Profound Medical Corp. Q2 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the Profound Medical Second Quarter 2020 Financial Results Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is my pleasure to turn the floor over to your host, Stephen Kilmer, Investor Relations. The floor is yours.

Thank you. 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 and 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 unknown and known 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 in competition. Although Profound has attempted to identify important factors that could cause actual results, actions, events to differ materially from those described in these forward-looking statements, there may be other factors that cause actions, events, or results to differ from those anticipated, estimated, or intended. Forward-looking statements cannot 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.

Thanks, Steve. Good afternoon everyone and welcome to our second quarter 2020 conference call. On behalf of the management team at Profound, I would like to thank you for your ongoing interest in our company. For those of you who are our 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 second quarter 2020 financial results. To streamline things, all of the numbers I will speak to have been rounded and are therefore approximate. For the three-month period ended June 30, 2020, the company recorded revenue of CAD1.4 million, an increase of 148% from CAD574,000 in the second quarter of 2019. Expenditures for research and development decreased CAD802,000 for the three months ended June 30, 2020 compared to the same period in 2019. This decrease was attributed to lower spending on materials and R&D projects due to the impact of COVID-19, as hospitals and testing facilities are not accessible. Lower travel due to COVID-19 restrictions decreased R&D personnel and lower software and hardware costs. This was offset by increased spending to pursue reimbursement for TULSA-PRO, market research, and options awarded to employees. General and administrative expenses for the second quarter of 2020 were higher by CAD689,000 compared to the three months ended June 30, 2019. The increase was attributed to higher costs associated with being a NASDAQ-listed company, options awarded to employees, options vested during the period, increased insurance costs associated with being NASDAQ-listed, and increased software costs for cybersecurity. This was offset by decreased salaries and benefits and travel due to lower personnel costs, as well as the Canadian Emergency Wage Subsidy and COVID-19 travel restrictions. Overall, the company recorded a second quarter 2020 net loss of CAD7.3 million or CAD0.46 per common share compared with a net loss of CAD5.8 million or CAD0.54 per common share for the same three-month period in 2019. Subsequent to the end of the second quarter of 2020, we closed an underwritten offering of common shares including the full exercise of the underwriters' overallotment option, resulting in aggregate gross proceeds of approximately USD46 million. Net proceeds will be used to fund the commercial launch of TULSA-PRO in the U.S. and the continued commercialization of TULSA-PRO and Sonalleve globally. As of June 30, 2020, Profound had cash of CAD56 million. As a result of the aforementioned offering, the company had cash of approximately CAD112 million as of July 31, 2020. With that, I'll now turn the call over to Arun.

