Earnings Call Transcript - EDAP Q4 2021

Operator, Operator

Greetings. Welcome to the EDAP TMS Fourth Quarter and Full Year 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. Please note, this conference is being recorded. I would now like to turn the conference over to John Fraunces, Investor Relations. Thank you, you may now begin.

John Fraunces, Investor Relations

Thank you. Good morning and thank you for joining us for the EDAP TMS's fourth 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; Ryan Rhodes, Chief Executive Officer of EDAP US; 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, John, and good morning, everyone. I will start by providing a brief operational update 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. I will start by recapping a few of the highlights. Full year 2021 revenue was €44.1 million or $51.9 million as compared to full year revenue of €41.7 million or $47.8 million for the full year 2020, an increase of 5.8%. While Ryan will cover developments in the U.S. business, it is worth noting that we exited 2021 with significant momentum. We placed Focal One machines with several new and highly regarded health care institutions that we believe serve as validation for the need of Focal One as part of the comprehensive prostate oncology program. For the fourth quarter, total revenue was €14 million or $15.9 million, representing a decrease of 9.1% as compared to the fourth quarter of 2020. The fourth quarter did offer 48% growth in sequential revenue from Q3 2021, though we do tend to see the fourth quarter as a more favorable time for capital purchases. As I mentioned a moment ago, we are very pleased with the momentum with which we exited the fourth quarter and entered 2022. Focal One is gaining acceptance as the most advanced non-invasive treatment for prostate ablation controlled by the urologist. Our focused investments in the U.S. market are delivering results, and our distribution business is growing globally, especially in regards to the ExactVu micro ultrasound platform. At this point, I would like to provide an update on our expansion activities where we believe HIFU can have clinical utility and indications outside of prostate cancer. We are currently running a Phase II study evaluating HIFU using the Focal One platform for the treatment of deep-infiltrating endometriosis. We are very happy to announce today that we completed enrollment in treatment of 60 patients. The last treatment was done just two days ago. These 60 patients were treated across four major hospitals in France and will be assessed over a six-month follow-up period, likely concluding at the end of September of this year. Investigators are evaluating the safety and efficacy of HIFU for this pathology. We believe the treatment of endometriosis may be greatly improved, and the use of HIFU technology could offer an important minimally-invasive treatment option for these patients. The alternative for these patients is often an extensive surgical removal of the bone. We look forward to results from this important study that HIFU could really add significant value in the management of complex endometriosis for which there are no currently effective minimally-invasive options, and it is becoming a major issue in women's health worldwide. We also announced in January the publication of positive pre-clinical results using properties hypoablation of the pancreas in the general cancers. The study was designed to assess the feasibility of using HIFU under doctor guidance to treat the pancreatic peritoneal tissues surrounding the superior mesenteric vessels in vivo in an animal model. Pancreatic adenocarcinoma is among the most aggressive of all cancers. Regardless of treatment, the overall five-year survival rate for patients with locally-advanced pancreatic adenocarcinoma is less than 5%. The HIFU touch could help in the treatment of such pathology that is inaccessible by other known therapeutic methods. Paper authors conclude that the possibility of treating the pancreas using HIFU holds great promise for the treatment of locally-advanced pancreatic cancer. We are very excited to further explore the possible utility of HIFU in this very difficult-to-treat cancer and build upon these findings. Finally, and as a quick note, we successfully treated the first two patients yesterday at Leon Eau University Hospital in a clinical trial to evaluate feasibility and safety in using our Focal One robotic HIFU device for the treatment of benign prostatic hyperplasia, or BPH. We will keep you posted as we move forward with this new clinical study. With $53.4 million of cash, we are well-financed to continue to execute our U.S. growth and expansion plans while in parallel, exploring these and other clinical expansion opportunities. At this point, I would like to turn the call over to Ryan Rhodes, our CEO of EDAP U.S., who I would like to congratulate for a strong finish to 2021 and the promising start to 2022 with a full pipeline of projects well-supported by a newly-hired team of talented sales experts. Ryan will give us an update on our U.S. operations.

