Profound Medical Corp. Q1 FY2021 Earnings Call

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 and osteoid osteoma. 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. For the benefit of those who are new to the Profound story, I would like to take a moment to summarize our business. Profound develops and markets customizable incision-free therapies for the ablation of diseased tissue. We are currently commercializing TULSA-PRO a technology that combines real-time MRI, robotically driven trans-urethral ultrasound and closed-loop temperature feedback control. The technology is designed to provide customizable and predictable radiation-free ablation of a surgeon-defined prostate volume while actively protecting the urethra and rectum to help preserve the patient’s natural functional abilities. TULSA-PRO is CE marked, Healthcare Canada approved and 510-K cleared by the FDA. We are also commercializing Sonalleve an innovative therapeutic platform that is CE marked for the treatment of uterine fibroids and powder pain treatment of bone mesothesis. Sonalleve has also been approved by the China National Medical Products Administration for the non-invasive treatment of uterine fibroids and has recently obtained FDA approval under a humanitarian device exemption for the treatment of osteoid osteoma. While we do not expect this FDA HDE approval to have a material impact on revenues in the near term it is a significant milestone for our company and we are making preparations for its U.S. commercial launch later in 2021.

Good afternoon, everyone, and welcome to our first quarter of 2021 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. For those of you who are shareholders, we appreciate your continued interest and 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, 2021 financial results. A quick reminder that we’ve changed our presentation currency from the Canadian dollar to the U.S. dollar to streamline things all of the numbers we will refer to have been rounded, so they are approximate. Our first quarter, 2021 sales performance was significantly negatively affected by COVID-19 impacts, particularly in the months of January and February, resulting in our first revenue decline since Q1 2018. For the three month period ended March 31, 2021, the company recorded revenue of $711,000 down 41% from $1.2 million in the first quarter of 2020. As we mentioned in today’s press release, business began to rebound in March so far that positive momentum has continued into the current quarter while we do not provide formal quarterly or annual financial guidance and we continue to be cautious about the scope and pace of U.S. TULSA-PRO commercial adoption in the near-term to the pandemic, factoring in the recent uptick in procedures at existing sites and what we already have in our TULSA systems agreement pipeline. We believe that we have the potential to make up for the Q1 revenue shortfall during the remainder of 2021. Total operating expenses in the 2021 first quarter, which consists of R&D, G&A, and selling and distribution expenses were $6.8 million, an increase of 47% compared with approximately $2.1 million in the first quarter of 2020. Breaking that down further on a year-over-year basis, expenditures for R&D increased 47% to $3.1 million. This was primarily driven by higher spending for R&D initiatives and projects opted in awarded to employees, additional headcount and an overall increase to general expenses partially offset by decreased travel expenses due to COVID-19 restrictions. G&A expenses decreased by 6% to $2.1 million due to lower salaries and benefits as the result of bonuses earned by management in the prior year and timing differences associated with the accruals partially offset by increases to consulting fees and share-based compensation. Finally, selling and distribution expenses increased by 70% to approximately $1.6 million. Overall, the company recorded a first quarter 2021 net loss of $7.5 million or $0.37 per common share compared with a net loss of $2.6 million or $0.21 per common share for the same three month period in 2020. As of March 31, 2021, Profound had cash of $78.5 million. With that, I’ll now turn the call over to Arun.

