions and promote the adoption of Focal One in the U.S.?

Marc Oczachowski, CEO

No, you're absolutely right, and that's the plan. As we increase and expand coverage and have more and more payers supporting the technology and paying it, the idea is to expand from the Tier 1 institution to Tier 2, and that will indeed require a broader commercial organization and network.

Operator, Operator

And our next question is from Andrew D'Silva with B. Riley Securities.

Andrew D’Silva, Analyst

Congratulations on a strong quarter. I have a few quick questions. To begin with, regarding the fourth quarter, do you think the strength was primarily due to pent-up demand resulting from your customers' limited ability to make capital investments earlier in 2020, or do you think there were other factors involved? Additionally, as we are now at the end of the first quarter of 2021, did you notice any change in momentum, or has the momentum from the fourth quarter continued into 2021?

Marc Oczachowski, CEO

No. I think in the fourth quarter, you're absolutely right. There is a seasonal effect in the sales of capital equipment, like what we are offering. Typically, the fourth quarter is larger because it often marks the end of the fiscal year, and investments must be made if they weren’t made earlier in the year. Consequently, we usually see more investment from hospitals, particularly private ones, at the year's end. This year, I believe that seasonal trend has been significantly heightened by the impact of COVID-19 during the first half of the year, which was very slow due to the global crisis. Therefore, we experienced a strong quarter, further intensified by the crisis. Looking ahead to 2021, the pandemic's effects are unfortunately still present. Despite the advancements with vaccines, there remains a significant lack of visibility in the global economy, leading to cautious investment behavior. As a result, people are hesitant to spend money at the beginning of the year, much like last year, though this hesitation may be slightly more pronounced this time. We anticipate a similar investment appetite to what we observed last year. However, the momentum in technology and the number of interested institutions in our pipeline continue to grow in both the U.S. and globally.

Andrew D’Silva, Analyst

Okay. And just to recap of what you're saying. So basically, while the pipeline is as large as it's ever been, and interest is continuing to grow, the first quarter of 2021 is likely to have more of an augmented seasonal impact than you would typically see because of COVID-19 and the second wave that actually took place during the winter.

Marc Oczachowski, CEO

Yes. I think the seasonal effect in general over the year, last year and maybe this year, at least in the beginning will be amplified, yes.

Andrew D’Silva, Analyst

Okay, okay. Great. And then I know you provided hospital facility fees before, but are there any significant differences in HIFU reimbursement between the hospital facility fee and then, say, an ambulatory surgery center, an ASC facility fee? And there's been a positive pipeline development now, as you referenced with the Focal One. Are you able to maybe tie that to reimbursement? Or are these just initiatives that took place before final reimbursement was put into place in January?

Marc Oczachowski, CEO

I believe it's a combination of factors. The implementation of the CPT code at the start of the year was anticipated; it’s something we have been aware of for nearly a year since receiving the grant from CMS. Everyone, including the hospitals, was prepared for this, so it wasn't unexpected news. Regarding the payment differences, by law, the payment structure for hospitals and ambulatory surgery centers remains consistent and has always been the case for all procedures.

Andrew D’Silva, Analyst

Okay. Wonderful. And just last thing, if you can just refresh my memory on ExactVu. How exactly does reimbursement work there? And do you have dedicated reimbursement? Or are you working on obtaining dedicated reimbursement for ExactVu?

Marc Oczachowski, CEO

We currently do not have dedicated reimbursement for the micro-ultrasound capability of ExactVu. At this time, our sites are utilizing reimbursement for standard ultrasound or for targeted biopsy and MRI fusion capabilities of the device. ExactVu offers various functions, including conventional ultrasound, MRI fusion imaging, targeted biopsy, and micro-ultrasound. While there is reimbursement for the first two capabilities, we do not yet have dedicated reimbursement for the micro-ultrasound, and this is something we are actively pursuing.

Operator, Operator

And our next question is from Arthur He with H.C. Wainwright.

Arthur He, Analyst

This is Arthur for RK. I have two questions. First of all, could you provide any anecdotal insights regarding the implementation of the CPT code? Is there any feedback from your discussions with the payer?

Marc Oczachowski, CEO

I'm not sure I completely understand the question. As we've mentioned before, now that we have the code, we are enhancing and speeding up our market access strategy, which includes discussions with payers, particularly with medical directors at the maximum level and private payer level. If that was the question, that's the answer.

Arthur He, Analyst

And my second question is regarding the gross margin. Is the fourth quarter gross margin could be at the run rate for 2021? Or if you can give us more color on that part.

Marc Oczachowski, CEO

It's difficult to answer. Again, we don't give forward-looking statements. But yes, I mean, it could be at the run rate. If we get the same sort of mix product, the gross margin is pretty effective between the three divisions. So yes, if the mix remains the same and the momentum on sales is about the same, that should be consistent. But in any case, it shouldn't be far from what we've seen in the full year 2020, as usual.

Operator, Operator

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Marc Oczachowski for closing remarks.

Marc Oczachowski, CEO

Thank you, operator, and thank you, everyone, for joining us today. We'll keep you informed and posted of further developments, and we will be pleased to discuss our start of 2021 during our next earnings call for our Q1 results. You all have a good day.

Operator, Operator

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.