Ryan Rhodes, CEO of EDAP US

Thank you, Marc. As Marc alluded to earlier, in the fourth quarter, we placed several new Focal One systems in notable hospital institutions. These included both a mix of leading academic hospitals as well as prominent community hospitals. Early in Q4, we installed a Focal One device at the University of California at San Diego. This sale was particularly meaningful as it was our third sale to the highly regarded UC Health Care system, following earlier sales to both University of California, San Francisco and the University of California, Irvine. More recently, we announced Focal One installations at Brigham and Women's Hospital in Boston, Cedars-Sinai Medical Center in Los Angeles, Henry Ford Health System in Detroit, Duke University in North Carolina and Prisma Health in South Carolina. We believe these placements, together with those announced earlier in the year such as University of Washington, are a reflection of our growing pipeline, which is now the largest it has ever been since gaining approval of Focal One in the United States. We believe this further validates that Focal therapy is a needed option to each and every comprehensive prostate cancer program, and that Focal One is uniquely suited as the most advanced HIFU technology, utilizing robotics, MRI fusion, and improved ultrasound energy delivered while all controlled by the urologist. It's also worth noting that these new centers represent both a mix of academic and community hospitals. Prisma Health, for example, is South Carolina's largest non-profit health care system, and the Henry Ford Health care system is a large integrated delivery network made up of 40 facilities in Detroit and the surrounding areas of Michigan. Selling to a mix of leading academic and community health care providers is an important validation that Focal therapy with Focal One is growing as a valued option for all types of busy prostate centers. Another important highlight continues to be the growth in U.S. prostate treatment volumes at existing installations. For the full year 2021, U.S. HIFU treatment volumes increased 66% over full year 2020. As we have said in the past, we believe robust year-over-year procedural growth is one of the most important leading indicators as it directly reflects the increased adoption and utilization of Focal One by urologists, even as the pandemic continued to weigh on hospital capital spending and activity for much of the year. In terms of our U.S. team, we continue to add world-class sales talent with deep industry experience. In December, we hired a new Vice President of Sales, Scott Finger, with more than 18 years of experience leading large sales organizations in selling disruptive capital equipment, including those in medical robotics. At the close of 2021, we have now grown our capital sales team strategically, so they may cover multiple geographies. This gives us the ability to actively engage the many leading institutions in 22 out of the 25 largest metropolitan statistical areas in the United States. The profile of our capital team is made up of sales professionals with a proven track record in selling disruptive medical capital equipment. I'm very pleased with the quality of this team. We look forward to them ramping up to have a significant positive impact on our business. And on the clinical sales side, we have also added several new clinical sales managers who have separate dedicated responsibility for driving utilization within the existing customer accounts. Before turning the call over to Francois to review the financials, I want to highlight a recent peer-reviewed consensus paper that was published during the fourth quarter in the Journal Urologic Oncology. This paper is noteworthy in part because it was authored by numerous notable academic institutions and leaders in focal therapy, some who use our technology and some who use other focal technologies. Out of this paper, there were 56 respondents across multiple disciplines, including physicians representing urology, radiology, and radiation oncology. The key takeaway is that there are significant benefits of focal therapy, including an important role for HIFU for these patients with localized prostate cancer who progressed beyond active surveillance. In addition, as noted and presented, focal therapy has distinct advantages and benefits over more aggressive treatments such as surgery and radiation. 91% of respondents indicated that focal therapy has a greater likelihood of preserving both rectal function and urinary continence, two significant and life-altering side effects of more invasive radical therapy. We view this publication as yet another very strong validation of the clinical role of our technology. This sentiment was also shared at the 22nd meeting of the Society of Urologic Oncology held in Orlando in early December. Our team actively participated in this meeting, and we brought systems for focal therapy and micro-ultrasound to perform simulated treatments. The SUO is made up of notable academic thought leaders who have a defined focus in advancing the treatment of cancers within the field of urologic oncology. During that meeting, there was a very high level of interest expressed in acquiring Focal One HIFU technology to support the growing delivery of focal therapy. Momentum for HIFU is clearly accelerating. We believe we have the most advanced platform in delivering HIFU on the market today. In summary, I'm very pleased with the trajectory that our U.S. business is on. And while we will not be discussing Q1 results today, we did enter the new year with good sales and utilization momentum, and I look forward to providing our first quarter update in May. And now our CFO, Francois Dietsch, will provide some details of our financial results.

