Profound Medical Corp. Q3 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the Profound Medical Third Quarter 2020 Financial Results Conference Call and Webcast. At this time, it is my pleasure to turn the floor over to your host, Stephen Kilmer. Sir, the floor is yours.

And apologies, 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, as expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes, or variations including negative variations of such words and phrases or states that certain actions, events or results may, could, would, might, 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 will now turn the call over to Aaron.

Good afternoon, everyone, and welcome to our third 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 third quarter 2020 financial results. To streamline things, all the numbers I mention have been rounded and are therefore approximate. For the 3-month period ended September 30, 2020, the company recorded revenue of $3 million, an increase of 337% from $682,000 in the third quarter of 2019. Expenditures for research and development increased by $1.3 million for the 3 months ended September 30, 2020, compared to the same period in 2019. The increase was attributed to higher spending on materials and R&D projects for technology improvements and upgrades, options awarded to employees and R&D personnel, in addition to the ineligibility of Scientific Research and Experimental Development or SR&ED credits, tax credits from the government of Canada. This was offset by decreases in consulting fees and travel. General and administrative expenses for the third quarter of 2020 were higher by $427,000 compared to the 3 months ended September 30, 2019. The increase was attributed to higher salaries, option awards to employees, insurance costs associated with being NASDAQ-listed, and software costs due to COVID-19 and annual subscriptions. This was offset by decreases in consulting fees associated with one-time NASDAQ listing costs incurred in 2019 and travel expenses related to COVID-19 restrictions. Overall, the company recorded a third quarter 2020 net loss of $8.1 million or $0.43 per common share compared with a net loss of $6.3 million or $0.57 per common share for the same 3-month period in 2019. During the third 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 $46 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 September 30, 2020, Profound had cash of $110.4 million. I would like to close by saying that our performance this quarter speaks to the strength of our technology and our business model, but we remain cautious in the near term mainly due to the uncertainty surrounding COVID-19. With that, I will now turn the call over to Arun.

