Profound Medical Corp. Q1 FY2020 Earnings Call

Greetings, and welcome to the Profound Medical First Quarter 2020 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stephen Kilmer, Investor Relations. Thank you. You may begin.

Good afternoon, everyone. Let me start by pointing out that this conference call will include forward-looking statements regarding Profound and its business, which may include, but is not limited to, expectations regarding the efficacy of Profound's technology in the treatment of prostate cancer, BPH, uterine fibroids, and palliative pain. Often, but not always, forward-looking statements can be identified by the use of words such as plans, is expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes or variations, including negative variations of such words or phrases, or state that certain actions, events or results may, could, would, might, or will be taken, occur or be achieved. Such statements are based on the current expectations of management. The forward-looking events and circumstances discussed in this conference call may not occur by certain specified dates or at all, and could differ materially as a result of known and unknown risk factors and uncertainties affecting the company, including risks regarding the medical device industry, economic factors, the equity markets generally, and risks associated with growth and competition. Although Profound has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated, or intended. No forward-looking statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made, and Profound undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than as required by law. On the call today representing the Company are Dr. Arun Menawat, Profound's Chief Executive Officer; and Aaron Davidson, the Company's Chief Financial Officer and Senior Vice President of Corporate Development. With that said, I'll now turn the call over to Aaron.

Good afternoon, everyone, and welcome to our first quarter 2020 conference call. On behalf of the management team and everyone at Profound, I would like to thank you for your ongoing interest in our company. And for those of you who are shareholders, we appreciate your continued support. I will turn the call over to Arun in a moment for an update on our commercial activities. However, before I do, I'd like to provide a brief update on our first quarter 2020 financial results. To streamline things, all of the numbers I will mention have been rounded and are therefore approximate. For the 3-month period ended March 31, 2020, the company recorded revenue of $1.6 million, an increase of 6% from $1.5 million in the first quarter of 2019. Expenditures for R&D increased $161,000 for the 3 months ended March 31, 2020, compared to the same period in 2019, due to increased spending and testing for R&D projects and additional systems applications, reimbursement of consultants and option awards to employees. This was offset by decreased salaries and benefits from decreased R&D personnel, lower software and hardware costs, and an overall decrease in general R&D expenditures. General and administrative expenses for the first quarter of 2020 were higher by $1.5 million compared to the 3 months ended March 31, 2019. The $1.5 million increase was attributed to salary increases and bonuses awarded to management, options vesting during the period, increased costs associated with being NASDAQ listed including insurance costs, increased software costs for cybersecurity and an overall increase in general costs. Overall, the company recorded a first quarter 2020 net loss of $3.6 million or $0.25 per common share compared with a net loss of $2.9 million or $0.27 per common share for the same 3-month period in 2019. During the first quarter of 2020, we closed an underwritten offering of common shares, including the full exercise of the underwriters’ over-allotment option, resulting in aggregate gross proceeds of approximately $40 million. Net proceeds will be used to fund the commercial launch of TULSA-PRO in the United States and on the continued commercialization of TULSA-PRO and Sonalleve globally. We also retired our $12.5 million in principal amount loan with CIBC almost 30 months ahead of its maturation date of July 29, 2022. This extinguished all of Profound's long-term debt and translates to total estimated net interest payment savings of $900,000. As at March 31, 2020, Profound had cash of $61.9 million. With that, I'll now turn the call over to Arun.

