Profound Medical Corp. Q1 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Profound Medical First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

Thank you. Good afternoon, everyone. Let me start by pointing out that this conference call will include forward-looking statements within the meaning of applicable Securities Laws in the United States and Canada. All forward-looking statements are based on Profound's current beliefs, assumptions, and expectations, and relate to among other things, expectations regarding the efficacy of the company's treatment technologies, results of future clinical trials, the ability to obtain coding and/or reimbursement from third-party payers, anticipated financial performance, business prospects, strategies, regulatory developments, market acceptance, and future commitments. Such statements are subject to known and unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from those implied by such statements. No forward-looking statement can be guaranteed. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. 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 also like to take a moment to summarize our business. Profound develops and markets customizable, incision-free therapies for the ablation of diseased tissue. We're currently commercializing TULSA-PRO, a technology that combines real-time MRI, robotically-driven transurethral 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, Health Canada approved, and 510(k) cleared by the FDA. In the U.S., we employ a pure recurring revenue model for TULSA-PRO, whereby we charge customers around $8,000 on a per-procedure basis for TULSA-PRO consumables, lease of medical devices, and services associated with extended warranties. Outside of the United States, we also primarily deploy a transactional procedure model, but we also sell capital and consumable separately if the situation warrants that. We're also commercializing Sonalleve, an innovative therapeutic platform that is CE marked for the treatment of uterine fibroids and palliative pain treatment of bone metastases. 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 the Humanitarian Device Exemption for the treatment of osteoid osteoma. The business model for Sonalleve systems is currently a one-time sale of capital equipment. On the call today, representing the company are Dr. Arun Menawat, Profound's Chief Executive Officer, and Rashed Dewan, the Company's Chief Financial Officer. With that said, I'll now turn the call over to Rashed.

Good afternoon, everyone. And welcome to our first-quarter 2022 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 would like to provide a brief update on our first-quarter 2022 financial results. To streamline things, all of the numbers we refer to have been rounded, so they are approximate. For the three-month period ended March 31, 2022, the company recorded revenue of $1.4 million, up 92% from $711,000 in the first quarter of 2021. Recurring revenue increased 115% from $477,000 in Q1 2021, while one-time equipment sales increased 45% compared to the $234,000 recorded in Q1 2021. Total operating expenses in the 2022 first quarter, which consists of R&D, G&A, and selling and distribution expenses, were $7.7 million, an increase of 13% compared with approximately $6.8 million in the first quarter of 2021. Breaking that down further, expenditures for R&D increased 2% on a year-over-year basis to $3.2 million. This was primarily driven by CAPTAIN trial enrollment, travel for off-site MRI testing, slight inflation, and additional headcount. G&A expenses increased by 10% to $2.3 million due to additional headcount, increased legal, accounting, and recruitment fees, increased travel as restrictions continued to be lifted, and increased license costs of our enterprise resource planning and customer relationship management software. Finally, selling and distribution expenses increased by 39% to approximately $2.2 million. Overall, the company recorded a first quarter 2022 net loss of $8.2 million or $0.40 per common share, compared with a net loss of $7.5 million or $0.37 per common share for the same three-month period in 2021. As of March 31, 2022, Profound had cash of $60.1 million. With that, I will now turn the call over to Arun.