Francois Dietsch, CFO

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 1.1386 for the fourth quarter of 2021 and 1.1787 for the full year 2021. Beginning with the fourth quarter, total revenue for the fourth quarter of 2021 was €14 million, roughly in line with the street expectations as compared to total revenue of €15.4 million for the same period in 2020. Looking at revenue by division, total revenue in the HIFU business for the fourth quarter of 2021 was €4.2 million as compared to €0.4 million for the fourth quarter of 2020. We sold 5.1 units in the fourth quarter of 2021 versus six in the first quarter of 2020. Total revenue in the LITHO business for the fourth quarter of 2021 was €3.3 million as compared to €4.6 million for Q4 2020. This includes lithotripsy devices during the fourth quarter of 2021 versus 16 in the year ago period. Total revenue in the distribution business for the first quarter of 2021 was €6.4 million as compared to €6.4 million for the fourth quarter of 2020. Gross profit for the fourth quarter of 2021 was €6.2 million compared to €7 million for the year ago period. Gross profit margin and net sales were 44.5% in the first quarter of 2021 compared to 45.8% in the year-ago period. The decrease in gross profit year-over-year was primarily due to the lower sales effect on fixed costs. Operating expenses were €5.8 million for the first quarter of 2021 compared to €5.3 million for the same period in 2020. The decrease was primarily driven by the ongoing build-out of our U.S. team and commercial infrastructure. Furthermore, we recorded in Q4 '21, a grant of €0.4 million as a final settlement of our LNG HN program. Operating profit for the first quarter of 2021 was €0.5 million compared to an operating profit of €1.7 million in the first quarter of 2020. Out of the non-cash share-based compensation program impact, operating profit for Q4 2021 would have been €1.2 million compared to an operating profit of €1.7 million in Q4 2020. Net income for the fourth quarter of 2021 was €1.4 million or €0.04 per diluted share as compared to €0.8 million of net income or €0.03 per diluted share in the year ago period. Now turning to the full year. Total revenue for the full year 2021 was €44.1 million, also roughly in line with the street expectation, an increase of 5.8% from total revenue of €41.7 million for the full year 2020. Total revenue in the HIFU business for the full year 2021 was €9.9 million as compared to €11.4 million for the full year 2020. We sold seven Focal One units for the full year 2021 versus 10 for the full year 2020. Total revenue in the LITHO business for full year 2021 was €11 million as compared to €12.9 million for the full year of 2020. We sold 21 lithotripter devices for the full year '21 versus 33 for the full year 2020. Total revenue in the distribution business for the full year 2021 was €23.1 million as compared to €17.3 million for the full year of 2020. The 33% increase was driven in part by growth in exact margin revenue. Gross profit for the full year 2021 was €18.4 million compared to €18.4 million for the full year 2020. Gross profit margin on net sales was 41.8% for the full year 2021 compared to 44.1% for the comparable period in 2020. The decline in gross profit margin and net sales was primarily due to the adverse mix effect generated by the increase in percentage of distributor revenue to overall revenue. Operating expenses were €20 million for the full year 2021 as compared to €18.5 million for the full year 2020. 2021 operating expenses included the non-cash impact of share-based compensation programs initiated in 2021 for €1.8 million. Operating loss for the full year 2021 was €1.6 million compared to an operating profit of €0.3 million for the full year 2020. Net income for the full year 2021 was €0.7 million or €0.02 per diluted share as compared to a net loss of €1.7 million or €0.06 per diluted share for the full year 2020. As of December 31, 2021, the company had cash and cash equivalents of €47.2 million or $53.4 million. The number of our outstanding shares was approximately 33.5 million at the end of the year 2021. I will now turn the call back to Marc.

Marc Oczachowski, CEO

Thank you, Francois. In summary, we are very pleased with our performance against what continues to be a challenging operating environment in many parts of the world. Our U.S. significant growth in treatment volumes and the many notable Focal One placements that we announced in Q4 give us tremendous optimism for this year and beyond. We look forward to providing our next regularly-scheduled quarterly update in May. We will now open the call to your questions.

Operator, Operator

Our first question comes from Frank Takkinen with Lake Street Capital Markets. Please go ahead.

Frank Takkinen, Analyst

Mark, Bryan, Francois, congrats on all progress. Thanks for taking my question. Wanted to start with the expectations of capital equipment sales versus placements. Just curious if there were any sole placements with the disposables contract in the fourth quarter? And how should we be thinking about this model as you go throughout 2022 to accelerate some of the placement volume you may see in the year?