Thanks, Aaron. On the 2019 year-end call, which was about two months ago, I talked about what we see as the value proposition of TULSA, particularly focusing on its potential flexibility in treating a variety of prostate disease patients. Today, I will focus on our initial commercial experience in the United States and our market-entry strategy, including the three primary market segments or delivery channels. I will also update you on the reimbursement process and its status. As you already know, the first commercial patient in the U.S. was treated in early January, representing the culmination of several years of development. During the first quarter, the first two TULSA commercial sites became operational in the United States. Our goal has not only been just to demonstrate that TULSA is a viable treatment for prostate diseases, but also to confirm the value proposition of its flexibility and the ease with which new users could adopt the technology as well as to garner patient feedback on the tolerability of the treatment. Our initial experiences bode well on all of those fronts. Both of the first two sites came up to speed quickly and have treated a variety of prostate disease patients ranging from whole gland ablation of prostates with high-risk disease, whole gland intermediate risk disease, partial or focal prostate gland ablations, and even ablations of large prostates with BPH. We are satisfied with this start and pleased that what we observed in Europe is being duplicated in the United States. We are particularly happy to learn that the patient feedback on treatment tolerability is very positive. Patients are appreciating that TULSA is a one-time, same-day procedure and have reported minimal pain after the procedure, with many of them indicating the return of their erectile function in as little as 24 hours. We are thrilled with this feedback as it confirms our belief in the long-term potential of our technology. Let me next elaborate further on our TULSA U.S. market-entry strategy, having discussed on our last call its focus on three delivery channels. The first channel includes urologists who already specialize in cutting-edge alternative treatment of prostate disease, knowing that today's options do not meet the standard for their patient population. We are delighted that Dr. Scionti in Sarasota, who is considered the leading urologist specializing in ablative treatment, has become an early adopter of TULSA, and that his partners are already beginning to visit him as they consider expanding their practices. Our strategy is to continue to focus on such leading-edge physicians who are already the leaders in ablation therapy and value the TULSA technology for its ability to expand the patient population that can be treated. We will continue to focus on such physicians with the goal of partnering with their local imaging center to create a TULSA treatment center. The second and, we believe, the most important channel from a long-term perspective is the imaging center company. The second U.S. TULSA site, Busch Imaging, in the suburbs of Atlanta represents such an imaging center channel. They're now able to provide a complete solution to their patients from prostate disease MR-based diagnosis to MR-based biopsy and MR TULSA treatment. This complete solution is a strong proposition for the site as well as a comfort to patients knowing that the same doctor they trust for disease diagnosis is now offering TULSA treatment. We are impressed with the speed with which Busch Imaging adopted the procedure, having treated their first eight patients within the first two weeks of installing TULSA. So far, in Q1, we initiated one site in each of the first two important channels, and both are meeting our expectations. As you know, we also have a multisite agreement with the largest imaging company, RadNet. Their site initiation did get delayed. We believe that it is a 90-day delay. But due to the uncertain times, we plan to remain flexible. The third and strategically very important channel is the creation of Center of Excellence at teaching or opinion-leading hospitals. Our pipeline for such hospitals is significant, and none have indicated anything but enthusiasm for TULSA. But because their priorities have been on the coronavirus, new installations are delayed. We do not believe that the delays will last any longer than necessary and will most likely be 90 days, but because of uncertainty, they could be as long as 180 days. Our plan is to remain flexible during this time and shift our focus to imaging centers. These centers are not directly involved in treating coronavirus patients and generally feel that this is a good time to evaluate new therapeutic options. Our experience in the U.S. is also consistent with what we saw in Europe. The European TULSA imaging center site continued to operate during their shutdown. But three of the treating sites did experience a 90-day shutdown. Now that Europe is starting to open again, all of the teaching sites have indicated that they are restarting their TULSA program in the near future, and we plan to support their restarts. In summary, we consider each of these three TULSA-PRO delivery channels to be unique and a key part of our strategy to drive adoption. We plan to tailor our Genius support program to fit the needs of each unique channel. For example, we are working with RadNet and the Busch Imaging Center to help educate their urology community and with the teaching hospitals to drive the next generation of clinical publication. We are also working with all channels to provide the appropriate content for their social media presence. In terms of our expected number of sites in 2020, we originally anticipated agreements with about 20 sites by year-end, with approximately 15 of those operational. We now believe that the time to achieve these numbers may be delayed by a quarter, perhaps two quarters, due to the COVID-19 pandemic. While we don't have a lot of visibility into the rest of the year at this early stage in the TULSA rollout, I think it's fair to say that revenue impact from these potential U.S. placement delays may well be somewhat offset by higher-than-anticipated system utilization should that continue. Although TULSA is only operational in two sites so far, we remain excited by the early success of the rollout in the U.S., particularly the greater-than-expected initial procedure volumes and the variety of patients being treated. We are receiving physician feedback that supports this. One physician said that when evaluating a patient for prostate disease, the question should be, when should I not use TULSA-PRO? Of course, the TULSA-PRO procedure will not be appropriate for all patients, but feedback suggests the TULSA-PRO may potentially be one of, if not the first treatment option that urologists and their patients consider. To further support TULSA awareness, I also encourage listeners to visit our newly launched TULSA-PRO procedure patient website, tulsaprocedure.com. The site has been designed to provide up-to-date information on where the TULSA procedure is available, both within the United States and internationally, as well as contact forms to reach out to each center directly. I also encourage listeners to visit independent patient websites like inspire.com to read unsolicited, unfiltered patient feedback. The URL for the TULSA-specific chat board is fairly lengthy. So, rather than spelling it out here, I ask you visit inspire.com and simply search TULSA. I'd now like to conclude our opening remarks by providing an update on our reimbursement strategy. As discussed in our last call, in late 2019, we submitted an application for a Health Care Common Procedure Coding System C-Code from the Centers for Medicare & Medicaid Services, or CMS, for the TULSA-PRO procedure. Also, as I had mentioned previously, we see reimbursement as a three-year process. Since we initiated that process with the C-code application late last year, we have had an opportunity to meet with CMS and also with a number of hospitals. The feedback from these discussions as well as from our consultants is that there is a possibility that an existing code could apply to TULSA. For that reason, we have asked CMS to set our application aside for now and allow the hospitals to decide if they would like to use that existing code. We don't see this as a positive or a negative. Rather, we see this as a continuation of the process. If the existing code does get accepted by the hospital, indeed, it would be a positive because it would move us ahead sooner. If it is not accepted by them, we would resubmit our CMS application with a high level of confidence that a new code would be issued. In either case, we will provide updates as developments unfold. So to summarize, what we're looking forward to in the near term: one, additional TULSA-PRO site agreement; two, expanding TULSA adoption, both in terms of procedure volumes and types of patients treated; and three, progressing TULSA-PRO's reimbursement strategy by pursuing the most appropriate reimbursement code. This ends our prepared remarks for today. With that, we're happy to take any questions you might have.

