Earnings Call Transcript - EDAP Q2 2022

John Fraunces, Managing Director of LifeSci Advisors

Greetings. Welcome to EDAP TMS Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I'll turn the conference over to John Fraunces, Managing Director of LifeSci Advisors. John, you may now begin. Good morning, and thank you for joining us for EDAP TMS's second quarter 2022 financial and operating results conference call. On today's call, we will hear from Marc Oczachowski, Chief Executive Officer and Chairman of the Board; Ryan Rhodes, Chief Executive Officer of EDAP U.S.; and Francois Dietsch, Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plans. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Factors that may cause such a difference include but are not limited to those described in the company’s filings with the Securities and Exchange Commission. I'd now like to turn the call over to EDAP’s Chairman and Chief Executive Officer, Marc Oczachowski. Marc?

Marc Oczachowski, CEO & Chairman

Thank you, John, and good morning, everyone. As mentioned, I will start by providing a brief operational updates before turning the call over to Ryan Rhodes, our EDAP U.S. Chief Executive Officer for a review of the U.S. business and strategy. And then Francois Dietsch, our CFO, will present our financial performance. Let me begin by recapping a few of the highlights. For the quarter, we generated total revenue of EUR14.2 million or $15 million, representing an increase of 36.7% over the second quarter of 2021. The increase was driven by contributions from all of our business segments, HIFU, lithotripsy, and distribution. Notably, for the first half of 2022, our HIFU revenue increased nearly 80% over the prior year period, reflecting a combination of the higher average selling price and growth in treatment volumes. We sold one Focal One machine during the quarter, which is equal to what we sold in the second quarter of last year. We sold eight lithotripsy units compared to three in the year-ago period and 15 ExactVu units compared to nine in the year-ago period. Ryan will cover this in more detail in a moment. We recently learned that the Centers for Medicare and Medicaid Services will set reimbursement rates for medical procedures performed on Medicare beneficiaries, releasing its preliminary Outpatient Prospective Payment System rule for calendar year 2023. With the proposition of upgrading from level 5 to level 6, the payment for the HIFU procedure for malignant prostate tissue ablation. This is great news for HIFU technology and if maintained, the final rule would be a positive catalyst for our business. Our second quarter and year-to-date results together with this proposed increase in reimbursement gives us a high degree of confidence that our growth will continue as HIFU technology is increasingly recognized as a viable offering in all urology practices, with trusted cancer patients. At this point, I would like to provide an update on our clinical extension activities where we believe HIFU can have added clinical utility in indications outside of prostate cancer. As a reminder, we are running a Phase 2 study evaluating HIFU using the Focal One robotic platform for the treatment of deep infiltrating endometriosis. We've previously announced that we completed enrollment in patient treatments, so we remain in the six-month follow-up period that will likely conclude at the end of September of this year. Investigators are evaluating the safety and efficacy of HIFU for this pathology. The current standard of care treatment of deep infiltrating endometriosis involves surgical resection of the bowel and/or rectum, which is a highly invasive procedure that presents both risk to the patient along with significant recovery time. We believe the use of 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. I'm also pleased to note that our HIFU program in pancreatic cancer also continues to move ahead. Earlier in the year, we noted that results from a preclinical study using Intraoperative HIFU Ablation of the pancreas were published in the Journal of Cancers. Pancreatic adenocarcinoma is among the most aggressive of all cancers, with an overall five-year survival rate of less than 5% for patients with locally advanced pancreatic adenocarcinoma. This continues to drive the urgent need for new, more effective treatment options. These areas of development and critical data further demonstrate the potential effectiveness of HIFU beyond managing prostate cancer. Further exploration of HIFU in other indications remains part of our longer-term R&D plans. With over $48 million in cash, we are well financed to continue executing on our current U.S. growth initiatives while we explore these indications and other clinical expansion opportunities. At this point, I would like to turn the call over to Ryan Rhodes, CEO of EDAP U.S. for an update on our U.S. operations. Ryan?

Ryan Rhodes, CEO of EDAP U.S.

