Earnings Call Transcript - EDAP Q2 2023

Operator, Operator

Greetings, and welcome to the EDAP TMS Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to John Fraunces, Managing Director of LifeSci Advisors. Thank you. Please go ahead.

John Fraunces, Managing Director of LifeSci Advisors

Good morning. Thank you for joining us for the EDAP TMS second quarter 2023 financial and operating results conference call. Joining me on today's call are Ryan Rhodes, Chief Executive Officer; Francois Dietsch, Chief Financial Officer; and Ken Mobeck, Chief Financial Officer of the U.S. Subsidiary. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, which include statements regarding the company's growth and expansion plans. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. I would now like to turn the call over to EDAP's Chief Executive Officer, Ryan Rhodes. Ryan?

Ryan Rhodes, CEO

Thank you, John, and good morning, everyone. I will start today's call by providing highlights from the second quarter of 2023 and then turn the call over to Ken Mobeck, our U.S. CFO, who will then present the corresponding details of financial performance. I'm pleased to report that we achieved record second quarter and first half revenues, reflecting strong underlying demand for Focal One high-intensity focused ultrasound technology. Second quarter revenue of €14.3 million was predominantly driven by new U.S. capital placements at leading academic and community hospitals as well as increased procedure volumes leading to higher disposable sales. We are very encouraged by the higher utilization trends of Focal One HIFU among our existing customers, which helped EDAP generate strong year-over-year HIFU revenue growth of 63.6% for the quarter. There are several factors contributing to increased adoption. As a reminder, Focal One Robotic HIFU is a non-invasive outpatient procedure that demonstrates excellent oncologic control with minimal patient downtime and does not require the use of surgery or radiation. Focal One continues to demonstrate strong clinical outcomes and favorable economics that are driving both growth and adoption. In fact, Focal One is now a leading and prominent focal therapy in six out of the ten best hospitals for urology according to a recent U.S. News and World Report. Focal One HIFU is also becoming one of the fastest-growing treatments within the category of prostate cancer management. Strong Focal One Robotic HIFU capital sales continued to lead our top line performance with sales of four Focal One units in the U.S., including the first system placements in the states of both Kansas and West Virginia. While we continue to see adoption at leading academic and regional cancer centers, we are also proud to announce the recent sale of Focal One to Memorial Sloan Kettering Cancer Center, which is a top-ranked world-renowned urology institution. While prominent academic urology-focused hospitals continue to be strong proponents of Focal One HIFU therapy, community hospitals and large urology practices are increasingly adopting Focal One HIFU as a necessary treatment option for their prostate cancer patients. Procedure growth is also an important metric that we follow closely. As noted, Focal One HIFU procedure volumes in the U.S. experienced robust 85% year-over-year growth in the second quarter. Sequentially, procedure volumes grew 29% in the second quarter of 2023, as compared to the first quarter, representing our third consecutive quarter of double-digit percentage growth. We attribute this acceleration in procedure growth to our strategic investments to grow the Focal One clinical sales team, combined with improved reimbursement rates. While we continue to see favorable impact on demand for higher reimbursement in the U.S., in July, we were also pleased to announce reimbursement approval in Switzerland for the use of High-Intensity Focused Ultrasound in the treatment of prostate cancer, having taken effect on July 1, 2023. Switzerland is a member of the DACH region, including Germany, Austria, and Switzerland with over 100 million in combined total inhabitants. Switzerland has many hospitals ranked among the best 250 in the world according to Newsweek's the World's Best Hospitals 2023. Included in this list is the University of Zurich, an active prominent Focal One site and the leading innovation center for HIFU in the country, and a member of the League of European Research Universities placing it among Europe's most prestigious research institutions. We have also made commensurate investments in ongoing educational activities, including the live broadcasted Focal One procedure performed by Dr. Andre Abreu and Dr. Amir Lebastchi, Assistant Professors of Clinical Urology at the Keck School of Medicine at the University of Southern California, the first institution to acquire and adopt EDAP HIFU technology. In April, we broadcasted this live event worldwide and