Thanks, Aaron. I would like to start by addressing the revenues in Q1. As Aaron discussed, they were lower than expected, but as you will see, that has not translated into our being less bullish for the year. Let me highlight the key reasons why. First, as various sell-side analysts have noted this earnings season, a similar pattern emerged across the medtech space in the first quarter with even the most established companies seeing COVID impacts in January and February followed by a late March resurgence. We saw a similar pattern. However, since we are a game-changing technology that requires full training for treating in the MRI Suite and are relatively early in the U.S. commercial rollout of TULSA, all procedure declines in the first two months of the quarter were likely a little steeper and the recovery in March, while noticeable, wasn’t robust enough to make up the shortfall. Second, we’re starting to gain traction in building a high-quality U.S. installed base. As a reminder, our U.S. market entry strategy for TULSA-PRO targets three types of end users; one, early adopters, which includes urologists specializing in cutting-edge alternative prostate disease treatment; two, independent imaging center companies; and three, opinion-leading teaching hospitals. Each of these is expected to play different roles in supporting both short-term and long-term adoption. Our early adopter TULSA-PRO sites were not significantly impacted by COVID in the first quarter; while still slowed by travel restrictions, they continued to treat a growing number and an increasing variety of patients. At the beginning of 2020, we estimated that after the first six to 12 months of being operational, the average run rate would be 40 procedures per year, eventually growing to 100 procedures or more after that. Today, these centers have exceeded those targets by about 50%, achieving an average run rate of 60 procedures per year, and we believe that their run rate will continue to increase as COVID recovery continues. With respect to the second group, the imaging center company RadNet’s Liberty Pacific West Hills center in Los Angeles is now actively treating patients using TULSA after initially experiencing delays in 2020 and early 2021 related to COVID-19. As most of you know, we also announced a U.S. multi-center TULSA-PRO agreement with Acumen last week. Acumen currently has 79 operating clinics in Florida and a total of 134 sites across its network in seven states. We expect to install TULSA-PRO systems at up to 10 Acumen centers over the next year or so with the first site anticipated to be operational in the fourth quarter of 2021. Acumen is making a significant investment to impressively outfit these centers to focus on men’s health. The initial geographic focus of their new men’s health centers will be in Florida, where their first TULSA-PRO install will be. Texas and Pennsylvania are expected to follow based upon the success of the first ten installs, we hope to expand our relationship in the future to include additional Acumen men’s health centers. I’m pleased to highlight that as part of the third group that we are targeting, we have agreements with top-tier hospitals in geographic locations that represent the largest markets for prostate care in the country. In California, Florida, and the Northeast, we have agreements with renowned institutions like UCLA, Stanford, Johns Hopkins, Yale Cancer Center, WellSpan Advanced Prostate Cancer Center, and Mayo in Jacksonville and Rochester. In Texas, we have agreements with University of Texas Southwestern, Memorial Hermann, and Methodist San Antonio. A couple of these are listed on our patient site tulsaprocedure.com yet, but they will be added once they are up and running. From the perspective of signing new U.S. TULSA-PRO commercial agreements, the first quarter was our best yet. All the leading hospitals that I mentioned, with the exception of Rochester, are expected to go live in the summer timeframe, while Rochester would become active around the end of the year. And as I mentioned before, the first Acumen site is to go live in Q4. The price point of all agreements remains the same at $7,710 or higher per patient. While we continue to expect teaching hospitals to be relatively lower volume at first, and we have seen these institutions being particularly impacted by COVID-19, we still believe they are best positioned to drive long-term adoption of TULSA-PRO by training the next generation of urologists, presenting at medical conferences, and publishing papers in relevant journals. We are already starting to see the impact of that with TULSA-PRO being featured on the March 2021 cover of the Journal of Urology. To summarize the adoption status of TULSA in the United States, we have 10 operating sites and they are looking to increase usage in the remainder of 2021 and beyond. We have a significant number of opinion-leading sites, which we believe is also an early indicator of future adoption. Finally, Q1 was our best quarter yet in terms of new TULSA-PRO system agreements signed, as hospital administrations were still functioning. As a result, we now have more contracts for installations in our hands than our current installed base. These are the primary reasons why we remain confident in regaining our momentum in spite of the COVID-19 effect on our Q1 revenue. Although we remain cautious, we continue to also be pleased that the leading hospitals are utilizing the C-Code to bill for TULSA procedures. What we are generally hearing is that the hospitals are getting paid. This again continues to be our interim strategy until, if full CPT-1 application for TULSA can be filed and supported by the American Medical Association. Next, I would like to provide an update on the status of the planned CPT-1 application. We have initiated dialogue with relevant societies including the American Neurological Society and the American College of Radiology to get initial feedback on the requirements to qualify for the CPT-1 application. Based upon their feedback, we continue to believe that the clinical publications on TULSA procedures and the publications that we anticipate later this year will likely be sufficient to meet the requirements for the application by the end of this year. If the adoption of TULSA usage continues to increase, as we anticipate, we may get the support that we need to file in 2022. In short, our CPT strategy remains intact. Our strategy is to not only continue to pursue the CPT-1 application with the combination of clinical data that already exists and that will likely be published by the end of this year, but also support a full level one study specifically for the treatment of prostate cancer. This study will be run in parallel with the filing of the CPT-1 application as the study is not a requirement to obtain the code, but may further support coverage by insurance payers and will also provide additional clinical data to support significant adoption.

