Earnings Call Transcript - EDAP Q2 2021

Operator, Operator

Greetings and welcome to the EDAP TMS Second Quarter 2021 Earnings Conference 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'd now like to turn the conference over to your host, Mr. Glenn Garmont, Investor Relations. Please go ahead, sir.

Glenn Garmont, Investor Relations

Thank you, Hector. Good morning and thank you for joining us for the EDAP TMS second quarter 2021 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 the 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 CEO, Marc Oczachowski. Marc?

Marc Oczachowski, CEO

Thank you, Glenn, and good morning, everyone. I will start by providing a brief operational update and then turn the call over to Francois Dietsch to review our financial performance. I'll recap a few of the highlights that we covered in our pre-announcement press release of August 4. Total company revenue for the six months ended June 30 was EUR20.7 or $24.8 million, representing growth of 22.5% over the first six months of 2020. While our HIFU division continued to be negatively impacted by the ongoing effects of the COVID pandemic on hospital CapEx trends, we were very pleased to see US treatment volumes increase a very healthy 79% over the second quarter of 2020. This is important for two reasons. First, the growth in the US treatment volumes is noteworthy as it is a leading indicator of growing adoption by urologists of Focal One HIFU as a prostate cancer treatment alternative. Second, we believe this growth in US treating volume reflects the positive impact of HIFU reimbursement rules that went into effect on January 1 of this year. Recall that CMS in its Physician Fees Schedule final rule established, for the first time, payment to physicians performing the HIFU procedure in the US. Regarding the rule, CMS has set a total relative value unit for RVU for a physician performing a HIFU procedure at 29.09. This translates to an average payment of $996 for urologists performing a HIFU procedure on a Medicare patient in a facility setting. As a reference, a comparable established minimally invasive therapy for prostate cancer, cryotherapy, has a RVU of 22.72, which translates to $786 for the urologist under the same setting and patient conditions. So HIFU can significantly broaden the revenue base of urologists treating prostate cancer patients. We believe this new rule will be a meaningful long-term catalyst to accelerate the Focal One adoption. On the topic of reimbursement, I would like to share with you a recent update that could very positively impact reimbursement rates in 2022 and beyond. Earlier this week, we requested and were granted an opportunity to present at the summer meeting of the CMS advisory panel on Hospital Outpatient Payments or HOP panels. The HOP panel is a mechanism whereby CMS brings together a group of subject matter experts to consider and discuss changes to current reimbursement rates for specific outpatient procedures or technologies. Recall that on the hospital payment side, HIFU is currently reimbursed as a level five neurology 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 in 2021, as a national average, adjusted locally based on the wage index. However, based on the analysis of the reimbursement paid for other prostate cancer ablation procedures, including cryosurgical ablation, we believe there is a strong argument to be made for level six APC reimbursements for Focal One HIFU. For the sake of comparison, if HIFU were reimbursed at level six this year, the average reimbursement would increase from approximately $4,500 currently to approximately $8,500, a huge increase of nearly 88%. This is important because the lower reimbursement for facilities limits how broadly phototherapy may be offered to the full range of Medicare patients. At the meeting, which occurred this past Monday, the HOP panel voted unanimously in favor of the increase. While the final 2022 rule will not be published until November or December of this year, it is worth noting that CMS has historically given the HOP panel's recommendations very strong consideration. If we are successful in moving our APC classification to level six from level five next year, we believe this will be a significant driver for many more hospitals to initiate a Focal service program. The financial analysis of acquiring a Focal One machine and offering the critical benefits to a broader patient population becomes much stronger. We are very excited and hopeful regarding this potential change and look forward to progress later this year. Notwithstanding the challenging CapEx environment during the second quarter, we continue to add to our robust pipeline of Focal One and ExactVu sales opportunities during the quarter, and we believe several of these... Over the past few months, we have added key healthcare institutions to our Focal One roster, including Cleveland Clinic and Mount Sinai in New York, among many others. These are all leading institutions in the treatment of prostate cancer and are increasingly becoming reference centers with teaching, research, and case observations now available for pipeline accounts. We look forward to updating you on the growth and development of our Centers of Excellence for Focal One in the coming months. We believe that the eventual return of hospital CapEx to more normalized trends, coupled with continued growth in treatment volumes, bodes well for the future for our company and the hundreds of thousands of men around the world who could potentially benefit from this treatment. Turning now to other highlights from the quarter, in June, we announced the hiring of med tech industry veteran Ryan Rhodes to be Chief Executive Officer of our US subsidiary. Ryan brings a wealth of highly relevant experience, including 14 years at Intuitive Surgical, where he played a leading role in the global clinical extension of robotic surgery across multiple specialties, including urology. The addition of Ryan reflects the continued execution of our US expansion plans; he will be instrumental in helping to drive continued growth and adoption of our technology. Ryan has already started assembling a world-class team around him by adding medtech leaders that will be instrumental in building high production and utilization in the country. One of them is Mohan Nathan, who has an extensive background in the medical device industry, including many years in global clinical and marketing leadership roles at Intuitive Surgical and TransEnterix. Mohan will play a major role at EDAP developing our clinical and marketing adoption program. To fund our growth initiatives in the US and elsewhere, in April, we completed a successful financing that raised gross proceeds of approximately $28 million. Together with cash on hand, we ended the second quarter with cash of more than $53 million. As we discussed last quarter, this financing was strategically important for several reasons. First, it brought a number of new high-quality institutional healthcare investors into the fold. These investments occur only after a significant amount of due diligence has been done. The investors who participated in this offering did so because they share our belief in the potential of HIFU, not just as part of the prostate cancer continuum, but potentially for other indications as well. We believe this validates our mission and our technology. The funds that we raised will support our US expansion plan, specifically our efforts to expand market access and increase HIFU adoption and utilization. We previously announced that we are working with leading US reimbursement consultancies MTP and Argenta Advisors to expand market access and coverage. This reflects our broader commitment to establish ourselves as a leader in the US market, making HIFU technology as broadly available to patients as possible. We also have sufficient capital to build out our clinical marketing and sales organizations. I believe that these initiatives, together with the hospitals and KOLs who are ready to champion the technology on the ground, will present a different approach designed to maximize awareness and access to our HIFU technology. I will provide a brief update on our Endometriosis program. As a reminder, this Phase II study will enroll a total of 38 women across five major hospitals in France, assessed over a six-month follow-up period. Investigators will evaluate the safety and efficacy of HIFU for this condition. Enrollment is tracking closely with our internal expectations. We expect to treat the last patient by the end of this month, which is in two or three days. We also received authorization from the French Health authorities to continue enrolling patients after we achieve our initial enrollment target of 38 patients to further strengthen this Phase II study and collect more safety and efficacy data. We believe the treatment of Endometriosis could be greatly improved as the application of less invasive procedures and the use of HIFU technology could offer an important minimally invasive treatment option for these patients. Now our CFO, Francois Dietsch will provide some details of our financial results. Francois?