discussed its success on our last earnings call. A replay of that procedure is still available to view at our website focalone.com. In April, we had our largest presence ever at the American Urological Association Meeting, with many productive engagements among prominent clinicians, hospital executives, and other stakeholders who validated our leading position in the category of focal therapy. As a reminder, there were multiple Focal One scientific abstracts presented by several prestigious institutions, including the Martini-Klinik in Hamburg, Germany. The Martini-Klinik has the largest prostate cancer treatment program in the world. The AUA abstract presented by the Martini-Klinik highlighted seven years of experience using Focal One High-Intensity Focused Ultrasound in 164 patients with prostate cancer. All treatments were established as primary therapy and monitoring definitions follow a very strict protocol. The oncologic outcomes showed excellent cancer control with only 7% significant in-field recurrence and 91.5% radical treatment-free survival at seven years. On the functional side, very few complications were reported with 91.5% of patients maintaining their baseline urinary continence and 85% maintaining their baseline rectal function. These results were impressive as we continue to further educate clinicians, patients, and providers on the benefits of Focal One Robotic HIFU. Additionally, throughout the AUA meeting, EDAP was very busy giving numerous customers the hands-on ability to use Focal One in a simulated prostate ablation procedure. They were able to see in action the robotic positioning system, advanced imaging, and fusion capabilities while setting up a prescribed ablation treatment plan. More recently, Focal One was the only focal therapy invited to present and participate in a plenary panel on innovative robotic systems at the preeminent Annual Meeting of the Society of Robotic Surgery held in Melbourne, Australia. I'd now like to provide a brief update on our distribution business. As previously announced during the first quarter, EDAP received approval from Japan's Pharmaceutical and Medical Devices Agency for commercialization of ExactVu micro-ultrasound, enabling EDAP to emerge as a major player in the prostate cancer market in Japan. Japan remains the second largest market for advanced medical device technology, with prostate cancer being the most commonly diagnosed cancer in Japanese men, with over 100,000 new prostate cancer diagnoses made annually. Following this approval, EDAP has a strong presence in the 110th Annual Meeting of the Japanese Urology Association, which showcased and efficiently launched ExactVu micro-ultrasound in Japan. During the quarter, we sold nine ExactVu units. We continue to see ongoing demand for this differentiated advanced imaging technology that is becoming routinely used in performing targeted biopsies for prostate cancer. In parallel, our Focal One HIFU clinical development programs are progressing well. Last quarter, we reported positive results from the Endo-HIFU-R1 Phase 2 study in deep infiltrating rectal endometriosis where patients treated with Focal One HIFU experienced measurable improvement across a broad range of debilitating symptoms. Following these positive results, we are pleased to report that more than 50% of the patients have now been enrolled across six centers in France for our confirmatory Phase 3 comparative double-blind randomized controlled trial. As noted, the primary efficacy endpoint for this 60-patient study is the level of acute pelvic pain as assessed at three months post-procedure. If results from the Phase 3 trial mirror those from the Phase 2 trial, we would possess strong clinical evidence to support Focal One HIFU as a new, effective, less invasive first-line treatment for deep infiltrating rectal endometriosis. Given how few treatment options are available, Focal One HIFU could become an important new treatment option, enabling patients to avoid the known morbidity and complications often associated with surgical resection of the bowel or rectum. Looking ahead, we expect both growing demand for new Focal One HIFU systems as well as increased utilization among our existing customers. With €51.3 million or US$56 million in cash and short-term investments and minimal debt, we remain well positioned to invest in our sales, marketing, education, and clinical development activities to support the continued expansion of Focal One HIFU. The strategic and ongoing investments made in the first half of 2023 will support the increased demand in the U.S. marketplace for our technology. With our growing active pipeline for new business, we anticipate continued strong adoption of the Focal One technology platform with respect to new system placements and increasing utilization. With that, I will now pass the call over to Ken to review the second quarter financial performance. Ken?