Thank you, Rashed. I would like to talk about our Q1 2022 achievements and outlook for the rest of the year. I would like to provide a little more color on our financial discussion and installed base in the U.S., which has grown to 24 TULSA-PRO systems, just shy of our global target of 25. While we said on our last call that we thought some international one-time capital sales would start to trickle in the second half of this year, I'm pleased to report that those sales have already begun, with $340,000 worth of equipment sales recorded in Q1 2022. Our worldwide installed base is now 30. We believe that the direct impact of COVID-19 has subsided with respect to our ability to access new U.S. sites to install TULSA PRO systems, but we still see some lingering effects in the supply chain, primarily in the form of delayed deliveries of new MRI units to the sites where we have TULSA agreements. The good news is that we expect this to eventually correct itself, and we are seeing the trend of increased utilization in our installed base. Accordingly, independent of future installs, we continue to believe that the pace of utilization will accelerate meaningfully in the second half of this year as the newly installed sites get up their learning curves and increase utilization. While we are a medical device company, as you already know, we have chosen to charge on a per-patient basis in the United States for bundled services that include the use of our device, the one-time disposable, and the ongoing services that we provide to support cases. Because we deploy this unique business model in the U.S., we also want to clarify how we recognize revenues. We recognize no revenue upon installation of the TULSA-PRO system; we recognize part of the revenues upon shipment of the disposable and defer about 24% of the per-patient revenue until the actual usage of the disposables or the treatment of the patient. We believe that this is the winning model as it creates a true partnership between us and the healthcare provider. In the first quarter of 2022, we continue to see that our physicians are using TULSA for whole gland, partial gland, or focal therapy and salvage cases. Two sets of significant datasets were announced. One was the publication on the use of TULSA in patients who have had fiducial markers placed in their prostate due to prior SBRT radiation treatment. The authors concluded that TULSA ablation was possible in these patients as long as thorough precautions were taken. The publication continues to enhance the proposition that TULSA is a safe modality for salvage patients. In addition, Dr. Ming recently reported on 50 patients at UT Southwestern that received focal rather than whole-gland treatment with a variety of treatment plans, including partial-gland ablation of intermediate-risk lesions, concurrent treatment of BPH along with lesions for men with BPH or lower urinary tract symptoms, near whole-gland treatment for men with multifocal disease, and partial-gland ablation of localized radio-recurrent prostate cancer. Early outcomes show that at 12 months following treatment, PSA declines an average of 63%, and prostate shrinks an average of 19% in terms of quality of life outcomes. Only 6 to 8% of patients reported worsening voiding and erectile dysfunction, respectively, at 6 months post-treatment. Notably, no recurrence of cancer has been reported. Overall, UT Southwestern reported minimal adverse events with high rates of potency and continence preservation, demonstrating the ability to treat a wide variety of prostate disease patients. These include those I just mentioned, as well as very large prostates. UT Southwestern's experience affirms that TULSA is the best way to implement focal therapy and can be used to treat malignancy anywhere within the prostate, which is just one of the ways that TULSA helps customize treatment of the whole or partial gland. UT Southwestern is one of the seven top opinion-leading U.S. hospitals that are currently using the TULSA-PRO system, and the study they presented is an example of how we expect opinion-leading sites to adopt TULSA. They started first by cautiously analyzing the outcomes and feedback of their old patients, and now that they see promising results, they're on track to expand usage. Another significant development during the quarter was the confirmation of TULSA-PRO's compatibility with GE, making the system compatible with the three largest medical technology companies in the Global MRI space, which comprise more than 90% of the installed base of MRIs in the U.S. This is an important achievement as it significantly increases our available opportunity. In addition to the agreement that we announced at Brigham and Women's Hospital, we now have two additional agreements for GE MRI sites to be installed in Q3 this year. I'd now like to turn to our sponsored CAPTAIN trial, which stands for a comparison of TULSA procedure versus radical prostatectomy, which treated its first patient in January and continues to progress. To-date, seven sites have been activated and are currently recruiting patients with an expected total of eight or more sites in the United States and two sites in Canada. We remain on track to finish enrollment in the second half of 2023 and anticipate the first readout of early data in Q4 2023. We also continue to await fluid data on the FARP trial, whose robotic RP arm is similar to that of our CAPTAIN trial. Should the RP outcomes and CAPTAIN match what we're seeing in FARP, we believe there is potential to demonstrate clear superiority, even though the CAPTAIN trial has been designed with a non-inferiority endpoint. Broadly speaking, we are conducting the CAPTAIN trial to increase awareness and adoption of TULSA-PRO, as well as to support coverage by payers. To further support the first part of this goal, Profound will be very much front and center at the American Urological Association meeting in a few days. Indeed, as many of you know, our semi-live TULSA case will be presented during the plenary session. We are limited in what we can say ahead of that, but you should expect us to provide more details closer to the event. As for our ongoing reimbursement strategy, our TULSA systematic review paper that was published online in March completed the clinical requirements to qualify to file a CPT I application. It also provides the highest level of evidence available in support of TULSA. In this case, Level 2A, demonstrating that TULSA is safe and effective for treating primary prostate cancer, recurrent prostate cancer, and locally advanced prostate cancer, as well as the simultaneous treatment of prostate cancer and the lower urinary tract symptoms normally caused by BPH. Having met the clinical requirements for filing for a CPT code, we remain on track to file the application by the end of June, which is fast approaching. This application will be up for consideration at the AMA's fall 2022 meeting. If approved, the CPT I code would be effective in January 2024. To summarize, to-date, well over 2,000 TULSA procedures have been performed by more than 100 physicians. We anticipate that this number will continue to increase as the new install base begins to ramp treatment. We also see more activity in the international market as the year progresses, as a few one-time capital sale projects are revived. As a result, we anticipate higher recurring and total revenue growth for the remainder of the year. We are pleased to see the clinical data presented recently by UT Southwestern has established that TULSA is the best way to perform focal therapy. TULSA continues to be unrivaled in its flexibility to provide whole gland, partial gland, or focal salvage ablative treatments in any size or region of the prostate. We are seeing early indications that TULSA's compatibility with all three major manufacturers of MR scanners, GE, Siemens, and Philips, is increasing our market access. We continue to be on track for filing our CPT I application for TULSA-PRO this June. This ends our prepared remarks for today. With that, Rashed and I are happy to take any questions you might have.