Our first question comes from Josh Jennings with Cowen and Company.

I was hoping to start just on the TULSA-PRO sales funnel. It sounds like it continues to build in all three channels, but I don't know if there are any incremental details you can provide about where the sales funnel sits today or pipeline funnel versus 2 months ago at the end of the year '19 call. And then just what can you do here in this COVID era to help cultivate increased demand? And do you have a virtual, I guess, marketing platform? Have some of these urologists been experiencing downtime? And have you been able to reach out to more practices and more surgeons over the last weeks to months?

Josh, thank you. I hope you can hear me okay. Yes. I think the pipeline certainly continues to build. I think we're not quite comfortable giving explicit numbers. But I think that during this time, certainly, even the large hospitals where they are busy with the pandemic, I think the urologists are certainly quite open to listening and learning to the next technology. And yes, we are holding webinars and education programs for these channels. And so we are doing that for imaging centers, small imaging centers. We're doing it for urology communities that are associated with certain imaging centers. And certainly, we're doing it for teaching hospitals wholesale. So I think that is the reason why, certainly, the feedback, as I mentioned in our prepared remarks, the feedback certainly is quite positive that as soon as they can and do want to open. In a couple of cases, we do have schedules already in place to get started. But I think I can certainly share with you that, generally, the pipeline is good. And as things open, we feel okay. We feel good. And we certainly will take advantage of the fact that a lot of urologists are interested in learning through virtual, and we are doing those conferences.

Great. And then just a follow-up on...

I just want to clarify that I don't believe we have lost anyone from our sales pipeline, and we have actually added to it over the last quarter. We've also made a strategic shift; we initially expected to close some deals in the second quarter, but that may not happen due to closures in leading hospitals. Instead, we've redirected our sales and marketing efforts toward independent imaging centers and urologists that are currently open and operational. We might simply be substituting some of the leading institutions we anticipated would be available in Q2 with others that might close in Q3 or Q4. Overall, I feel our pipeline is stronger now, and even though I don’t want to sound overly optimistic, I want to emphasize that we've expanded our funnel without significant losses.