Ken Mobeck, CFO of U.S. Subsidiary

Thank you, Ryan, and good morning, everyone. Please note that all figures, except for percentages, are in euros. For conversion purposes, our average euro-dollar exchange rate was 1.0871 for the second quarter of 2023. Total revenue for the second quarter of 2023 was €14.3 million, an increase of almost 1% as compared to total revenue of €14.2 million for the same period in 2022 and a record level for a second quarter. Looking at revenue by division, total revenue in the HIFU business for the second quarter was €4.9 million as compared to €3 million for the second quarter of 2022, a 63.6% increase year-over-year. As referenced, the increase was driven by selling four Focal One units in the second quarter of 2023 versus one unit sold in the second quarter of 2022. Total revenue in the LITHO business for the second quarter was €2.2 million as compared to €3.6 million for the second quarter of 2022. The year-over-year decline in LITHO revenue was mainly attributed to six less units sold year-over-year as well as supply chain constraints with a few key suppliers during the quarter. Total revenue in the distribution business for the second quarter was €7.2 million as compared to €7.6 million for the second quarter of 2022. The decline in distribution revenue was primarily driven by nine ExactVu units sold during the second quarter of 2023, as compared to 15 units sold during the second quarter of 2022. Gross profit for the second quarter was €5.7 million compared to €6.2 million for the year-ago period. Gross profit margin on net sales was 39.6% in the second quarter compared to 43.8% in the year-ago period. The decrease in gross profit margin year-over-year was primarily due to distribution product mix, global inflationary price pressure on components, increased manufacturing costs, and continued investments in our U.S. service and clinical application organizations to support HIFU and long-term revenue growth. Operating expenses were €9.9 million for the second quarter compared to €6.6 million for the same period of 2022. The increase in operating expenses was primarily due to the strategic and planned build-out of the U.S. team and commercial infrastructure, variable compensation, and increased marketing activities. Operating loss for the second quarter was €4.2 million compared to an operating loss of €0.4 million in the second quarter of 2022. Excluding the impact of non-cash share-based compensation, the operating loss for the second quarter would have been €3.1 million, compared to an operating loss of €0.1 million in Q2 2022. Net loss for the second quarter was €4.7 million or €0.13 per diluted share as compared to net income of €1.8 million or €0.05 per diluted share in the year-ago period. Total cash and cash equivalents at the end of Q2 was €51.3 million or US$56 million as compared to €58.3 million or US$63.4 million at the end of Q1 2023. We continue to monitor cash flow closely as we invest for long-term business growth while also remaining cognizant of short-term financial performance. Through our strategic investments, we are confident in realizing the extraordinary opportunity with Focal One HIFU to fundamentally change the emerging treatment paradigm for the management of prostate cancer. Those are our key financial highlights for the second quarter of 2023. And with that, I'd like to turn the call back to Ryan. Ryan?

Ryan Rhodes, CEO

Thank you, Ken. In summary, our second quarter results continue to reinforce our confidence in the growing demand for Focal One as well as validating our strategy and execution to drive education and adoption. Sales and unit placements of Focal One are growing along with increased Focal One HIFU procedures. In closing, we remain optimistic about the remainder of 2023. And I would like to thank the entire EDAP team for their dedication and hard work that is driving increased awareness among clinicians and patients of Focal One HIFU as an important and growing treatment option for prostate cancer management. We look forward to sharing our progress with you again in the fall. And I will now turn it back over to the operator for questions.

Operator, Operator

The first question today is coming from Michael Sarcone of Jefferies.

Michael Sarcone, Analyst

So first one is just on the four Focal One system sales in the U.S. I guess, can you just talk more about the sales funnel and how demand is shaping up there? And maybe how you think the trajectory of the system placements might shake out through the remainder of the year?

Ryan Rhodes, CEO

Yes. So we continue to see our active pipeline growing. As noted, we have added additional headcount. We're building a broader coverage model. And again, our pipeline continues to grow. We have a number of projects in play, and we expect to have notable sales in both Q3 and Q4. So we would say openly, the back half of the year should be a stronger portion of the year. So currently, again, we've got our team active. We have some deals in process, and we're excited to close out both Q3 and Q4.

Michael Sarcone, Analyst

Great. Maybe just a follow-up on that. So if you had about 11 system placements in 1H, just based on your commentary, that means we could see above that for 2H?

Ryan Rhodes, CEO

Definitely, I would say above that, for sure. And again, we continue to grow the commercial structure. And with that, we broadened the number of hospitals, as I would say, in our active pipeline.

Michael Sarcone, Analyst

That's really helpful. And then just the last one for me. 85% procedure growth in the U.S. seems pretty strong. Can you just give a little more color on what you're seeing in terms of the utilization environment, even if it's trends in procedures per system? And is there any way you can quantify or ballpark the number of procedures you're seeing either quarterly or annualized in the U.S.?

Ryan Rhodes, CEO

Yes, Michael, we don't give out our actual procedure numbers. What I would say is we continue to see increased utilization, both in our installed base customers and even new customers that are just acquiring the technology. We track metrics to include time to first case, time for case 1 to case 10 and beyond. So I think we're seeing the impact our clinical sales team is making, but we're also seeing the consumer that is patients looking for other options beyond just surgery and radiation. And again, I think in our message, we have a non-invasive treatment option for men diagnosed with prostate cancer. So we continue to create more market awareness, and I think that also will breathe additional momentum into our story.

Operator, Operator

The next question is coming from Frank Takkinen of Lake Street Capital Markets.