Thank you, Aaron. As we mentioned in today’s press release announcing the Q3 results, our recent financing, combined with the increasing interest in our technology from opinion-leading hospitals and independent imaging centers, enables us to strategically and responsibly lay the groundwork to drive significant adoption of the TULSA procedure. We’re bolstering our management team, field force, clinical development programs, and manufacturing capacity. With respect to adding talent, we recently welcomed two very experienced senior management team members. Jacques Cornet, our new VP of Marketing and Business Development, is leading patient recruitment and digital marketing strategies as well as relationships with our MR partners. Jacques joined us from Philips, where he was VP of Sales and Marketing of one of the Healthcare divisions. He has more than 25 years of experience in global leadership roles, in-depth knowledge of the global imaging systems market including healthcare IT and a broad network of contacts at leading-edge hospitals and healthcare organizations within the United States. Most importantly, Jacques and I have worked together in the past and have known each other personally for over 20 years. Welcome, Jacques. In addition, I am very pleased to welcome Michael Mydra, who joins us as of Monday as VP, Head of Global Market Access and will take on the dedicated role of leading TULSA’s reimbursement strategies. Michael joins us from Boston Scientific, where he was the VP of Global Market Access and Reimbursement for all of the company’s urologic products. Prior to that, Michael led reimbursement strategies at Augmenix, which developed the SpaceOAR device to reduce side effects associated with prostate cancer. Michael has more than 20 years of startup and large company medical device and health plan reimbursement experience. Welcome, Michael. The senior management team at Profound reflects a good mix of relevant experience and homegrown talent, resulting in a full complement of the necessary skill sets and experience to support Profound’s success. And I feel particularly honored to lead such a high-performance team. As you probably know, our U.S. market entry strategy includes three types of end users. We continue to see traction among early adopters, which includes urologists specializing in cutting-edge alternative prostate disease treatment. The second group includes independent imaging center companies such as RadNet, which I am pleased to report, is still on track to treat their first patient in the current quarter despite initially experiencing delays related to COVID-19. The third group is comprised of opinion-leading teaching hospitals, and we are delighted with the caliber and the number of hospitals that are now offering the TULSA procedure. I invite you to visit our tulsaprocedure.com website to see the list of centers offering the TULSA procedure, which is updated regularly. As you can see today, the site now includes the Mayo Clinic, University of Texas Southwestern Medical Center, and Prostate Advanced Cancer Center. We also have additional contracts that are not in the public domain yet but that we expect to be operational by the end of this year. We will be adding them to the tulsaprocedure.com website as they begin treating patients. Continued traction in the early adopter segment, progress in the imaging center segment and an impressive group of top-tier hospitals adopting the technology is also an early indicator that our core recurring revenue business model is working. I would now like to provide an update on the clinical front. Four important studies were published in Q3 that have added to the evidence establishing TULSA-PRO as a safe, effective, and flexible tool for customized ablation of prostate disease. First, the 12-month outcomes of our TACT pivotal clinical trial, which supported FDA authorization of the TULSA-PRO last year, were published in the Journal of Urology, the official Journal of the American Urological Association. This marks an important milestone for Profound as the publication establishes TULSA-PRO as a minimally-invasive procedure for effective prostate cancer ablation with a favorable side effect profile, minimal impact on quality of life, and low rate of residual disease. Second, 3-year follow-up data from the Phase I safety and precision study of TULSA-PRO were published, demonstrating durability of safety, efficacy, quality of life, and functional outcomes, as well as predictability of oncological follow-up based upon early imaging and PSA, all without precluding any potential salvage treatment options. PSA at 3 years was stable at 0.8 nanograms per millimeter, with repeat biopsy findings consistent with those previously reported at 12 months. From year 1 to year 3, there were no new serious adverse events, and new onset or mild adverse events were rare, with little or no change in urinary, sexual or bowel quality of life. From my perspective, results at the end of 1 year seemed to be a good predictor of results after 3 years of ablative treatment. Third, I will review early data from a prospective study of TULSA-PRO in 10 BPH patients. Urinary function improved during the initial 3-month follow-up among the first 7 patients treated, with no adverse events seen on sexual or bowel functions. The average International Prostate Symptom Score, or IPPS, decreased from 17.7 to 4.6. Quality of life IPPS decreased from 4.3 to 1.0, and peak flow rate or QMAX increased from 11.5 to 26.8 milliliters per second, granted that the number of patients treated so far is small. These are outstanding results and in line with improvements that we have seen even in patients who received the TULSA procedure primarily for prostate cancer. We are also looking forward to more data in a larger number of subjects as the study is ongoing and will recruit a total of 40 patients. Finally, investigators at Turku University Hospital in Finland have published results from an investigator-initiated clinical trial, demonstrating the safety and feasibility of TULSA-PRO for palliation of severe urinary retention and intractable hematuria in men suffering from symptomatic, localized, advanced prostate cancer. Prior to undergoing the TULSA procedure, all 10 men had continuous catheterization and gross hematuria or blood loss, requiring frequent hospitalization. At 1 year post-TULSA, 80% of men had improved catheterization, 70% were completely catheter-free, and 100% were free of gross hematuria or blood loss. Notably, and importantly, the average hospitalization time for local complications reduced from 7.3 days in the 6-month period before TULSA to only 1.4 days in the 6-month period after the TULSA. In conclusion, the evidence that TULSA-PRO is a versatile and flexible technology that can be deployed in customized ablative treatment of prostate disease continues to grow, and Profound remains committed to supporting significant additional studies and building the evidence base for TULSA in the future. To that end, we are extending the trials for the TACT trial for another 35 patients to achieve a total of 150 patients treated. The Johns Hopkins University and UCLA are among the two sites that are already recruiting for this study. It is a core strategy of our company to continue to support additional clinical trials both in the United States and other parts of the world, and we plan to announce additional trials as protocols are finalized. So to summarize, first, I would like to echo Aaron’s concluding comments that there remains significant uncertainty with respect to the TULSA procedure’s adoption rate in the very near term, primarily due to COVID-19. However, we are energized with the performance in Q3, particularly with respect to the new sites that have now started their TULSA programs. Second, we have strengthened our leadership team and are investing in increasing our capacity to grow the business. And third, we are delighted with the recent clinical publications and the reinitiation and continuation of the TACT trial. This ends our prepared remarks for today. With that, we’re happy to take any questions that you might have. Operator, please proceed.

Thank you. And our first question comes from Raj Denhoy from Jefferies. Go ahead.

Hi, good afternoon. I wonder if, Arun, maybe I could start with any changes on the reimbursement front. There have been some talks of some hospitals using established codes to try and bill for the TULSA procedure, and yet we hadn’t heard whether that had been successful or not or they had been paid under those codes. Have you – do you have any updates you want to share today?

Raj, I think I can only share today that certainly the newer hospitals that we are signing up are continuing to think that the recommendations we’re making are consistent with their thinking. We are also hearing that there are certain other ancillary codes they can use in addition to the C code that we are recommending. So I don’t have any update regarding the number of patients that may have been where these codes have been used as of yet. I would say, to be honest, I didn’t expect that we would be there by now. So I would say we will update you in the year-end call, and I do think that by that time, we will have a better update on that front for you.