Marc Oczachowski, CEO

Ryan, can you answer that?

Ryan Rhodes, CEO of EDAP US

Yes, I'll answer that. Frank, yes. We have a few of the accounts where we placed systems under what we would call an operational lease or a bridge to buy. That model is not a leading model we use, but we reserve the opportunity to visit that model if accounts may have some challenges in getting funding for capital equipment in the near term. So I think what we see commonly out there is that most centers we sell to buy the technology outright, either they finance it themselves or they pay cash. In some instances, we will find accounts that are very eager to acquire Focal One technology and we may help them in an operational lease scenario. And so we still lead obviously with sales, direct sales and that is our go-forward strategy, but we reserve the opportunity to have other flexible models and visit those models periodically throughout the sales cycle.

Frank Takkinen, Analyst

Got it. That's great. Then next, moving on to one of the comments made in the press release and on the call pipeline at the best point in company history. Can you extend that thought process at all? And would be great to get a little feel into how many high potential prospects are in the funnel right now, and how we should expect those to convert throughout 2022?

Ryan Rhodes, CEO of EDAP US

Yes. So since joining the company last year in June, I can clearly say we've been ramping our pipeline. Part of it is just organic growth and interest as we've gotten out there and been interacting with notable new institutions. The other is we have added salespeople to our team in the U.S., and of course, they're cultivating new interest. As mentioned on the call, we attended the SUO meeting in December in Florida. We'll attend other notable urology meetings throughout the year. So I can really assure looking at where we were when I joined in June, that our pipeline has increased dramatically. I can't give you hard numbers, but rest assured that it's never been healthier than it is now. And I think we know through history, and certainly me, I probably have 18 years in urology, kind of where the key institutions are to focus our time and attention. I'm eagerly excited with our new sales team, this new team we brought on. Some fantastic individuals to make a big contribution in this area.

Frank Takkinen, Analyst

Okay. That's helpful. And then last one for me. It feels like we're getting to a point, you have a little bit more predictable market. Some investments have been made in the selling organization, obviously. But how should we be thinking about additional investments and the impacts on operating expense as you get to a little bit cleaner environment, you can more predictably pursue growth?

Ryan Rhodes, CEO of EDAP US

I am primarily focused on commercial excellence, which is a key priority for us. We have an excellent product, and I foresee hiring additional staff as necessary, particularly in the sales area. We operate with two separate sales teams: one for capital sales and another for clinical sales, and we plan to invest significantly in both. Additionally, we may allocate resources toward our marketing organization and other areas such as training and market development. This year has been a transition period for the company; we are clear about our goals and have a strong team in place. As needed, we will bring on new team members and expand our structure. It's difficult to predict exactly how this will look in the next three or four quarters, but our commitment to top-line growth remains strong, and we are making significant investments to support that.

Frank Takkinen, Analyst

Perfect. I'll stop there. Congrats on all the progress.

Ryan Rhodes, CEO of EDAP US

Thank you.

Operator, Operator

Our next question is from Jason Bednar with Piper Sandler. Please proceed.

Jason Bednar, Analyst

Hi, thanks. Good morning everyone, good afternoon to those in Europe, and congratulations on the progress. I wanted to ask some questions regarding the current environment in med tech. Many companies are experiencing supply chain challenges related to accessing necessary products, especially from technology suppliers, and difficulties in delivering products where they need to go. Can you share if you are encountering any issues in obtaining products or delivering them to customers?

Marc Oczachowski, CEO

Well, we didn't get to a point that where we had to stop or to slow down anything. We feel like everyone that the time and the environment is getting more challenging, so we're trying to anticipate and we work with our supply chain team here to really make sure that we anticipate with enough time so that we don't have any slowdown or an issue. But it's true that the environment is getting more and more challenging in that aspect.

Jason Bednar, Analyst

Okay. All right. Very helpful. I guess, with Omicron out there influencing patient visits in cancer diagnosis. I'm just curious maybe if you can talk about the trajectory of HIFU procedure demand if we compare the exit velocity of where we were here at the end of March or where we sit here today versus where we might have been at the beginning of the year? I mean, it seems intuitive or logical that things would have gotten better. Is that what you saw in your business?