Francois Dietsch, CFO

Thank you, Marc, and good morning, everyone. Please note that all figures, except for percentages, are in euro. For conversion purposes, our average euro-dollar exchange rate was 1.2024 for the first half of 2021. Our total company revenue for the second quarter of 2021 was EUR 10.4 million, an 11.8% increase compared to the revenue of EUR 9.3 million over the same period in 2020. Looking at the revenue by region, total revenue in the HIFU business for the second quarter of 2021 was EUR 2 million, a decline of 21.8% from EUR 2.6 million for the second quarter of 2020. The decline was driven primarily by continued weakness mostly toward CapEx spending. Total revenue in the LITHO business for the second quarter of 2021 was EUR 2.3 million, a decline of 22.6% from EUR 2.9 million for the second quarter of 2020. As for HIFU, the decline was driven by continued weakness in hospital CapEx. Total revenue in the Distribution business for the second quarter of 2021 was EUR 6.1 million, a 61.6% increase compared to EUR 3.8 million for the second quarter of 2020. This reflects the growth in ExactVu sales development. Gross profit for the second quarter of 2021 was EUR 4.2 million, compared to EUR 4.3 million for the year-ago period. Gross profit margin on net sales was 40.7% in the second quarter of 2021, compared to 46.8% in the year-ago period. The decrease in gross profit year-over-year was due to lower sales affecting fixed costs in the HIFU business. Our operating expenses were EUR 4.6 million for the second quarter of 2021, compared to EUR 4.0 million for the same period in 2020. The operating loss for the second quarter of 2021 was EUR 0.4 million, compared to an operating profit of EUR 0.3 million in the second quarter of 2020. The net loss for the second quarter of 2021 was EUR 0.4 million, or EUR 0.01 per diluted share, as compared to a net loss of EUR 0.2 million, or EUR 0.01 per diluted share in the year-ago period. At the end of June 30, 2021, we had cash and cash equivalents of EUR 45 million or $53.3 million, compared to EUR 24.7 million or $30.2 million as of December 31, 2020. Including in our June 30 future financing is net proceeds of approximately $25.7 million from the secondary offering of ADS that we completed in... reflecting the offerings, the number of outstanding shares was approximately 33.4 million shares at the end of June 2021. And we now turn the call back to Marc.