Thanks, Aaron. Today, I will provide an update on our TULSA-PRO U.S. commercialization strategy. The first two operational sites, the Scionti Center in Florida and the Busch Center in Georgia are continuing to treat a steady number and an increasing variety of patients. We're seeing, at these sites, the same observations we noted during our commercial launch in Europe, where physicians began using TULSA-PRO to treat intermediate-risk patients, then to treat low and high-risk patients and then those with BPH. Prior to the COVID-19 pandemic, we estimated that after the first six to 12 months of being operational, the average run rate will be 40 procedures per year, eventually growing to 100 procedures or more after that, based on the number of procedures these centers are conducting. Despite the dynamic, we still believe this target is attainable and that these sites may actually slightly exceed the target. Our first multisite agreement with RadNet is delayed as the Los Angeles region has been particularly hard hit by the pandemic. RadNet plans to be operational and treating patients at its first site by the fourth quarter of this year, followed by its second and third sites by the first quarter of next year. RadNet is currently recruiting additional staff and is reaching the final stages of our first systems installation. Teaching hospitals, or centers of excellence, as we often refer to them, also remain an important channel for Profound, one that we will continue to pursue. I'm pleased to report that we completed the first TULSA-PRO installation at a teaching hospital, the world-renowned Mayo Clinic in Jacksonville, Florida in early July. We're looking forward to receiving feedback from physicians and patients treated at this site as more procedures are performed and we will be happy to share this feedback with you on our next call. In terms of 2020 site number expectations, I noted during our year-end call that the time to achieve our original expectation of 20 site agreements with 15 operational sites by the end of 2020 might be delayed by a quarter, perhaps two quarters due to the COVID-19 pandemic. We still believe that this revised expectation is accurate. That said, the revenue impact from these potential U.S. placement delays may well be somewhat offset by higher-than-anticipated per-system utilization should that continue as it did in the first half of the year. Our operational sites are reporting that patients are responding well to the procedure. Physicians report that because of imaging and the ability to customize treatment, they're able to have a more engaging dialogue with their patients in terms of the treatment design. Post-treatment patients are reporting minimal pain. In fact, patients are reporting even less pain in the commercial setting than what we observed in the TACT clinical trial, in addition to quick recovery times with respect to erectile function. Also, as I briefly touched on earlier, TULSA-PRO sites are increasingly treating a variety of prostate patients ranging from those with BPH to those with low to high-risk high-volume disease and even advanced cases. As physicians become more confident with and more accustomed to the technology, they're using it in a wide range of patients. We believe this confirms TULSA-PRO's flexibility and even though we're still early in the commercialization stage, suggests that the available market is indeed as large as we envisioned. We also believe that patients want to adopt a mainstream tool that can be used to treat a variety of patients rather than a highly specialized tool that can only be used in a small subset of patients. These observations, although still at an early stage, do speak to the adoption potential of the technology. BPH continues to be an important part of Profound's strategy. Every year in the U.S., there are 300,000 to 400,000 extreme BPH cases that require surgical intervention. The overall BPH market is large, up to 10 million patients, but most can be treated with either drugs or office-based interventional procedures that have become available in the last few years. Our target segment of this large market is only those patients who are not candidates for drugs or office interventions but require one or more surgical procedures that are associated with significant side effects. We believe that treating those patients with TULSA, which is a one-time infusion-free procedure, can fulfill a significant unmet need and complement other interventions that are typically used to treat other segments of the same disease. Although the number of patients treated with TULSA-PRO today is relatively limited, our clinical observations combined with the TACT trial demonstrating that the procedure shrinks prostates to 10% of their original size speaks to the durability of the treatment. I'd also like to point out that while other BPH treatment methods aim to widen the urethra to alleviate BPH symptoms, which is particularly difficult with large prostates, TULSA relieves BPH symptoms by removing excess prostate tissue, alleviating pressure on the urethra and even the bladder to reduce the symptoms. In collaboration with our partners, we're continuing to gather data on the use of TULSA-PRO to treat BPH to further evaluate what we believe is a significant opportunity in addition to the prostate cancer opportunity. Before I open the call to questions, I would like to provide a brief update on our tulsaprocedure.com website, which represents the beginning of our strategy to increase awareness of the procedure among patients. We continue to gather positive patient feedback and plan to augment the site with the launch of a patient forum in the fall. We are also working to initiate both surgeon-to-surgeon and patient-to-patient education programs and look forward to updating you on our progress. To summarize, what we are looking forward to in the near-term: one, additional TULSA-PRO site agreements; two, expanding TULSA adoption both in terms of procedure volumes and types of patients treated; and three, enhancing our website, marketing and education programs to provide even more comprehensive resources for patients and physicians. This ends our prepared remarks today. With that, we're happy to take any questions you might have. Operator?

Thank you. We'll take our first question from Josh Jennings with Cowen. Please go ahead, sir.

Hi. Good afternoon, Arun, Aaron. And thanks for taking the questions. I just had a couple for you. Just first on the RadNet agreement. I understand COVID has pushed out that first site. There are some other sites that are going to come on board. After those initial, I think, three or four sites do you have any line of sight for incremental centers that could be sites for TULSA-PRO installations within that RadNet agreement down the line?

Sure, Josh. Good afternoon. The RadNet site is currently intended to consist of three locations. We are discussing the possibility that, in the longer term, these locations could facilitate the adoption of additional RadNet sites. While this is not formalized in a written contract right now, it is something we’ll consider. We have previously mentioned in public forums that we expect a solid pipeline for the second half of this year. Therefore, I anticipate that, in the long run, we will see more RadNet sites and new locations adding to our installed base this year.

Excellent. Thanks. And we do get a bunch of questions just on the path to reimbursement. I know that there are a couple of different channels. But is there anything you can provide incrementally on this call just in terms of codes that centers can use that are already in place versus the potential for pursuit of a C-code in front of a full-out CPT code in a couple of years?