Thank you, Marc. I would like to begin my remarks today by picking up on the topic of reimbursement. The proposed change in reimbursement reflects the appropriate value of HIFU as an ablative treatment for men diagnosed with prostate cancer. The situation, as stated, is now shaping up quite positively in terms of reimbursement for both the physician and the facility. HIFU procedures have a robust relative value unit rating or RVU rating, which allows physicians to be paid more for HIFU procedures than for older modalities like Cryotherapy. At the higher reimbursement, HIFU is now approaching the level for radical prostatectomy. With a proposed increase to APC Level 6, facility payments will now cease to be a barrier for adoption of the HIFU technology. One impact of the reimbursement change is that there have been some facilities that have looked to upgrade their focal therapy approach to be primarily robotic HIFU, moving away from Cryotherapy. This had been difficult in the past, but with the proposed change, we believe this will help rectify those circumstances. As referenced, the preliminary OPPS rule for calendar year ’23 was recently released, and the proposed rule would increase reimbursement level to APC Level 6. This move would result in an increase in reimbursement to a hospital performing the HIFU procedure on a Medicare patient to $8,711 per procedure as a national average, adjusted locally based on the wage index, compared to the current national average of $4,506. TMS is accepting comments on the proposed rule until September 30, and we anticipate the final rule to be published in November, for January 1, 2023 implementation. We continue to work with our consultant partners and leading physicians to ensure that CMS understands the true value that HIFU brings to prostate cancer management, especially when you consider that HIFU would spare many prostate cancer patients from more expensive and invasive radical surgery in certain cases. If the increase stands in the final rule, it would be difficult to overstate the positive impact this would have on expanding patient access to the HIFU procedure. Furthermore, higher Medicare reimbursement often translates into higher commercial reimbursement as many commercial payers typically follow CMS's lead on such decisions. We've been successful in driving adoption and sales growth under existing reimbursement, and the financial return on investment for hospitals purchasing Focal One has been very positive, but we believe the classification to APC Level 6 will significantly improve access to treatment for many more patients seeking the benefits of focal therapy. As mentioned, this is only a proposed rule at this point, and things could certainly change, but we remain optimistic and if implemented securing APC Level 6 reimbursement from CMS would be among the most significant positive catalysts since Focal One was approved by the FDA in 2018. Now turning to the quarter, we generated strong revenue growth of 36.7% driven by capital sales contribution from all our businesses. With regards to Focal One, we previously announced sales to New York-Presbyterian and Weill Cornell Medical Center, Beth Israel Deaconess Lahey Health, an affiliate of Harvard Medical School, and University of California Davis Medical Center in Sacramento. In the second quarter, we added M.D. Anderson to the centers that are adopting Focal One. M.D. Anderson is one of the most prestigious cancer centers in the world and their selection of Focal One is further encouragement that robotic focal HIFU will be a part of the treatment paradigm at major comprehensive cancer programs. EDAP now has a significant commercial team on the ground in the U.S. and we are having a very positive impact on our continued sales pipeline growth. We anticipate converting many of these prospects into sales and placements in the back half of the year. The Focal One sales cycle can be quite long with the necessity of working through hospital budgetary cycles, but the awareness of HIFU as a viable treatment for managing prostate cancer is growing at an accelerating pace. As we said last quarter, and still holds true, our pipeline is comprised of a healthy mix of community hospitals, in addition to academic medical centers. This is key as greater than 80% of hospitals across the United States are community hospitals and therefore represent fertile ground for future sales. At this point, I want to briefly recap the American Urological Association meeting, which is the largest annual gathering of urologists worldwide. We exhibited and prominently showcased Focal One and it was a feature topic during both binary presentations and instructional courses. In addition, several leading academic medical centers delivered presentations on the growing acceptance of focal therapy in the management of prostate cancer. We supported an accredited AUA course with hands-on skills training, which taught urologists how to implement focal treatments in their practice, while allowing them to utilize Focal One under the guidance of expert faculty. ExactVu micro ultrasound was also featured in three of these sessions. This year's meeting was the most significant presence that we as a company have ever had at AUA and we believe it is a function not only of the growing acceptance of focal therapy as an important part of a comprehensive prostate cancer treatment program, but also as a reflection of our technological leadership position. In addition to AUA, we also had meaningful participation at several other related conferences, including the 21st International Symposium Therapeutic Ultrasound held in Toronto, the 6th European Endometriosis Congress held in France, the Society of Robotic Surgery, which took place in Orlando, Florida, and the recent European Association of Urology Congress held in Amsterdam. As noted, we have several more important meetings and scientific programs that we will be attending in the fall. These medical meetings give us an opportunity to showcase our state-of-the-art technology to large and diverse audiences around the world. In closing, we've made significant strides in driving results in building the U.S. organization. We are executing on the tremendous opportunity to bring robotic focal HIFU as a mainstream treatment option to men throughout the United States. And now our CFO, Francois Dietsch will provide some details on our financial results. Francois?