Yes. Hi, this is Brianna on for Anthony. Thank you for taking our questions. I have a couple. So regarding the five newly contracted sites and backlog as of last quarter, when do you expect these sites to be up and running? And then my follow-up to that question would be given the delays in one quarter – in the first quarter, are you still targeting roughly 25 installed by year end?

Yes. Brianna, good afternoon. So, most of the sites that I described are slated to be operational this summer. So, I would anticipate that by the end of June at the latest by the end of July, most of the sites, there are two sites that will be operational in Q4. One of them is Mayo, Rochester. The other one is the first site that we signed the agreement with for Acumen. To your second question, as I mentioned, we have about 10 sites that are operational. We have more agreements already in our hands. And so, getting to 25 at the moment, we do not see a problem with that. We think we should be able to quite frankly, do better than 25 this year. And because of the fact that we already have these agreements is one of the reasons why we do believe that we will be able to make up for the Q1 shortfall.

That’s very helpful. And then just regarding the Acumen deal, how many systems will be installed in the initial 10 centers across Florida, Texas, and Pennsylvania? And then looking ahead, what is the potential to expand across Delaware, Illinois, or any other states?

Yes, so the majority of the systems or the first few systems are most certainly slated towards Florida. And then there are likely to be at least half of the systems will be in Florida and the remaining other five would be in the other two states that we mentioned, Texas and Pennsylvania. The strategy let me just quickly talk about the strategy. And I think it’s more of an Acumen strategy than ours, but it is I think a pretty important strategy and an impressive strategy. The idea is that we are focusing on the states that have the majority of prostate cancer patients or prostate disease patients. And they happen to be California, Florida, Texas, and the Northeast. And then Arizona is another one that we will focus on later on. So by focusing on these large states, I think that as the awareness increases, we want to make sure that sufficient centers have TULSA-PRO availability, so that people will become aware of it and they can go get treated. And as the awareness grows in the state and we are higher and higher in numbers, we think we will be able to then supply sort of mimic those strategies from one state to the next. So rather than try to scatter these around the whole country, the idea is that we’re putting them in key states in the beginning and leveraging all of our resources. Does that answer your question Brianna?

Yes. That’s very helpful. And I have one more question on the procedure mix. So, with the procedures that have been done through Q1 and even into Q2, are you – what is the mix of BPH off-label and then intermediate prostate cancer then moving into high-risk and low-risk prostate cancer?

Yes. So I think that in general it’s a very general comment Brianna. These are not perfect numbers, but I think that the number of BPH patients that we are treating is increasing. My best guess is that about 20% of the patients being treated right now are in the BPH category. I think in Europe, that number is probably a little higher, maybe 35% in Europe of the patients that are prostate cancer patients. That’s an interesting question because I think what we are seeing is that in the teaching institutions, which were undoubtedly very low in Q1, but I think what we’re seeing in the teaching institution, they are looking to follow the clinical trials that have been done. So they’re sticking more to Gleason 7, which is mid-grade cancer patients, the early adopters, which are continuing to increase as well. They are actually treating patients that may be as much as the patients they may have a slightly extra capsular activity or even patients where, they are relatively high-risk patients, where they think that there might be a need for a combination treatment. And they’re looking to upgrade the bulk with TULSA and then leave the rest for another combination. So, we are seeing a pretty good variety. And even in BPH, I was actually talking with a physician just 15 minutes before we started today. And he was telling me they treated today a patient with a 270 CC prostate, the largest prostate that has been treated with TULSA. So, they are definitely testing the limits. And I think that is certainly another reason for the confidence that the versatility and the flexibility of this technology is that, we do believe that a large majority of the patients can be treated with TULSA.