Marc Oczachowski, CEO

Thank you, Francois. In summary, we are pleased with our second quarter results against a difficult hospital CapEx environment. Through the first six months of the year, we increased revenue by 22.5% over the comparable period in 2020, demonstrating that we are successfully navigating through this crisis. In addition, we carefully and successfully managed our gross margin and operating expenses to keep the company near breakeven. At the same time, we continue to build our US pipeline and we remain optimistic that we will announce additional sales and key placements very soon. We also anticipate that treatment revenue growth will accelerate, as we saw with the positive momentum in utilization during the first half of the year, and this should be strengthened by new US resources. The most important leading indicator, US treatment volumes, increased 79% year-over-year, reflecting growing awareness of HIFU as well as the positive impact of the new reimbursement rules that went into effect in January. Finally, we are very excited about the results of this week's meeting of the CMS HOP panel and the positive recommendation towards the upgrade from APC level five to level six of HIFU reimbursement from $4,500 to $8,500. If reimbursement for HIFU is upgraded to level six next year, this will represent a significant increase in dollars to hospitals performing Focal One procedures, and we believe it will drive accelerated machine placement in the future. All in all, I believe we are very well positioned to establish ourselves as the leader in the non-invasive and focal ablation of prostate tissue. I would like to thank you for your interest and support. We will now open the call for your questions. Operator?

Operator, Operator

Your first question comes from Frank Takkinen with Lake Street Capital Markets.

Frank Takkinen, Analyst

Great, thanks for taking my questions. A couple for me this morning. I wanted to start with the reimbursement change. I was just hoping you could give us a little bit more background on why it was previously categorized into level five and the more specific justification to get it to level six. Although I am very excited and can completely appreciate the jump up here, is there an opportunity to increase the reimbursement even more from the level six reimbursement level in future years?

Marc Oczachowski, CEO

Hi, Frank. Thanks for the question. The level five reimbursements were given by Medicare some years ago after it was studied on the level of six. After the first claims made by users of the HIFU technology one or two years later, they decided to categorize it to level five based on the average amount claimed. We also initiated programs to educate hospitals and users on properly claiming their HIFU treatment to Medicare. We have significantly increased and improved that average amount to be claimed, which will also justify upgrading the APC from level five to level six. That's what we've been discussing with CMS and the HOP panel at the beginning of the week.

Frank Takkinen, Analyst

Got it, okay. That's helpful. I wanted to move over to capital budgets a little bit more. I heard your comments about potentially announcing some key placements very soon. I was curious if you could help us understand how conversations are going as of recently. I know there was an expectation for a second half bulge of placements similar to what happened last year. Do you still think that's something that could be occurring this year? Or do you feel there's maybe a little bit more conservatism or cautiousness in CapEx budgets right now?

Marc Oczachowski, CEO

I think we're about in the same situation as last year. Although seasonality in this type of business has increased due to the current lack of visibility in the COVID context, we really hope that, like last year, many hospitals will spend their budgets before the end of the cycle, which is the end of the year for the majority of institutions. We are having regular and frequent discussions with the purchasing departments and legal departments in a significant number of leading hospitals in the US with the goal of finalizing and closing deals before the end of the year. That's why I mentioned earlier that we have good hope and confidence that we might be able to announce and close the key placements and sales soon, probably before the end of the year.