Francois Dietsch, CFO

Thank you, Ryan, and good morning, everyone. Please note that all figures except for percentages are euros. For conversion purposes, our average euro-dollar exchange rate was 1.0579 for the second quarter of 2022. Total revenue for the second quarter of 2022 was EUR14.2 million, a 36.7% increase compared to total revenue of EUR10.4 million in Q2 2021. Looking at revenue by division, total revenue in the HIFU business for the second quarter of 2022 was EUR3 million, as compared to EUR2 million for the second quarter of 2021. We sold one Focal One unit in the second quarter of 2022 and one unit in the second quarter of 2021. This was a 49.3% increase driven by both higher average selling price and equipment sales and 42.7% growth in treatment-driven revenues. Total revenues in the LITHO business for the second quarter of 2022 was EUR3.6 million, as compared to EUR2.3 million for the second quarter of 2021. We sold eight lithotripsy devices during the second quarter of 2022 versus three in the year-ago period. Total revenues in the distribution business for the second quarter of 2022 was EUR7.6 million, as compared to EUR6.1 million for the second quarter of 2021. The 25.5% increase was primarily driven by 15 ExactVu units sold during the second quarter of 2022 as compared to nine units during the second quarter of 2021. Gross profit for the second quarter of 2022 was EUR6.2 million compared to EUR4.2 million for the year-ago period. Gross profit margin on net sales was 43.8% in the second quarter of 2022 compared to 40.7% in the year-ago period. The increase in gross profit year-over-year was driven by the higher sales effect on fixed costs. Operating expenses were EUR6.6 million for the second quarter of 2022 compared to EUR4.6 million for the same period in 2021. The increase was driven by the ongoing build-out of our U.S. team in commercial infrastructure and included EUR0.3 million of non-cash impact related to share-based compensation programs. Operating loss for the second quarter of 2022 was EUR0.4 million compared to an operating loss of EUR0.4 million in the second quarter of 2021. Excluding the impact of non-cash share-based compensation, operating loss for Q2 2022 would have been EUR0.1 million compared to an operating loss of EUR0.3 million in Q2 2021. Net income for the second quarter of 2022 was EUR1.8 million or EUR0.05 per diluted share, as compared to a net loss of EUR0.4 million or EUR0.01 per diluted share in the year-ago period. As of June 30, 2022, the company had cash and cash equivalents of EUR46.3 million or $48.5 million compared to EUR47.2 million or $53.4 million at the end of December 2021. And I will now turn the call back to Marc.

Marc Oczachowski, CEO & Chairman

Thank you, Francois. In summary, we are very pleased with our performance in the second quarter and year-to-date, and I believe this sets us up for a very successful second half of the year. Both U.S. capital placements, treatment volumes, and pipeline growth continue to reflect the efforts of Ryan and his team, and I believe they are just scratching the surface in what is clearly our most important markets. One final item before we open the call to questions. We are planning a Focal One expert user event for Thursday, September 29 in New York. We will release more details soon, but we hope that you can set aside some time and participate in what is sure to be a very informative session. We will now open the call to your questions.

Operator, Operator

Thank you. We'll now be conducting a question-and-answer session. Our first question comes from the line of Frank Takkinen with Lake Street Capital. Please proceed with your questions.

Frank Takkinen, Analyst

Hey. Great. Thanks for taking my questions and congrats on all the progress. Wanted to start with a follow-up around some of Ryan's comments regarding commercial reimbursement. I think what you stated is typically the commercial reimbursement will follow suit around Medicare reimbursement and that could pick up higher as the APC Level 6 goes into effect. Maybe just go a little bit deeper into that and how we should be thinking about commercial reimbursement and how that could progress over the next couple of years?

Ryan Rhodes, CEO of EDAP U.S.

Yeah. So Frank, the best way to look at that is, again, everyone looks at CMS. And of course, if we have the final rule, which we anticipate coming out in November, supports the move to APC 6, which would go into effect January. We'll be in a process of educating the commercial payers. Today, we have a number of commercial payers that pay for HIFU procedures. I think what you'll see is, it'll be over a course of time, it doesn't happen immediately. We have an outside team of consultants. We have an 800 number that helps our customers work through the appeal process, if there is a needed appeal. But typically, as noted, most of the commercial payers obviously look at CMS and they pay a multiple, sometimes two times of what CMS will pay. It really helps overall when you look at the pro forma analysis done at the hospital level, especially in community hospitals. So we're excited about it. Again, it is a process; commercial payers kind of turn on over their time. And we've seen this pattern before in some of the other companies that work for.

Frank Takkinen, Analyst

Got it. That's helpful color. And then maybe just on the commercial organization in front of APC Level 6, assuming it goes into effect at the beginning of the year. Do you anticipate hiring a little bit more aggressively to be ready to hit the ground running once that goes into effect or do you think the current sales force you have in place is sufficient to cater to what could be the increased demand coming at the start of the New Year?

Ryan Rhodes, CEO of EDAP U.S.