Great. Thank you so much.

Brianna, I just want to comment, this is Aaron. That BPH is not off-label. We’re approved for the ablation of prostate tissue, not specific to whether it’s malignant or benign.

Good afternoon, Arun and Steve, thanks so much for taking our questions today. So, thanks for addressing the revenue upfront that isn’t even helpful. So it would be recognizing that you don’t provide revenue guidance and we’ve sort of talked about the 25 install-based goal or hopefully beating that by the end of the year. Are you able to give us a little more visibility in terms of going from the 10 currently operating to how many do you expect to be installed in Q2 and Q3, and then as a result, we can then do our own math to figure out what that rep would look like?

Yes. So Rahul, I think I would say two things. One is we are, where the hospitals are open, as we talked about in our prepared remarks. We saw March was better than January, February and April has been better than March. We are able to go to hospitals now and start installing. So, if you do the math, I think we have enough agreements to do – I mean, we have enough agreements to be double-digits already. So, you would see quite a bit of activity in the next four to – from here to September, we’ll be installing, I would say at least one to two systems a month, probably isn’t it my best can. Again, it’s a little bit still unpredictable, but I would say, we will be installing 75, a quarter is a reasonable expectation.

Terrific. That’s excellent visibility. Thank you very much for that. And then now moving to the utilization rates you referenced the early adopter sites, operating at this relatively high level over 60 per year annualized. When we look at the – when we kind of reconcile that with the revenue number, it’s – there seems a bit of an asymmetry there. So, because then if – then we back calculate for the rest of the installed base teams that they’re essentially doing few to none. So, how should we be thinking about an average utilization rate across the installed base, recognizing that, of course, we attenuated as you install devices and get them trained up? How should we be thinking about that rate as an average?

Yes. So Rahul, I understand that where you’re going with the question. And let me just start one more time. I think part of the reason what we said that we do have confidence in the growth rate returning after this COVID, part of it is coming from the fact that, that we already have enough contracts to be able to go install systems. So, we know, we think we can get to the installed base. And so along those lines, I would say, we’re going to end up with more new systems very, very soon than the older systems, which is more than a year old. So, I think I do want to be very, very open and clear about that also is that initially the run rate of these new systems is not going to be in that 60 per year rate right away. It’s going to take six to 12 months before we get there. And the second thing is that, I do want to continue to emphasize the point that we have a very, very disciplined market entry strategy that looks after those three types of what I call channels or customers. Every one of them is going to behave differently. And so the early adopters, they’re 60 plus I actually think this year they’ll do better than that. Even with the first quarter, I think overall, they’re going to do better than that. I think the hospitals are actually going to be relatively, even more disciplined. Those channels are going to say, I’m going to do five or 10 Gleason 7 before I go to a higher risk, or I’m going to train three or four different physicians before I really ramp up, or I might want to look at, a couple of outcomes on my own patient in spite of the clinical data that I see. So, I do think that we should be, realistic with respect to the run rate at the large teaching hospitals. Now again, having said that, I can give you another, again, a little example, we, WellSpan is one of the hospitals that we started that we signed the contract late last year. Again, they got delayed, they did their first patient in March. The second patient, they did the physician put the whole patient and the whole thing on his own LinkedIn website with the whole, like all the information and the images of the treatment itself, it’s all done by the physician. So it gives me confidence that they are liking what they see, but at the same time, they’re still saying, look, I’m, I really like what I see, but I’m going to be very measured in the way I increase the types of patients I treat. And on the imaging center side, I think we’re off to a very good start with RadNet with the delays. And I think Acumen, we should do even better than that, but they’re not going to start until Q4. So, I realized that this is a little bit of pluses and minuses here, but I want to be very clear and open about this and the reasons why it is and why we remain midterm optimistic, short-term cautious. Again, every quarter we’ll share with you more and more details on the adoption rates and so on. So, I hope that helps.