Marc Oczachowski, CEO

Ryan?

Ryan Rhodes, CEO of EDAP US

Yes, there is some seasonality in each quarter based on how patients are being managed, particularly those under physician care who may move from active surveillance to other treatments or are newly diagnosed. At this point, I don't see any challenges in the U.S. that would impact our business. Most physicians I talk to believe things are improving, which has been a trend over the last several months, although I'm only referring to the U.S. Overall, we have strong momentum with new systems to implement and increase usage while also supporting our existing accounts. I don’t foresee any major obstacles in this area, and I expect we will continue to enhance utilization. Additionally, there is a growing interest and awareness as more patients look for less aggressive options than surgery and radiation. We have a compelling solution for a significant number of patients diagnosed with prostate cancer.

Jason Bednar, Analyst

All right. Very helpful. Ryan. And maybe to come back as a clarifying point on Frank's question, just there previously. Just on the commercial team, I think the reference in the press release was the commercial team rightsized at this point. But it sounds like there's still maybe opportunistic adds that could be made, whether it's on the capital side or the clinical side, in terms of bringing in new headcount. So I guess, am I hearing you right there? And then just is there anything you'd be willing to speak to as far as, like, the pace of ads that you might be thinking about for this year as we move throughout 2022? Thank you.

Ryan Rhodes, CEO of EDAP US

Yes. So I'd say we feel that we have the right team in place now to execute for the year on the capital side. Clinical side, we may add some additional headcount as we place more systems. And so the cadence in terms of placing clinical headcount really is dictated upon where we place the systems, how many, etc. So I leave the door open. We have a plan that we execute on, but we reserve the right and opportunity to make additional investments where needed throughout the year. And I think, as I mentioned before, it's a transitional year, so we'll up those investments if needed, if we see an opportunity to grow faster. And so, again, I'm very pleased with the people we've hired. We put a good team in place. They've been through training. And now we may add a few others and a few other areas throughout the year.

Jason Bednar, Analyst

All right. Very helpful. Thanks so much. Congrats again.

Operator, Operator

Our next question is from Arthur He with H.C. Wainright.

Arthur He, Analyst

Hi, everyone, this is Arthur in for RK. Thanks for taking my question. So my first question regarding the CMS reimbursement. What can we expect from the CMS side of this year regarding the upgrade, the APC reimbursed level?

Ryan Rhodes, CEO of EDAP US

Yes. We had a meeting with CMS on February 17th, which I believe was quite productive. We presented our case by examining average charges and the data points CMS considers for facility reimbursement. All indicators show that average charges within the HIFU sector are rising. If they rely on this data during their analysis this year, the proposed rule will be released in July, followed by the final rule in the fall. Leading up to the proposed rule, we are hopeful they will review data from the past year, specifically based on 2021 charges. We have analyzed the data for the first half of the year and are currently processing the figures as they come in, which we can assess through the third quarter of last year until the end of September. Both charges and treatment volumes have increased. Therefore, I would say we are cautiously optimistic. However, given the nature of government processes, we must be prudent. Last year, the HOPS panel, an independent advisory group, unanimously recommended an increase in reimbursement, yet the final rule showed no change. While the numbers and analytics suggest an increase, I remain cautious about confirming that we will receive one. Ultimately, it is up to CMS, and we have done everything we can to be prepared for discussions that support our case.

Arthur He, Analyst

That sounds great. Thanks Ryan. And also congrats on the completed enrollment for the endometrial study. Could you guys give us more color on your plan for a pivotal study to get HIFU into these patient populations?

Marc Oczachowski, CEO

So as I said, I mean, we completed the enrollment of our Phase II study. So we work on the follow-up, which should lead us to the end of September, and then get some computation done by the end of the year, probably. And then the next step will probably be to go into a Phase III study with a randomized clinical study compared with control. So that's the next step, and that should be by the end of the year.

Arthur He, Analyst

That's great. Thanks Marc. And thanks for taking my questions.

Marc Oczachowski, CEO

Thank you very much.

Operator, Operator

This concludes our question-and-answer session. I would like to turn it back over to Marc for closing comments.

Marc Oczachowski, CEO

Well, thank you again for your interest in EDAP. We wish you a good day, and we look forward to updating you in May after the Q1 results. Thank you very much.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.