Thank you. We will now be conducting a question-and-answer session. Please stand by while we compile the Q&A roster. The first question comes from Rahul Sarugaser with Raymond James. Your line is open.

Good afternoon, Arun and Rashed. Thanks so much for taking our questions. So looking at first at the revenue recognizing that about a million of it was recurring and we saw about a million dollars last quarter of recurring. And given that you're now at 24 installed devices, you're very close to your target, could you give us a sense of how the utilization rates are balancing to provide for that such a similar recurring revenue, quarter-over-quarter? And how should we be thinking about those utilization rates, hopefully increasing to drive that number upward?

Sure, Rahul. Good afternoon. The recurring revenue in Q1 is primarily on the original installed base. The impact of the recurrent revenue from the number of patients treated in the new installed base is still relatively limited. As I mentioned in the prepared remarks, we defer a good portion of revenue until the patients have been treated, even if they have shipped disposables. It is, in fact, about 5%, 10% higher than last quarter. While it may not show up significantly now, I believe that you can expect at least a doubling of those by the end of this year or maybe sooner, because this installed base will start to produce revenue, which will be reflected in Q2. You will definitely see significant improvement in the second half of this year as these sites become more experienced and increase utilization over time.

Okay. That's very helpful. Thank you very much, Arun. And so you started referring to the installed base growing through the remainder of the year. Could you please give us a sense of how the funnel looks for the remainder of 2022?

Yes. We still have at least another 10 agreements that we have not installed, in addition to what we have done. As I mentioned in the prepared remarks, some of these delays relate to the fact that the sites where MRIs already existed were bottlenecked. But now those issues are behind us, and we're able to place systems and they're becoming operational. There are at least four sites where they had ordered new MRIs, and standard delivery of these MRIs is currently running about six months behind schedule. So I think that as those MRIs come in, we should be able to continue to see growth through the rest of this year, with at least another 10 installations.

Great. That's very helpful. If you don't mind, one more question. Recognizing that the FARP trial should hopefully readout sometime this summer, and we're looking forward to those results, do you have a sense of whether on the CAPTAIN trial we may be able to release some interim readouts before the Q4 2023 readout that you outlined? That's all for me, and I'll get back in the queue after this.

Sure. Given that the FARP trial should readout in July or August this year, and the CAPTAIN trial is not blinded to us—that's randomized, but because it's a device, it is not blinded. It’s challenging to keep it blind given that one patient will undergo a prostatectomy while the other will undergo TULSA. If we were to adhere strictly to the Level 1 concept, then we would need to wait until all patients are treated. However, we will consult with the trial coordinators and lead authors on this. I believe considering this is more about adoption and coverage, we will likely have interim updates. The worst-case scenario is Q4 2023, but we will definitely discuss it with the investigators conducting the trial.

Okay. Great. Thank you very much, and best of luck for the next quarter.

Thank you, Rahul.

Our next question comes from Frank Takkinen with Lake Street Capital. Your line is open.