Okay, that’s helpful. Maybe just a second question, you mentioned the pipeline for new sites is still pretty healthy into the back half of the year or the rest of the year, right? We have a month or so, 2 months left. Do you have a sense of where you might settle out this year? You mentioned you’re at 6 sites. I think you also said that in your prepared remarks that you’ll add them when they start treating. So when do you think we will get additional sites that will be treating patients?

Raj, I think originally, when the COVID situation started, our team, we all felt that 3 to 6 months was a good timeframe in terms of movement backwards. And based on Q3 performance, we felt like, okay, it could be closer to 3 months rather than 6. But again, due to resurgence, I’m a little bit concerned. Having said that, I do think that it’s possible that we could get to up to 10 sites this year, but I would say, still, it’s not a commitment to be cautious, but we certainly have additional agreements. If the hospitals remain open and we can install and train, it’s certainly possible.

Okay. That’s helpful. I will leave it there for others. So appreciate it. Thank you.

Thank you, Raj.

And our next question comes from Andre Uddin. Go ahead, Andre.

Good afternoon, Andre.

Hi, this is Toby Ma for Andre Uddin. I just have two questions. First question for Arun, I was wondering if you can talk about the average number of procedures performed per week per imaging center in Q3? And how was that number in Q3 compared to the second quarter and the first quarter? And then my second question is for Aaron. The R&D expense increased in Q3. So how should we think about R&D expense in Q4 and next year? And I will stop here. Thank you.

Sure. Let me answer your question from the perspective of per site. So certainly, the total number of procedures in this last quarter, Q3, is higher than what we had in Q2. But I think that, again, because we’re in start-up and all of these macro factors at the moment, the way we look at it, is what’s the utilization per site which we think is actually quite meaningful and I think that we are fairly comfortable that, originally, we thought that the first 12 months of site would be approximately 40 procedures. I think at the last call, we talked about that number being closer to 50. I think at the moment, we’re probably feeling that number might actually be closer to 60, 65 for the year. So the patients continue to be treated, and the sites continue to increase the variety of patients they are treating. So I think that might sort of answer your question overall basis that the trajectory is certainly in the direction of additional procedures. And again, with all of these macro factors, there might be some minor ups and downs, and we will obviously ride through it. But I still believe that achieving higher numbers than what I talked about 12 months after the installs is a realistic goal.

Our next question comes from Josh Jennings from Cowen. Go ahead, Josh.

Yes, sorry, this is actually Neil on for Josh. I think a couple of my questions got answered already. But just one thing I was going to ask was just about the payment per procedure model, like how that’s potentially enhancing the sales process, if you have any color or updates there.

Yes. No, we’re happy to. I think it’s actually a great question because when we started marketing TULSA and we treated our first patient in January this year, at the time, our VP of Sales, Abbey, she and Aaron sort of joined hands to come up with a business model that was much more flexible. If the hospital wanted to rent the system, we were prepared to do that and so on. And you do that, obviously, when you start. But based upon the feedback that we received, the utilization that we’re seeing, we have gone strictly to a recurring revenue model now, and that is the only option that our sales team is offering to the market. And generally, the agreements at the moment are all $7,000 or higher per patient. And I think our analysts and investors may consider that it could go up and down a little bit, but I would be a little bit conservative in modeling. At least currently, they’re all in the $7,000 or higher range. In addition to the business model, we are more rigorous in the way we present the model in the sense that the Profound Genius Services is presenting it and it’s an inclusive model where we support them with very strong clinical scientists upfront. These scientists are not just there to support the cases, but they are there to help conduct a variety of cases so they can start with a salvaged prostate and then move to a whole gland prostate and move to a higher risk patient and so on. And I think the strategy that we’re using is partly designed to ultimately drive utilization. We’re also helping with patient recruitment and so on through our tulsaprocedure.com website and additional efforts underway. We have added reimbursement support with Michael joining us as well. So there is a set of offerings, and we are providing this as a bundled service with this recurring revenue charge. That’s the model that we have settled on. Aaron, do you have any other comments?

Yes. I would just say that we have a single deal that was our first or our second deal that was not a 100% paper procedure. It was rental and per procedure. Since then we’ve only done paper procedures. We don’t anticipate doing anything else, and Arun’s being conservative on the amount we’ve seen, as our price has been $7,710 per procedure consistently. Arun is saying, over time, the volume commitments and things may have somebody trying to negotiate hard, and we’ll listen. But that’s the model, and we’re very pleased with it. We’re making great progress. We believe that model in these times is a real winner, and that the barriers to entry for a new program to start up are minimal. The capital requirements associated with our equipment have been relieved, and we’re being very choosy as to where we want to set up to make sure we’re confident they’re going to be a high-utilization site. And long term, we want to own it, and it’s in their best interest because through our Profound Genius Services model, we’re going to make sure they have very successful procedures and happy physicians and happy patients.