Yes, absolutely, Josh. Firstly, regarding the C-code, we have an excellent law firm in Washington providing us with guidance from a former CMS Council member. We're quite confident in the support we have. The latest update is that they are transforming our initial ideas, which we discussed during the Q1 call, into a specific coding guide for hospitals to use. This guide should be ready in a few weeks, and we're in discussions with several hospital systems that are considering these recommendations. If everything continues as planned, I expect that by Q4 this year, a few hospitals will start using the code, and we'll assess our progress from there. It's also worth mentioning that while we believe the existing codes should function correctly, there remains a slight uncertainty. However, we've communicated sufficiently with CMS to have increased confidence that a new code can be established relatively quickly if needed. Ultimately, I believe the C-code strategy could start influencing our company's revenues in 2021. I want to be cautious about how fast this occurs, but it is meeting or exceeding our expectations. Looking long-term, regarding the CPT code, we've publicly stated that we've reviewed the AMA's guidelines. We anticipate engaging with more patients through what we're calling TACT 2.0, which will enhance recruitment in our TACT trial, primarily involving U.S.-based patients. This would help us meet one of the requirements for filing for the CPT code. Additionally, we expect further publications, and we have a reasonable expectation that by the end of next year, we could be in a position to apply for the CPT code. The process typically lasts about 18 months from that point. As for the cash pay model, we're quite comfortable with it, especially since our sites have been treating patients using this model even during the pandemic. We have a well-established pipeline of patients at the three sites, and even RadNet has patients scheduled. The hospitals we expect to finalize later this year also have patients lined up, reinforcing our confidence in the viability of the cash pay model. We plan to implement the intermediate strategy with the C-code possibly next year, which could start making an impact. Generally, this model is beneficial for at least three years, and we believe we are on track to apply for the CPT code within that timeframe, establishing a long-term strategy. These are the three key areas we see, and we believe our plans are reasonable. We will provide updates as we progress. I hope this answers your question thoroughly.

That was great. Thanks for all the details. That was super helpful. And just one last question. I may get a little bit ahead of myself here. But just the TULSA-PRO pipeline, anything you can share? Any details or updates on design enhancements or iterations of TULSA-PRO perhaps potentially to speed up the procedure or any other design changes that could be in the works? Thanks for taking the questions.

Sure. Sure, Josh. So I think that, as you know, we did a recent financing. One of the things that we have said is that we do see that our physicians are using the technology on a variety of patients. And as you also know, we have what we call our Profound Genius Services that are in place that do a pretty rigorous and comprehensive analysis of how the treatment is coming along and benchmark things and pluses and minuses. So, one of the things that we are looking to do is simply certainly increase some of our investments in our R&D and our manufacturing sites that will allow us to evaluate the current technologies and continue to enhance the technology, with the goal that we want to be able to treat a minimum of four patients per day consistently. And that would allow our sites to schedule for patients. This is something that our physicians have expressed to us, and if procedures do not take longer, they can avoid contingency times and can start scheduling patients confidently. So I think that, I won't go into the details of what enhancements and so on, but our overarching goal is to continue to make the procedures consistent and easier to use, and the way we want to measure our success is the number of patients treated per day because that throughput ultimately impacts the bottom line for our customers.

Understood. Thanks again, Arun.

Thank you.

We'll take our next question from Rahul Sarugaser with Raymond James. Please go ahead.

Good afternoon, Arun, and thanks so much for taking my question. So as we think about revenue increasing over this year and then, of course, next year and how that might be impacted by C-code, et cetera. There's really two parts of the equation that we think about: one is the installed base and, of course, second is the utilization rate of the existing installed base. So, focusing first on the installed base. Arun, you referred to a relatively strong pipeline. We saw two sites up and running, Florida and Georgia, by the end of Q2. And then since then, quite rapidly, Mayo and then RadNet coming online, as you mentioned, although it's not starting until Q4. Are there any sort of benchmark yardsticks that we can use to look out between the balance between radiation clinics and/or teaching hospitals for Q3 and Q4?