Hey, Arun, hey, Rashed. Thanks for taking my questions. Just a couple for me today. Wanted to start with the commentary around capital equipment sales—how should we be thinking about that sequentially? I know you heard your comments about some sales coming in this quarter, and then it sounds like there's a good chance of a ramp in capital equipment sales in the back half of 2022. Any color there would be greatly appreciated.

Yes, a year or two ago, people were concerned about whether the pipeline would disappear or be lost. We are seeing that our pipeline did not really vanish; in fact, it is returning. Except for China and to some extent Japan, the pipeline in Europe and the U.S. is looking pretty solid. We're seeing some systems of Sonalleve being sold in the U.S. due to the research work happening in various areas. I think that pipeline does look promising. Our primary business still focuses on building the recurring revenue model. I'm hesitant to give you a specific number, but I can tell you that I'm more optimistic today than I have been in previous quarters. You will see more capital revenue in Q2 as compared to Q1.

Got it. Okay, that's helpful. I wanted to swing back to utilization and ask a little bit more specifically about that. If I remember correctly, there’s a kind of 40-60-100 concept—maybe 40 procedures annualized the first 6-12 months, some power users doing 60, and then at scale, there was a thought that you could reach 100 procedures once fully folded into the organization. Is that still an accurate way to think about that? How have you been seeing that turning with your initial placements in 2022 so far?

Yes, generally speaking, Frank, your description is still an accurate way to view it. I know everybody is anxious to see how quickly we ramp up, and I believe that will happen. As I described, UT Southwestern serves as an example where they were cautious initially, and then they began to see positive feedback from patients, noticing that cancer was not returning. They are now on track to reach that 100-procedure run rate by the second half of this year. So that original hypothesis remains intact.

Okay, perfect. Lastly, of the 24 systems that you have installed to date, what is the mix of those that are standalone TULSA versus those introduced alongside a broader prostate cancer treatment program, whether that's da Vinci or radiation specifically? I just want to get a feel if there's some standalones or if they're mostly an add-on to broaden the offering at a specific clinic.

I would say that the majority of them are in hospital systems where they are adding on. Approximately 80% of them are in hospital systems. That's a great question. We are also assessing how feedback from patients changes over time regarding their specific requests for TULSA. We are observing a significant increase in the number of patients who are asking specifically for TULSA.

Got it. Okay, that's helpful. I'll stop there. Thanks for taking my questions, and congrats on all the progress.

Thank you, Frank. Thank you very much.

Our next question comes from Josh Jennings with Cowen. Your line is open.

Hi. Good evening. Thanks for taking the questions.

Good evening.

Good evening. I was hoping to ask just about the sales from, I know you had some commentary about seeing some momentum and increased demand. But I was hoping that you may be able to give us a little bit of color on two different channels that your team is pursuing: the entrepreneurial urology channel and the imaging center channel, as well as the academic medical center. Are you seeing differentiated levels of demand or success from your sales team in those channels, or is it a broadly based interest? I just wanted to check in on that and get some incremental insights.

Josh, that's a great question. I agree with your high-level assessment. Interest is indeed growing in all the channels we've previously discussed. The imaging center has been a bit of a challenging space because during this period, they have largely focused on their core business operations. However, in the next three to six months, I believe you will see an increase in demand from the imaging center channel. We have at least three or four systems going into imaging centers. But the majority of our placements in the last quarter or two have been geared towards hospital settings. Notably, patients want this product and are willing to pay for it. The imaging centers have been a bit cautious because they primarily operate on cash pay compared to hospitals that utilize reimbursement codes. Nevertheless, we expect patient demand will lead imaging centers to become active in the second half of this year.

Excellent. Thank you. Considering the per-procedure revenue that Profound is capturing, have there been any changes? I think you discussed on the fourth-quarter call about a potential lift. Where does that stand now and how have your customers in each of those channels been responding to the current per-procedure rate that Profound is charging?

Our agreements now are typically in the range of $8,300 to $8,500, so that's slightly better than the $8,000 previously mentioned. Importantly, we do not offer any alternative pricing options. That is the only price point, and we do not provide discounts. There is significant consistency in our purchasing agreements and contracts, which is a discipline we've maintained. We believe that taking this approach makes business sense in the long term, establishing a simplified business model. We are increasingly observing a lack of pushback from hospitals and imaging centers regarding this pricing structure.