Frank Takkinen, Analyst

I wanted to follow up just one more question on placement expectations in the second half of the year. Ryan, I was hoping you could comment on regular seasonality trends. I know I asked about this last call, but I was looking for just an update if you expect that Q3 being a summer month OUS seasonality more pronounced and sometimes U.S. seasonality more pronounced as well, with the majority of those greater than 11 implants in the fourth quarter as an expectation?

Ryan Rhodes, CEO

Yes, Frank, we don't see, at least as we're going through the quarter, the seasonality we would typically experience in, say, a summer slowdown. We don't see that. I think we see the momentum building. And as mentioned earlier, again, our pipeline continues to develop and grow. We've got our team head down and focused, and I would expect a stronger second half of the year. And again, so I don't see the slower Q3 that may be common for other companies or other technologies. I think we have that momentum as we walk into the back half of the year. So I think that's where we stand.

Frank Takkinen, Analyst

Got it. That's helpful. And then on the procedure side, I know one thing you've spoken about in the past is related to the disposable average selling price with the renewed reimbursement at the beginning of this year and maybe having a little bit of flexibility to increase that average selling price or slowly increase that average selling price over a number of years. Can you maybe update us on that dynamic and whether or not you still think there's more room to go on the average selling price related disposables?

Ryan Rhodes, CEO

So great question. I would say, yes, there is an opportunity. And I would say, historically, since I've been in the company, the average selling price on procedures has gone up. We continue to look at it closely. We work very closely with our legacy customers, and we've had some price increases, notably with certain accounts. And we continue to see that average, call it, average sales price per procedure going up. Now again, we pay close attention to that. And we monitor, and that also plays true for the new accounts that acquire our technology. So I'd say we would say there's room to grow for sure. And again, I think we enjoy some additional advantages from the reimbursement that's in place.

Operator, Operator

The next question is coming from Jason Bednar of Piper Sandler.

Jason Bednar, Analyst

I wanted to follow up just really on the Focal One placements. And sorry to ask another one here, but I wanted to check to see just how or whether the rate environment and the broader macro dynamics out there are just influencing the attitude of hospitals, both on the large academic side and the community centers. Are your prospects moving forward at the same pace as what you've seen historically? I may know the answer just based on how you responded to Frank's question just there regarding business strength here in the third quarter. But I just wanted to check to see if that's a dynamic at all that's influencing conversations you're having and whether business actually might even be stronger than what you're seeing in the third quarter, if not for some of the macro factors?

Ryan Rhodes, CEO

Yes, we don't see any challenges in that regard. Despite rising interest rates, we haven't observed any negative effects. We operate in a sector of disruptive capital equipment, but we are also involved in strategic capital. Hospitals regularly purchase capital equipment, and adding Focal One and Focal therapy, particularly in the form of Robotic Focal HIFU, is a strategic move. We collaborate closely with our hospital clients throughout the purchasing process. Therefore, we don't classify ourselves as operational capital; we are strategic capital. It's essential to provide clinically necessary offerings like focal therapy, which is also strategically beneficial for hospitals and can yield significant economic returns. This is a key part of our story.

Ken Mobeck, CFO of U.S. Subsidiary

Yes. Jason, the only other thing I'd add regarding your question is we have seen in the hospital environment and the purchase environment taking time in improving their purchases, okay? We had a few systems get stuck in the buying process in Q2. We see going through in Q3. So if anything, they're just taking a really good look at these purchases before they buy them.

Jason Bednar, Analyst

Okay. So maybe just a longer sales cycle, but not actually influencing the yes or no decision?

Ken Mobeck, CFO of U.S. Subsidiary

Exactly.

Jason Bednar, Analyst

Perfect. Okay. That's very helpful. I also wanted to ask Ken on the gross margins. They're a little bit below what we were looking for. I know you called out some of the factors that were influencing some of that softness. But maybe if you could just add any more color on the distribution side. That was probably the bigger miss in our model. But then any other directional guidance you can give? I know you don't offer formal guidance, but any color on how to think about whether it's segment or company-wide gross margins going forward? And whether we're at a trough here or if we need to contemplate additional services, that's investments that may still then weigh on those gross margins going forward?