Rahul, to be honest, I would like to sort of come back to our market entry strategy. I think beyond the fact that I do want to share that we feel good about our pipeline, it's kind of early to share numbers and so on until it happens. And particularly because of the COVID, I think it's always unpredictable exactly when the deal closes. But what I can tell you is that there is no hospital that has said no. Hospitals are generally saying they are reengaging. They do see TULSA as a revenue story, and the way Aaron and Hammy have put together a phenomenal recurring revenue model, the hurdles that relate to capital allocation and so on are minimal with our model. I think that part, certainly, I feel good about how we're positioned. But to answer your broader question, I wanted to just go back to the original market entry strategy. One of the things that we felt a year ago when we were just starting this process was that imaging centers will play a strong role and that our goal was to first find a few sites that were already experts in ablation or already sold on the idea that alternative therapies were needed. Then the next group was the emerging center group. The third group is really the teaching hospitals. Even though we felt the teaching hospitals might not necessarily be the highest volume users in the early stage, we felt we needed this triad of these three nodes of users to gain broad credibility for the long-term adoption of the technology. So that's how we're looking at this. So our priority when we quickly got the attention of the early adopter users or the experts and when we quickly got the attention of the imaging centers, I actually suggested to our sales team that we should focus more on the teaching hospitals earlier in the year. I do think that you will hear more about these excellence centers and the bigger name hospitals in the second half of this year, but they are more part of our strategic agenda. I think that once we establish the beachhead in all three of these nodes, then it will become a lot easier to drive broader adoption. So I apologize if – I don't know if I've really answered your question, but I try to be more sharing in terms of our strategy of how we're going about driving the broad adoption.

I think that was actually a very fair answer. And you just gave me more color than I probably deserved, so thank you. Maybe then coming back to the second part of that equation, and this is probably where I'll probably need a little bit from you, Arun, is the utilization rate. I see in the income statement, and maybe it was there last quarter, but I'm noticing it for the first time, this revenue line of pay per procedure and a significant ramp between Q1 and Q2 from CAD41,000 to CAD98,000. Of course, we can't really correlate that with a utilization rate per site, but is that something that we could be using as a proxy for recurring revenue, particularly given that this is fundamental to your model? And maybe I can ask another cheeky question is sort of what average rate, I think we've been using around CAD2,500 per procedure, can be used for our modeling as we try to project your recurring revenue going forward?

Unfortunately, I need to make things a bit less clear for a moment, so let me explain. Initially, we introduced a few options in the market. Customers could either purchase a device and pay for disposables, rent a device and buy disposables, or simply buy disposables and pay-per-click. Due to strong patient demand and challenges like COVID-19, we've shifted our approach between last quarter and this quarter. We no longer want to sell devices; we prefer to own them. Instead of collecting more money upfront and sacrificing potential revenue later, we want to focus on selling procedures. Midway through last quarter, we adjusted our model further, which is part of the evolution of launching a product. We've decided that we don’t want to offer pay-per-click or disposables separately anymore. Our goal is to sell procedures, and we’re securing agreements at CAD7,710 per patient. Some customers from earlier this year will still have pay-per-click and rental options, but as we expand our sites, those will become minor compared to our focus on per-procedure revenue. Based on what we know today, it will be CAD7,710 per procedure in the U.S. I apologize if this makes things confusing right now, but it will become clearer over time, quarter by quarter.

I understand, and we are looking forward to seeing those details reflected in the numbers in upcoming quarters. For the short term, to clarify the differences between Europe and the U.S., I believe the installed base in Europe follows a different model since it was set up under the prior sales approach. How should we interpret revenue in Europe compared to the newer model in the U.S.? Of course, the effects of these figures will lessen over time as the installed base in the U.S. grows, but for now, how should we consider revenue and recurring revenue in Europe?

Yes, Europe does generate recurring revenue since we sell disposables there. The last two facilities we set up in Europe operated on a per-procedure revenue model, which adds some complexity. However, I can say that in a few quarters, it will become clearer. Currently in Europe, we have some rental income, pay-per-click, and disposable income.

No, that was it. I was just going to say thank you. I think the numbers you shared today really do provide light, and I think the higher-level numbers that Arun shared in his opening comments, particularly on BPH, are quite exciting. So, we'll definitely look forward to seeing the impact of that. So thank you for taking my questions, and all thought off there.