Yes. that’s excellent. Thank you for that clarity. And if you’ll indulge, just one more question around reimbursement.

Sure.

Last quarter, you talked a little bit about the C-Code and you, of course, are always very cautious around speaking around the C-Code. Are you able to give us a little bit more update on how the rollout of C-Code is whether it’s starting to be adopted by broader jurisdictions other than the initial? And then also just as the second part, this is great to hear that the, some clarity on the CPT code strategy, given that you’re looking at an application hopefully towards the end of this year, but you also talked a little bit about maybe 2022. Can you give us a bit more clarity in terms of distinguishing between end of this year and 2022 for that submission of that CPT application?

Yes, I’m very happy to. So Rahul, in terms of the C-Code to be honest, there’s not a lot to add in the sense that the patients who are being treated at hospitals who are Medicare patients, they continue to get paid. The patients who are in, who are applying through private insurances, the majority of those patients are getting paid something. The hospitals that we have signed new agreements with are comfortable with the strategy, the same reimbursement strategy, and it’s becoming fairly clear that strategy is likely to continue to work. And I would say again, soft measure, I can see hospitals becoming comfortable with billing for this new technology and the outcomes that they’re seeing and in cases where they need to present more clinical data to get the insurance payer to pay. I think all that is continuing to happen. And we continue to remain pretty comfortable. On the CPT-1 side, again, to be honest, we’re pretty good, fairly happy with the way it’s progressing. As I said, in the prepared remarks, we were looking to engage with the various chapters, the reimbursement chapters are the top societies like American Urological Society and the American College of Radiology, which is a chapter of RSNA. And we’re getting very positive feedback in terms of the strategy we’ve picked and that if we can deliver what we believe we can, that the support that we would need from the societies is that they believe it’s going to be available to us. And so our goal was that we want to be able to get to that point where we qualify by the end of this year. But to be honest, it’s a little bit more positive in the sense that we not only believe we will be able to qualify, but we also think that we are more comfortable, that we will get supported by the society. Then, I was maybe four months ago. And so what that means is that once we qualify then the application and all the administration process will start in early 2022. And by the end of 2022, we should have some kind of ruling from the American Medical Association. So that’s kind of the process. And overall, as I said, these are not hard numbers or anything, but I think that the direction we remain pretty comfortable with.

Hey, Arun, and thanks for taking my questions. I wanted to start with the funnel as well. I want to better understand, hoping you guys can give us a little more clarity on better understanding the conversion time as customers work through the process from a pre-signed agreement, signed agreement, trained, installed, and then first patient treated, just looking to get a little better clarity on how long that total process takes on average, given there’s likely significant variation across customers.

Yes, yes, it’s a good question. What I would say is that, the best way to gauge that would be – when we did the install prior to COVID looking so big. And obviously in retrospect, we started the market introduction of our product in January, and it’s sort of the COVID here, but I think on what we’ve talked about this before, too though, is that from the time we typically receive an agreement, at the moment, it’s about 75 days to 90 days to get the installation done. And then it’s typically another 30 days to 45 days before we can really start treating patients and so on. So at the moment, I would say 90 days to 100 days is probably a good average number from the time we sign a contract to first patient treated. We certainly think over time that will diminish maybe by the end of this year to 75 days. And then over the long haul, we think it will diminish further to hopefully to 60 days. Some of the agreement that we have at the moment you will see a little bit of a bi-modal distribution from the perspective that a few sites are looking to buy new MRIs to take place for the TULSA system, and so we will have to wait till the MRIs get installed. And there are a little bit of delays related to that because of the same things that finding all the labor and all the things done during these times have been a little bit harder. But it will continue to get better over time. So, you will see a little bit of a bi-modal distribution, where we do have a new MR to be installed, it’s going to take closer to six months the ones where we can go to the existing MR it’s probably three to four months.