In light of the COVID-19 situation, I wanted to follow up on your comments regarding the volume and demand at your centers in the United States. Should we consider that patients with localized prostate cancer or even BPH might seek ablative treatments, such as MRI-guided options, at imaging or surgical centers instead of hospitals? Many patients may feel apprehensive about going to hospitals, which are now perceived as hotspots for COVID. I don’t want to speculate too much, but are you noticing any trends in that direction? Or is it still too early to tell? I had one more follow-up after this.

Yes, I believe that's how we see it. We are definitely being cautious and have noticed some mixed signals recently. The imaging centers view this product as a major revenue opportunity, and our comprehensive solution is an attractive proposition for them. We see these developments as favorable and expect them to continue. We're also aware that patients prefer to avoid hospitals during this time, and recently some patients have expressed a desire to delay travel for treatment for a few more weeks. Overall, while we are cautious, there are signs that suggest potential positive trends moving forward.

Great. And my last question, I appreciate your updates on the path forward for reimbursement. Can you provide more details on the existing code and the level of reimbursement it offers? What are the associated timelines for the decision by CMS? Should we expect that centers will use that code currently for reimbursement, or is there another decision by CMS to potentially expand the use of that existing code?

Sure. So Josh, as I mentioned, we have had meetings with hospitals, and a couple of them suggested certain MR-guided interventional codes. We want to ensure that we comply with CMS guidelines, and we will follow those closely. We have communicated to CMS the information we gathered. It's generally preferable for hospitals to use certain existing codes. Our next step is to observe how hospitals implement this as they begin to use it, which we believe is a key milestone. If that occurs, it's possible that CMS would indicate that this is the appropriate approach. As you know, hospitals must make their own decisions in this regard. As suppliers of the technology, we have chosen not to discuss specific codes beyond this point. However, we will certainly provide updates on developments during our quarterly calls.

Our next question comes from the line of Rahul Sarugaser with Raymond James.

I also want to congratulate you based on the strong cash position that you find itself in. So my next question is, I think I heard you correctly, and you said that the Busch Center in Georgia had treated eight patients in the first two weeks. Now at a significantly higher rate than what we saw out at Sarasota, could you maybe give us a little more color in terms of how that's playing out and how that growth is expected? Because, again, with Florida, with two patients every other week and growing the two patients every other week, whereas mathematically, there should be, I assume, four patients every week. So can you just give us a little more color on that? That would be great.

Sure, Rahul. I believe we are cautiously optimistic. On the positive side, Busch Center has been successfully conducting diagnostic prostate imaging and MR-guided biopsies. Their ability to add this service has strengthened their offerings, and even while we were finalizing agreements, they successfully built their patient pipeline. I think some of what we see is due to the pent-up demand they've created, which has allowed them to start strong. Overall, the concept of having a full solution at an imaging center in the U.S. is proving effective. We obviously need to acquire more centers to confirm this success, but I believe we are likely to achieve higher volumes at these imaging centers than we originally expected. Aaron, you may have additional insights.

No, I don't have any additional comments. It's been pleasant to see the start-up rate and the learning curve. With our genius services support, it's been very pleasant to watch developments.

Yes, Rahul, I would say the most impressive aspect is their ability to treat high-risk patients with whole-gland procedures. They understand how to do this through imaging, and they quickly adapted to it. As Aaron mentioned, it was certainly encouraging to witness this progress.

And I'd also then just add on 1 more piece. It's also very good to see them treating whole gland, focal and BPH to the broad spectrum of patients in early days. Repeating what we've seen in Europe is a really nice event to see. And that the cash pay patient demand is there. They're limited more by capacity than they are by patient demand so far.

Thank you for addressing my third question, which I realize now was actually a two-part question. Returning to the CMS, I'd like to discuss the questions regarding the C-code. I understand there is an evolution in this process, and it's important to be responsible in how we access it. Could you provide more details on what the code is, the associated reimbursement amount, and why hospitals might choose not to apply that code?