Frank Takkinen, Analyst

Got it, okay, last one for me. The distribution had a pretty solid quarter. I'm assuming this was related to ExactVu. One, can you confirm if that's correct? Two, can you give us a little bit more color on the sale of the ExactVu systems? How many you had this quarter as well as a rough estimate on the installed base?

Marc Oczachowski, CEO

Yes, you're exactly right. As you remember, in the first half of last year, we didn't have the distribution rights for ExactVu. We initiated that at the end of the second quarter last year, so we only had a few sales last year. This year, we were already commercializing it full speed, at least in the US and a big part of Europe. We completed nine sales of ExactVu during the quarter this year, as opposed to only three last year because we just got started in the month of June. That's been tremendously helpful in growing our distribution business, along with good momentum and good deals in France and Asia. This has been made easier to sell as the capital expenditure is much lower than for Focal One.

Operator, Operator

Your next question comes from the line of Jason Bednar with Piper Sandler.

Jason Bednar, Analyst

Hello, hope everyone's well. Two questions from our side. I wanted to see if you could expand on what you're hearing on the ground in your discussions with hospitals. I know you mentioned the COVID dynamic, but are you sensing that budgets are still tight? Is the technology education and sales negotiation process challenging in the COVID environment where access may still be limited, or are there other external factors holding back demand from hospitals?

Marc Oczachowski, CEO

I think it's a mix of all these factors. Access is a bit more difficult now, and hospital expenditures are different than usual; priorities have shifted. When speaking about amounts, for smaller capital equipment like stone lasers or even the ExactVu device, access and priorities are easier to achieve. However, for a $700,000 investment for a hospital, it takes a bit more time and priority. Similar to last year, we hope many decisions will occur towards the end of the year as hospitals will have to make those decisions before time runs out.

Jason Bednar, Analyst

Okay, that's helpful. Moving over to the update from the HOP panel, that's really encouraging news, and congrats on that update. As you mentioned, this would put HIFU on a more level playing field with cryo and radical prostatectomy. Could you elaborate on how influential you believe the payment increase could be on influencing Focal One purchases if it goes into effect? It seems like it has potential to be much more impactful than the physician fee schedule update for this year in terms of just driving future adoption. I would love to hear if you agree, and whether you have any additional insights on how this might influence commercial payers down the road.

Marc Oczachowski, CEO

That will definitely influence hospitals getting into the technology faster. When you nearly double the level of payment a hospital would get for the same technology, that changes the performance in favor of the technology. This will definitely help accelerate and boost sales and usage of the technology. So it's on both sides, not only on the CapEx, but also on the disposable side. For the private payers and insurances, they usually base their reimbursement levels on Medicare reimbursement levels, so this will also influence them. Again, the more adoption and utilization there is, the faster we can enroll private payers and have the technology accepted into their policies.

Jason Bednar, Analyst

Okay, just a quick follow-up to clarify how this might drive better hospital adoption when you try to sell Focal One. How much pushback do you run into simply because the ROI or economics aren't as favorable to hospitals as they would like it to be?

Marc Oczachowski, CEO

Not much. The ROI or breakeven point is good already. Remember that the CMS payment is only for Medicare patients, so we have to account for private pay patients that are also contributing to the ROI. The pro forma is already good; it will just be excellent if we move to level six. So we do not have too much pushback at level five, it will just be much better at level six.

Jason Bednar, Analyst

Okay, great. One final question. I appreciate the update on Ryan's team building. Are there any targets we should have in mind regarding the number or roles that Ryan plans to fill, and by when do you hope to have that talent in place?

Marc Oczachowski, CEO

Actually, for obvious reasons, we won’t disclose the complete plan and strategy. We also need to be cautious about competitors and the environment. But the idea is to build a strong, high-performance team of clinical marketing and sales people to spread the technology, educate users, and connect with the patient community. Ryan has a very broad network in the medical field, particularly in urology, and I am confident he will continue to bring on board a number of talents to aggressively penetrate the market and accelerate the adoption of HIFU.

Operator, Operator

Next question comes from line of Andrew D'Silva with B. Riley.

Andrew D'Silva, Analyst

Hey, good morning. Thanks for taking my questions. Just a few quick ones for me. To start, can you let us know how many Focal One and ESWL systems were replaced during the quarter, and were there any Ablatherm units installed during the quarter?