Yeah. So we have had a plan already in place to scale our sales organization. We have been making notable hires throughout the year. We are accelerating that process now. This allows us to have even deeper and wider coverage model. And I think making the investments now obviously sets us up well for next year. Again, we're looking for top talent and I'm impressed with some of the people we've been able to hire into the company. So yes, we are accelerating that process. And it also has a lot to do with the fact that customers see us as the technology leader. We have best-in-class technology, and when we engage with hospitals, they typically choose Focal One as their lead technology for focal therapy.

Frank Takkinen, Analyst

Okay. That's great. And then last one for Marc. Maybe following up on your comments around the endometriosis trial, I think I heard you say the follow-up concludes the end of September. Can you lay out just timelines of what we should be expecting after that readout, approval processes afterward? Do we need to initiate Phase 3 or how should we be thinking about the process after that readout occurs on the endometriosis side?

Marc Oczachowski, CEO & Chairman

Yeah. The follow-up period will conclude at the end of September. Then we need to work on data and get everything done. So we should be ready with everything by the end of the year. We've started already to discuss the regulatory process, which includes the MDR changes in Europe as well. So it's difficult to have a concrete timeline, but we certainly will go to the next step. We'll also work on having some Phase 3 studies starting as well. So these are the next steps.

Frank Takkinen, Analyst

Perfect. I'll stop there. Thanks for taking my questions and congrats again on all the progress.

John Fraunces, Managing Director of LifeSci Advisors

Thanks, Mike.

Operator, Operator

Next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your questions.

Jason Bednar, Analyst

Hey, everyone. Congrats on the results here. Maybe to start with a follow-up on the proposed reimbursement increase. Has the upcoding to APC Level 6 or proposed upcoding influenced discussions with potential Focal One customers over the past couple of months? And I know it's early, but just curious if there's been any early change in behavior or in the talk track you've seen from customers that are in your funnel?

Ryan Rhodes, CEO of EDAP U.S.

Yeah, Jason. I would say it has. We've been able to go back to some of the hospitals that we had spoken to over the many months who were engaged. They were looking at the technology and really looking at acquiring it at some future date. So having this in front of us is obviously very positive. We're not socializing this as noted. The final rule is not out yet. But as you can imagine, with the anticipation of the final rule being positive, centers would want to get their programs ideally up and running before the beginning of the year. So it has helped in the short-term with some of the conversations we've had with a number of our accounts. We will continue to engage appropriately. Bear in mind, we have sold effectively with the current reimbursement at APC Level 5. I think this helps us really in getting deeper into the community hospitals where they do typically a deeper pro forma analysis and they look very importantly at the economics around reimbursement. So it has been favorable, and we're continuing to engage conversations with many of these hospitals.

Jason Bednar, Analyst

All right. That's super helpful, Ryan. Maybe looking beyond reimbursement, could you talk about what it means for EDAP and Focal One to have the major medical meetings like AUA that you mentioned, back to being conducted in person? How critical has that in-person engagement and education event been in terms of creating or spreading awareness of Focal One in HIFU?

Ryan Rhodes, CEO of EDAP U.S.

Yeah. It's been a real benefit to us, as you can imagine, because part of the process not only being in front of our customers face-to-face has been our ability, as in the case of AUA, to do hands-on demonstrations of how the technology works. When we talk about robotics, focal HIFU and the platform, we can talk about it, describe it when they have the ability to sit down and test drive the system on a simulated procedure, and then kind of the bells and whistles happen, the lights go on, and they really have kind of that 'aha' moment. We were able to do that this year in May at AUA, and that's been a real help to us getting back together in person. We'll be doing more of those activities throughout the year. We have other meetings coming in the fall, as mentioned. We're excited to be back in front of customers where we can talk to them face to face and interact with them.

Jason Bednar, Analyst

All right. Great. And then, Marc, if I could just ask one here as a final question. You mentioned the pancreatic program in your prepared remarks. Just maybe could you talk just a little bit more about your plans for that indication and really what we might see from EDAP in addressing pancreatic cancer over the next few years? Just how does that unfold? Thank you.

Marc Oczachowski, CEO & Chairman

Yeah. Well, thanks, Jason. The pancreatic project is a very, very early stage project. So we are assuming the beginning of that. I mean, we did the animal study; it's interesting. So now we'll give the ideas to get to the next steps. But still, we will keep the market posted on that. Again, it's a very early stage to be as precise as you may want.

Jason Bednar, Analyst

Okay, understood. Thanks guys.

John Fraunces, Managing Director of LifeSci Advisors

Thank you.

Operator, Operator

Thank you. At this time, I would like to turn the floor back to Marc Oczachowski for closing remarks.

Marc Oczachowski, CEO & Chairman

Okay. Well, that concludes our call this morning. Thanks again for your interest in EDAP, and I look forward to our next quarterly update in November. Have a wonderful day.

Operator, Operator

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