Sure, Rahul. So first of all, the recommendation has come from the hospital. So it's really a decision that the coders need to make at the hospital. And they are evaluating that option. Unfortunately, because these are hospitals, and that's where the delays are, that it is going to take some time before we know if they are accepting the current codes. I cannot give you the specific number because I think that is up to the coders and CMS and so on. So I'll stay away from providing the specific numbers. No C-code or anything at this time. After the events, I think we might be able to do it. But starting today, we won't. But I think, certainly, the additional color is that these are codes that were originally designed for purposes of using MRI guidance for interventional procedures. We, in fact, talk with consultants who were involved in formulation of such codes, and we think that the original intent was in line with what we are hearing from the hospitals. So I think, as I said, we see this as a process. We think this is a very interesting step. But I think we want to wait until it is in use, and we want to wait until CMS then further provides guidance that they will accept the hospital's recommendation before we can believe that this is going to be a big positive or a big negative or anything like that.

Right. If I could ask one quick follow-up question. With the recent acceptance of this code by hospitals, how does that impact the imaging centers? Will the imaging centers be able to apply this code as well?

Right. So there is a separate process for imaging centers. And we are in the process of evaluating that process also. And I think, again, today, I don't have an additional update for you, Rahul. But I think as that grows, certainly, we'll keep you informed on a quarterly basis if the development takes place. But I think part of the reason why we talk about the three channels, part of the reason why this hospital is the right place to start is because they have that credibility. They have the infrastructure to be able to evaluate all of these. They have the relationships with insurance companies and so on. And so we want to be able to sort of establish the beachhead through that channel first and then use that as the guiding principles for the other channels.

Our next question comes from Brian Gagnon with Gagnon Securities.

Aaron, first for you. I've never known you to be overly bullish about anything. So it's nice to hear you excited about the pipeline. All right. So the website looks great. Will you be adding new centers when they start treating patients or when they sign contracts or when they begin marketing? Have you thought about that?

Yes, we have made it clear that the website is focused on Profound-driven content. Our aim is not to list every treatment site, but rather only those that are actively recruiting and treating patients. Over time, we will establish a minimum treatment threshold for sites to qualify for inclusion. The site is designed to direct patients to active treatment locations. We will likely include sections on ongoing clinical trials as well. However, we do not plan to add sites during the contract phase.

Okay. On the C-code, are there a certain number of procedures that need to be done either at a hospital or at an imaging center to be successful here? I know in the past, some places needed to submit five, ten, thirty procedures before CMS would really kind of take a look at it.

So the typical rule of thumb, that guideline from CMS tends to be minimum 100 patients running. We think that we will be able to meet that guideline. And so I think from the perspective of volume, we're not as concerned as we were last winter.

Okay. And then when it comes to virtual training, how are you handling this? Was the system developed with the idea of proctoring remotely and being able to do this training in this wonderful world we're living in the last eight weeks?

We are currently at two locations, and we have a dedicated individual at each site as part of our Genius program. Our team members are committed and present, contributing to a strong volume. Our clinical team is effectively utilizing networking software that allows them complete visibility of the computer screen. This setup enables both the urologist and the radiologist to video conference with our clinical expert, allowing for immediate answers to any questions. The remote proctoring is functioning effectively, and we plan to introduce more features into our software in the future. What we have right now is performing very well.

Terrific. Good forward thinking. And lastly, on the coding and MR-guided interventional procedures, is it reasonable to think that, that coding could be based around another company that's done brain procedures using MR-guided interventional?

I think that the key to this is certainly MR-guided interventional because the way the reimbursement procedures typically work is that they are cost-plus. And one of our obviously key question and key message to CMS is that, indeed, this is an MR-guided intervention. So I think that to your point, I think if it is an MR-guided intervention, then certainly, it's in the same ballpark as what we should be in.

It's in our best interest not to be too specific on this.

We have reached the end of our question-and-answer session. I would like to turn the call back over to Dr. Menawat for any closing remarks.

Thank you so much for attending the call this afternoon, and please be safe. And we look forward to our next call for the second quarter. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.