Ken Mobeck, CFO of U.S. Subsidiary

Yes, good question, Jason. The primary factor was our distribution mix this quarter, which I consider to be related to timing. We will continue to invest in the company's growth. Our operating expenses are still increasing, but we are monitoring them closely. It is essential that we invest in areas that will effectively drive the sales funnel. Additionally, we have a need to build support to get the necessary tools installed and serviced. We did notice some inflationary price pressures that we are keeping an eye on, and we are exploring solutions for that. Looking ahead, I anticipate that as the distribution mix improves, Focal One is expected to gain traction in the second half of the year. Earlier this year, we also raised our list prices for Focal One, so I expect to see margins improve compared to where they concluded in Q2.

Operator, Operator

The next question is coming from Swayampakula Ramakanth of H.C. Wainwright.

Swayampakula Ramakanth, Analyst

This is RK from H.C. Wainwright. With the growing volume, around 85% year-over-year and approximately 29% quarter-over-quarter, when do you expect this to be evident in your consumables revenue growth? I'm trying to understand the timing of that revenue stream.

Ryan Rhodes, CEO

Yes, RK. First thing, again, we build programs. So when the system is placed, there's a training event for the team. We call it an onboarding process. And so that can take some time. It really depends on each hospital. They are individual, but we do everything to shorten that timeline. So I think when we'll see more of a notable impact over time is certainly as we place more systems, but also as systems get used to using the technology and have clinical use and patients treated clinically and successfully. I think just organically, you’re going to see an increase in same-store sales. And we have a dedicated team, both a clinical sales team and applications team that work very closely with our customers. So I think as you look outward, it takes a while. But notably, based on percentage increase, we see an increase of procedures and that is both in our legacy accounts as well as we are placing more systems. So I think over time, that will be something to look closer at. And, again, we are very focused on our procedures as noted, and we continue to resource that team accordingly.

Swayampakula Ramakanth, Analyst

I'm trying to get more insight into the timing of the sales cycle. With reimbursement established, you mentioned earlier that the sales cycle is getting slightly longer as we take a closer look. Can you provide any additional insights on why that is? Is it related to financing, or is it more about administrative matters? I'm trying to understand what is causing the lengthening of the sales cycle.

Ryan Rhodes, CEO

Yes. It'd be fair to say today, hospitals that are looking at making investments in new innovative capital equipment, they typically go through their own pro forma analysis. So those pro forma analyses vary by institution. And some institutions move faster than others, some may slow down. They just want to do their due diligence. And again, we're adding in many cases, it's a new revenue-enhancing service line. And with that said, they just want to look at the numbers and run some calculations. As we have said in the past, we have favorable economics. And typically, when we go through that process, it leads ultimately to a sale. So again, I think it varies by institution and as Ken had referenced. And it's not for every hospital. I think some will always move faster than others. But we're accustomed to going through that process, and we pay a lot of attention to it. If it slows down, where we're active with our customers kind of working shoulder to shoulder to make sure we answer any questions they have or we can help them fully appreciate and understand the financial return from their investment.

Swayampakula Ramakanth, Analyst

And then on the Swiss reimbursement. With that in place, how long do you think it could take for it to reflect on your sales? And how big is the Swiss market or Swiss or associated countries along with Switzerland?

Ryan Rhodes, CEO

Switzerland is a country with three main languages: German, French, and Italian. We have been active in Switzerland for many years, notably with a strong program at the University of Zurich led by Professor Daniel Eberle. Additionally, we have established systems in the Geneva area. While I cannot provide a specific market size, there are several well-known hospitals with which we are currently collaborating. Our sales teams are engaged in the market and are familiar with our existing and target customer bases. We are well-equipped to pursue this business opportunity. Although Switzerland is a small country, it holds significant influence in Europe, and I find that noteworthy.

Swayampakula Ramakanth, Analyst

Last question for me. On the LITHO business, you stated there were some supply chain issues. Is that pretty much limited to the LITHO business? Or can it bleed into other divisions as well? And how long do you think the supply chain issue would last within the LITHO business?

Ryan Rhodes, CEO

The supply chain issues are primarily related to the components needed for our proprietary lithotripsy technologies. I don't see this as a long-term problem; the sales are just delayed until they can acquire the necessary additional components. Currently, there is no impact on other areas of our business. We had some sales prepared, but their completion depends on obtaining these extra components. At this stage, our other distribution business remains unaffected.

Operator, Operator

At this time, I'd like to turn the floor back over to Mr. Rhodes for closing comments.

Ryan Rhodes, CEO

I want to thank all who participated in today's call. As a reminder, we will be presenting in New York at both the Morgan Stanley and H.C. Wainwright investment conferences in September. In November, we plan to participate in the Jefferies Global Healthcare Conference in London. And we look forward to speaking to all of you again in November on our third quarter earnings. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.