Got it. That’s helpful. And then following up on the CPT-1 conversation and also understanding this is looking a little far out into the future, but if you stay with your guidelines of around the end – around the beginning of 2022, submitting, hearing a ruling by the end of 2022, what – how does that set you up for the CPT-1 going into effect?

So once the AMA typically you submit that to AMA by – if we’re going to apply for it, let’s say next year, we will know by before the year is out, if we receive it or not. If we receive it, then it goes into it pretty much of standard process. And the application goes into the recommendations in the committee then start to look at the costs associated with it. And by within 12 months they provide the code and the target reimbursement associated with it. And it becomes effective as of the following January. So in this example, January 2024 we would have effective full reimbursement theoretically. If all goes well. So that’s what we’re working towards at this point. And the other thing that happens typically, again, these are just our own beliefs and assumptions at the moment is that the C-Code strategy, as we’ve talked about before is the interim strategy, and once all these publications are done and the societies are beginning to be onsite, which as I mentioned, we feel pretty good about so far that also will continue to give us confidence with respect to the usage of the C-Code and continued payment against the C-Code. So, I think that’s what you will see in 2022 is applying for the code, C-Code in the meantime, supporting us society supporting us. Those are the kinds of milestones that you want to look for. And then if all goes well, then January 2024 to have a full CPT-1 operational.

Good afternoon, gentlemen. Thanks for taking the questions. Just a couple of quick ones for me. First off, Aaron, if I think, if I heard you say that the price point on the newly signed contracts is $7,710 or higher. Is that correct? That there’s an oral higher aspect to that and if so, what’s the variability on – how much higher that can go?

So it is a little higher. We took a price increase in 2021 that took effect about the end of March. And for sensitivity reasons with customers, I don’t really want to talk too much about it. But to assume it’s just like a typical inflationary increase you’d expect to see on drugs twice.

So like 50% these days?

No.

Ben, let me make sure I understand the question. So, you’re asking, what is the criteria on which people are signing agreements with us?

I’m just thinking about, if people are unaware of TULSA-PRO and maybe that, that the potential customers for the next multiple years are kind of already aware of you and identified and all that stuff, but with a 270 cc prostate being treated, do you think folks hear about that and say, oh, wow. What is this being able to treat in the fashion that you guys treat, or is it a journal publication that really makes them say, oh, wow?

Oh, I see what you mean. Yes. I mean, I think it’s, to be honest, it’s a combination of things. A year ago, people would say that, hey, we want to see the clinical data and we want to see more clinical data. I don’t think that when we go to the hospitals today, that is the lead question. I think people understand the clinical data is there. I think that the concept that they can treat a wider variety of patients with this technology is definitely something that perks them up because when you just see the PowerPoint that’s not necessarily obvious. And so we are working to create an Atlas and we do the training programs where all of these special cases will actually be proactively presented to our urology community as we go forward. And I think that certainly we believe will be a good driver. I think that that’s certainly one factor. The second factor I really think is again, what is continuing to drive TULSA is the patient response, to be able to go in and within four or five hours go home and be at home and have no pain and the only thing you’re complaining about is the grogginess from the anesthesia and the catheter that’s stuck inside of you for a few days and nothing else, not about the TULSA at all. I think that’s one of the other things that’s driving. And so you, I think you will see, I would – I mean to be honest, I would encourage you to look at the LinkedIn side from WellSpan, I think doctors.

Yes, I have run across that. Yes.

It is – like that’s what driving it. I think that’s what you are seeing is that the physicians, when they treat, they see all this, and then they are excited about this new capability and this is a leading site going on. So, I think that’s what’s driving.

Thank you. Our next question comes from Frank Takkinen with Lake Street Capital. Your question, please.

Thank you so much. And again, thank you for your support. And we look forward to the Q2 report. And before that, I guess the AGM that’s coming up later this month. Thank you so much.

Thank you everyone. This concludes today’s conference call. Thank you for your participation and you may now disconnect.