And our next question comes from Frank Takkinen from Lake Street Capital. Sorry, go ahead.

Hey, thanks for taking my questions. So just a couple for you here today. Starting on the sales funnel, I heard your commentary about potentially getting to 10 by the end of the year, albeit with a little bit of uncertainty due to COVID. But was hoping you could talk about the funnel on a little bit of a longer-term basis and see what kind of sight line you can give us into potentially how many sites you could be looking at for 2021. And if you could even go even a little bit more granular into where you are seeing the majority of that interest, whether that is imaging centers, teaching hospitals, or specialized urologists?

Sure, Frank. Good afternoon. I will share a couple of thoughts, but I think Aaron might want to chime in as well at some point. So Frank, what I will quickly go over is the strategy for 2020, which was to start with the early adopters who are current users of alternate technologies and then see if we can get traction with them. With the imaging center strategy, we wanted to see if all of the hypotheses that we put together in 2019 could convert into reality. At the same time, we felt that we needed to have opinion-leading sites because for the long haul, it drives credibility. So this is the three-pronged approach that we are taking, and we feel so far that this strategy is working. The guidance we provided to our sales team is that we want to start to see additional adoption in each of these three channels or segments. I think going forward, that is likely what you will see next year – additional imaging center sites with larger companies coming on in our pipeline, additional early adopters who have seen it enough and are excited about starting their own programs. Now that we have traction with some opinion-leading sites, we have a pipeline of other teaching hospitals that we will hear about within the next 90 days or so. I cannot give you specific numbers but starting out in this difficult COVID year, the fact that we are gaining traction as the window opened in Q3 gives us confidence.

I actually don’t have a lot to add other than we think our bigger long-term commercial opportunities are in the imaging centers. We are pleasantly seeing a high level of activity at academic and opinion leader sites and believe we are carefully selecting those sites that we believe will be high-volume centers as well. So we are optimistic at this point.

Got it. And then I apologize, I was jumping between calls, but I heard you right at the tail end talking about the extension of the TACT trial. I want to see if you said another 35 patients being enrolled and then the timeline around that as well as how that coincides with applying for a temporary reimbursement code?

Yes. So Frank, you are right. The idea is that we want to be able to do a parallel approach, where we continue to have additional publications. We need a certain number of patients treated, particularly U.S. patients, and all of this is designed to apply for a CPT code at the right time. In parallel to that, I explicitly spent more time today on the clinical side because the clinical data is now starting to come out, and it is quite impressive. By extending this trial, it shortens the time that we need to apply for the CPT code without requiring a separate trial. But we think to drive coverage where the payers have significant evidence should make it a straightforward decision for them.

Okay, that makes sense. And then if I could just sneak one more in. R&D was up this quarter as expected, as you guys are investing in the business, products, and trials and whatnot, so I completely understand that. But just curious on how you’re feeling about R&D on a go-forward basis. Do you view the 4-7 million as more of a baseline? Or was there perhaps some one-off expense in there where we could see that come in a little bit over the next quarter as well as into 2021?

Aaron, I appreciate if you took care of that question.

Sure, yes. So with the financing in July, part of the discussion around that was accelerating support for reimbursement through clinical trials and accelerating the generational improvement of our systems. So there will be some uptick in both engineering R&D and clinical trial R&D over the course of the next 18 months.

Okay, that makes sense. Thanks for taking my questions, and congrats on all the progress this quarter.

Thank you.

Thank you.

And our next question comes from Rahul from Raymond James. Go ahead.

Hi, Rahul.

Hi, good afternoon, Aaron. Thank you so much for taking my question. So I guess my first question is I noticed that you are starting to break out revenue based on products, recurring revenue, and service. Now recognizing that, of course, the model has been evolving with time, and of course, that’s going to become more resolved, are you able to provide us with – let us know how we’re supposed to think about the numbers as we are seeing right now? Because if you back them out, it seems like an underestimate of what your actual utilization rate is. So maybe you can give us a little more clarity there?