Thank you.

We'll take our next question from Cecilia Furlong with Canaccord. Please go ahead.

Hi, Arun and Aaron. It's John on for Cecilia tonight. Thank you for taking our question. I just want to start out by asking, what are you seeing in terms of access to imaging centers versus large hospitals? Any thoughts on longer-term trends that you think COVID could have in terms of where patients are treated? And perhaps you could compare and contrast what you've seen in Europe versus the United States?

John, that's a great question, actually. We, to be honest, feel a little bit lucky about that because imaging centers tend to be standalone places. There are about two to three times more imaging centers in the United States than there are hospitals. These imaging centers are conveniently located, and as citizens, we tend to get imaging for pretty much any serious disease. They do not have any infusion. They're cleaner, they have a large waiting area, and they treat one patient at a time. They cannot help the hospitals that have been busy with pandemic patients. So imaging centers have turned out to be a place where patients are willing to go. We think that even after the pandemic that can be a positive, because people will feel comfortable going to these places. From that perspective, we feel fairly good. The other question that I think you have is what about the use of MR, the availability of MR and so on. I can tell you at the moment, we think it is a very, very good thing. Not only from the perspective that as I mentioned in the prepared remarks, the images can be shared between the patient and the urologist, diagnostic images are shared. They can say, 'I see the disease right here, and your disease is much more aggressive.' They can have that dialogue. From a business point of view, it is a positive. And what I mean by that is you may have seen this even in just the latest proposed CMS guideline that just came out—a week ago diagnostic radiology payments are down 10%. When you look at an imaging center as a business, you ask the question on a per-unit time basis what will give you more profit. There's no question TULSA will win that. Anytime you're doing an intervention, it requires more attention and the reimbursement is higher. Diagnostic imaging reimbursement might be CAD500 to CAD600 to CAD800 per hour, while a TULSA procedure is generally two to three times higher. I think that per-unit profit gravitates towards TULSA. So enhancing this sometimes people ask whether there's a shortage of MR, but from that business perspective, we have not seen anything like this—this is going to be a positive.

Thank you. That's helpful. And then just my follow-up. Any update from Sonalleve? Current thoughts around longer-term in the United States?

So John, good question. We talk about TULSA because our priority one, two, three is TULSA because we see significant upside. But indeed Sonalleve is doing well in the international market. I would say give us another quarter or two, and we will provide—We do have things in the works, but they're too early to be brought out in the public domain. But certainly, we can tell you that things are in the works at the moment.

Thanks, Arun.

Thank you, John.

We'll take our next question from Ben Haynor with Alliance Global Partners. Please go ahead.

Good afternoon, gentlemen. Thanks for taking the questions. A couple of real quick ones here for me. Just following up on the payment or pay-per-procedure kind of model adjustment. How many centers right now or how many sites are fully on that model and if any? Just kind of a trick question there.

Yes, it's a bit of a trick question. I have to be careful because there are so few numbers at this point you can identify. But one is on a rental, where they rent per month and pay for disposables. The other two are on pay per click and disposable.

Okay, fair enough.

By the way, pay per click and disposable really is the same as CAD7,710 per procedure. It's just combining them.

Okay. And then maybe a follow-up. Does that all currently fall under pay per procedure then or does part of that fall under products?

No. So, today, some of it falls under pay per click and some falls under disposable.

Okay. But going forward as new accounts come on, new sites come on, it will be in pay per procedure and only the legacy sites will have some that split off in products?

Correct.

Got it. Okay, great. And then just looking at the tulsaprocedure.com site, it looks like you've got a Canadian TULSA center it says coming soon. Just curious on when that install is taking place.

Well, that happened fast. It's probably a little too early to say.

Okay. I just thought I'd sneak that in. That's all I had.

Ben, I'm impressed that you've looked at it. Yes, that should be coming up. I think we will announce as it happens. But you can imagine we have a couple of leading urologists in Canada and there's been quite a bit of requests from the Canadian community to at least put one site here as well.

Thank you.

That's all the questions that we have at this time. We'll turn the call back over to Dr. Menawat. Please go ahead, sir.

Thank you so much, and we are looking forward to updating you at the next Q3 call. Thank you for your time.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.