Marc Oczachowski, CEO

No, we had no Ablatherm sales and fewer are expected in the future as Focal One has taken over HIFU. We sold one Focal One during the quarter and in terms of lithotripsy per renewal, we had about three units sold during the quarter.

Andrew D'Silva, Analyst

Okay, thank you for that. Could you just recapitulate the next steps for EDAP from a commercial reimbursement standpoint? What should we monitor from our side? With the move to level six and its alignment with cryo ablation, the increase from $4,500 to $8,500, is that just the facility fee? Or does that also include the physician fee as well?

Marc Oczachowski, CEO

No, that's just the facility fee; the physician fee is a separate entity.

Andrew D'Silva, Analyst

Okay, so all told, if you get to level six, should we be thinking of something around close to $10,000?

Marc Oczachowski, CEO

Yes, for both fees, that would be accurate because we have one fee close to $1,000 and the other around $8,500.

Andrew D'Silva, Analyst

Okay, perfect. Lastly, what should we charge moving forward to see how you are progressing toward obtaining commercial reimbursement?

Marc Oczachowski, CEO

We're actively working on that. We've mentioned in past calls that we're working with different private payers and insurances, but that's a long process. The goal is to start getting some of these companies to offer treatment in their policies as soon as possible. It’s a long process, and we are actively investing in that direction. We'll keep you posted when we have material information.

Andrew D'Silva, Analyst

Is it tracking to your expectations? Have there been any delays or things moving ahead of schedule?

Marc Oczachowski, CEO

Actually, we are executing your plan as anticipated. We’re on track in terms of delivering the actions, meetings, and plans.

Andrew D'Silva, Analyst

Okay, just one last question for me. How indicative of your future OpEx was the second quarter? Could you provide context on how much to model an increase in OpEx, given the expansion in the US infrastructure?

Marc Oczachowski, CEO

I cannot provide an exact percentage, but we should expect a significant increase in our OpEx in the US, as we want to build a complete global marketing and sales organization. We will start seeing the impact of that in the second half of the year since Ryan joined the company only in June, and he is working hard on building that team.

Operator, Operator

Your next question comes from Swayampakula Ramakanth with H.C. Wainwright.

Unidentified Analyst, Analyst

Thank you. Good morning, Marc and Francois. This is RK from H.C. Wainwright. In the opening remarks, you stated that you've been seeing growth in terms of treatment volumes. Could you give us a bit more color, either in terms of percentage or total number of treatments being done using HIFU?

Marc Oczachowski, CEO

Yes, the overall percentage I mentioned earlier is about 79% to 80% growth, and this is spread across most of our sites. We can see consistent momentum and utilization in our existing reference sites. This is a very encouraging trend; people are getting more confident and witnessing the benefits for patients.

Unidentified Analyst, Analyst

Perfect. Regarding Ryan and his team, do you think their work will focus not only on meeting with additional hospitals and oncology centers but also messaging the utility of HIFU? Are there any additional publications planned to support Ryan's work?

Marc Oczachowski, CEO

Absolutely. We are continuing to follow various studies to get notifications on HIFU. Ryan and his team are focused not only on increasing the spread of HIFU technology but also on clinical utilization and adoption programs to further increase usage at existing hospitals.

Unidentified Analyst, Analyst

When you talk about HIFU reimbursement being approved at the APC level six, is that the same level as what cryotherapy and radical prostatectomy are getting reimbursed, or is it slightly better?

Marc Oczachowski, CEO

As I mentioned during the call, it will be at the same level as cryo surgery and radical prostatectomy. We can compare it, but yes, it will be at the same level as cryo surgery.

Unidentified Analyst, Analyst

That sounds great. Lastly, regarding the UDS division, the sales in the second quarter seem to have dipped compared to the last six quarters. What changes are happening in that commercialization process? Is there something in the market or something that needs adjustment within the firm?

Marc Oczachowski, CEO

I'm not sure, RK. We don't refer to UDS anymore. I remember some quarters, we spread UDS between ESWL and distribution because it no longer makes sense to add them together. Are you speaking about ESWL or distribution?

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.