Yes. So Rahul, we have actually – that’s consistent with the way we have been breaking out if you go back through in the quarterly materials. I would tell you I wouldn’t read too much into it yet. We are not providing guidance at this point. I wouldn’t read too much into it because, frankly, some of those lines are a little confusing between the European model that isn’t per procedure but is per disposable and capital, Japanese revenues that are capital and disposables, and then U.S. numbers that are almost all procedure revenue. It’s probably going to be a year before we’ll be able to point to it and be a little more descriptive. It’s just a little too lumpy at this point. We don’t want to confuse people with lumpy revenue between the various buckets. The capital sales, when you have a capital sale in Japan or something, creates very lumpy revenue if you break it down too much and try to read too much into it. I would look more at sites installed and under contract and treating and I would look at revenue more generically. In the next 12 to 18 months, we’ll hopefully be able to start giving you a more granular understanding. But at this point, we don’t want the lumpiness to be misleading.

Right, right. That makes sense. Thank you so much. And then so my second question then is, Arun, it’s great to sort of hear a little more about the data that is being published over the last quarter. Now with the broadened utility in BPH and in salvaged patients, are you hearing from the existing sites that they are also starting to use the device more broadly in these other indications in patient pay procedures? And also just going to shoot on a second question in there is that the R&D burn has gone up a little bit, and should we be thinking about that continuing to be a little bit higher because you are continuing to support that R&D in those additional clinical trials?

Yes, Rahul. So I think the short answer to your question is yes. But again, the question is that in the U.S., we only have two sites with more than six months and the third site with about a quarter’s worth of experience. But even the newer sites, I think there is beginning to be recognition that this is a very flexible technology. Certainly, the current sites, the older sites are moving the product for BPH and a variety of prostate cancer. So yes, I think the breadth or the flexibility of the technology is certainly one reason why, as I was saying before, I think that the actual utilization is slightly better than what we originally anticipated. Based on this data, I do think that we should – our strategy certainly is to continue to educate our sites to help them broaden the use of the technology as part of our Profound Genius Service. With respect to your second question on the R&D spend and so on, I think Aaron is better suited than I am.

Okay. Thanks, Arun. So Rahul, I would say twofold. One, I will go back for one second, and I’d say we’re seeing a very consistent message to the sites to even start treating with cancer. Patients come back and say, 'Gee, thanks for treating my cancer, doc. But my BPH, this is amazing. It’s resolving all my BPH symptoms or most of them as well.' It’s been a fairly consistent message we hear over and over, and it’s just nice to see, and it builds confidence in the physician and in us in BPH as a market opportunity. In the physician’s hands, when they see and hear that from the patient, it’s very positively self-reinforcing. Secondly, on the spend, as I was mentioning with Cowen’s questions, you will see us – we have made a conscious decision, and you saw it in the press release and in the prepared remarks, we have made a conscious decision to increase our level of investment in R&D and sales and marketing over the course of the next 12 to 18 months. After completing our financing in July, you will see an uptick in our spending there. We believe it’s a very careful, well thought-out investment to support and accelerate growth.

That’s great. Thanks very much for including me in the question queue.

Thanks, Rahul. We really appreciate your interest.

Sorry, thank you. Apologies for coming back in, but I just wanted to clear something up. So in the paper procedure revenue that you reported, it was about CAD 134,000. If one looks at that on a procedure basis, you mentioned that USD $7,710 for a procedure that equates to about 13 procedures if I’m doing the math correctly. And so one is that right? And then when you think about...

No, no.

Okay.

No, because one of our first sites, remember we only had two to three sites really doing procedures in a meaningful way, and now we have more coming on. One of them was a rental and per procedure at a lower rate. So unfortunately, right now, the small numbers are confusing things. It will take 12 to 18 months before you can start reading into those numbers. Some of that revenue is being recorded as rental and not in that bucket, so it’s confusing. I apologize. But unfortunately, it was right after that we locked in and said, okay, no more rentals. We are only doing paper procedures. But right now, it’s skewing the numbers inappropriately if you try to read into it too much.

Understood. But I guess what might clear up is if you would perhaps give us some directionality in terms of what procedures are actually doing. I doubt you will go there, but is that something you could provide in terms of how many procedures you actually did in the quarter?

Again, I think we are a little early because I think in the course of the next 12 to 18 months, we will do that.

We will. And I think today, we can only say you that real numbers are significantly higher than what you just mentioned.

Yes.

Understood okay. I appreciate it. Just wanted to clear it up. Thank you.

And there appears to be no further questions. I would now like to turn the floor back over to management for any closing remarks.

Thank you. Thank you for listening to us. Sorry, the start was a little bit messed up, but we are looking forward to updating you, I guess, at the year-end call next year. Thank you.

Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.