Excellent. Lastly, I know you announced earlier in the year about hiring Ken Snack as Chief Commercial Officer. I was wondering if you could help us understand better how that might impact your commercial operations within the med device space. Could you share any early impacts he is having on the team?

Thank you, Josh. I am very proud of Ken and thrilled with the contributions he has made since joining us in January. During the first several weeks, he has immersed himself in our products and team. He's already managed to recruit a couple of seasoned executives onto our team. He has made adjustments to our sales team to focus on utilization, and later this week, at the AUA meeting, you will see a significant presence from our company which is linked to enhancements in our sales and marketing team. You can expect noticeable positive impacts from our updated commercial team going forward.

Thank you. Our next question comes from Scott McAuley with Paradigm Capital. Your line is open.

Hi, gentlemen. Thanks for taking the questions. I wanted to follow up again on the pipeline. I was looking at the recent deck that you presented at the Bloomberg conference. You specifically mentioned there's about 15 additional POs in place for new systems to go in, and I think you just mentioned that you have signed contracts for about 10 new systems to be installed through the rest of the year. I wanted to dig into that delta and how you define purchase orders versus signed contracts, and what we should be expecting for the balance of 2022.

Sure, Scott. It's not a major issue. Some of the agreements we have are for multiple sites, and not every one of those would be installed in 2022. It's possible that in Q4, we may have accelerated installations, but for now, we feel like we could probably achieve at least 10 more systems by the end of this year. The difference stems from multi-sign agreements in place.

Got it. That definitely helps. Then on the reimbursement side, upcoming filing and potential application for consideration in the fall—do you know when the results of that AMA consideration would be made public ahead of it potentially coming into effect early 2024?

Yes, we're very excited about the potential of this application. We've engaged with the society and believe we will have their support. There are a number of milestones. First, we will file by the end of June, and we will update our status at the next call. The AMA meeting is scheduled for the 27th of September, and that's a public meeting where support will typically be stated, and if there are any significant issues, they will also be known on that day. The official announcement usually comes about six weeks after the meeting. So by mid-November, we will know whether we received approval for the code. Following that, the timeline for implementing potential reimbursement will be finalized. I want to add that while we are looking forward to the CPT1 step, we believe that we are already one year ahead of our original expectations. However, it's important not to underestimate that patients are willing to pay. We're continuing to see increases in utilization and recurring revenue during this period, and we confidently anticipate expansion even without CPT1.

That's great. Thanks for clarifying. Also, regarding costs—specifically increased sales and marketing costs as you're retooling the team, and R&D costs associated with CAPTAIN—could you provide some color on how you expect cash burn to increase in the coming quarters?

Yes. I think I'll start from Rashed's comments—our R&D costs are going to remain fairly level at this point. There will be incremental increases due to CAPTAIN, but not significantly impactful. Overhead costs are likely to be stable as well. Overall, our investments in electronic systems or ERP and CRM are mostly behind us now, and we will incur maintenance costs for those systems moving forward. The primary increase you will see in our cost structure will be in sales and marketing, which we will adjust in line with the growth in our installed base. I believe the cash burn should stabilize in the second half of this year as we anticipate a higher revenue run rate.

As you can see, our Q1 R&D was only 2% year-over-year. We're not expecting significant increases for R&D expenditures as long as the trial continues; we will spread those costs over a longer duration. Regarding selling and distribution expenses, it will be adjusted based on the revenue ramp-up. Overall, we still expect the burn rate to align similarly to last year.

Thanks, gentlemen. I appreciate you taking the questions.

Our next question comes from Brian Gagnon from Gagnon Securities. Your line is open.

Very close. Do you guys hear me okay?

Yes, Brian, please proceed.

It seems as if the number of new contract signings is continuing to outpace your installations. What are you guys doing to prepare for a higher level of installations throughout the balance of this year and as you progress into 2023?

Yes. The increase in contracts is due to bottlenecks in new MR installations. Our capability to install is sufficient to handle double our current output. Our current focus is on accelerating installation processes and ensuring that newly ordered MRIs are delivered as swiftly as possible. Our team is working diligently to optimize utilization from the current installations.

I would like to turn the call back over to Dr. Menawat for closing remarks.

Thank you so much. We look forward to updating you at the Q2 call. If any of you are attending the AUA conference, please feel free to stop by our booth; we have much to share there. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.