Earnings Call Transcript - PROF Q2 2022

Operator, Operator

Welcome to the Profound Medical Second Quarter 2022 Financial Results Conference Call. My name is Darryl, and I’ll be your operator for today’s call. I will now turn the call over to Stephen Kilmer, Investor Relations. Stephen, you may begin.

Stephen Kilmer, Investor Relations

Thank you, Darryl. 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 involve known and unknown risks, 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 are 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 function mobilities. TULSA-PRO is CE marked, Health Canada approved and 510 cleared by the FDA. In the U.S., we employ a pure recurring revenue model for TULSA-PRO, whereby we charge customers 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 primarily deploy a capital and consumable sales and service model separately as the situation warrants that. We are also commercializing Sonalleve, an innovative therapeutic platform with a CE mark 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 noninvasive treatment of uterine fibroids and has recently obtained FDA approval under our 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.

Rashed Dewan, CFO

Good afternoon, everyone, and welcome to our second 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 second quarter 2022 financial results. To streamline things, all of the numbers we will refer to have been rounded, so they are approximate. For the 3-month period ended June 30, 2022, the company recorded revenue of $2 million, with $1.16 million coming from recurring revenue and $864,000 from the one-time sale of capital equipment. This represented revenue growth of 48% sequentially over the previous quarter, driven by a 14% increase in recurring revenue and the first-time North American sale of Sonalleve systems. Q2 2022 revenues decreased $600,000 from the same period in 2021 due primarily to lower one-time sales of the capital equipment in international markets. Total operating expenses in the 2022 second quarter, which consists of R&D, G&A and selling and distribution expenses were $8.7 million, an increase of 15% compared with $7.6 million in the second quarter of 2021. Breaking that down further, expenditures for R&D increased 8% on a year-over-year basis to $3.7 million. G&A increased by 7% to $2.6 million and selling and distribution expenses increased by 39% to $2.4 million, primarily due to a higher foreign exchange gain. Net finance income for the 2022 second quarter was $1.9 million. This compared to a net finance cost of $602,000 in the same 3-month period of 2021. Overall, the company recorded a second quarter 2022 net loss of $5.9 million or $0.28 per common share compared with a net loss of $7 million or $0.35 per common share for the same 3-month period in 2021. As at June 30, 2022, Profound had cash of $53.2 million. With that, I will now turn the call over to Arun.

Dr. Arun Menawat, CEO

Thank you, Rashed. As you know, our primary focus for the past several quarters has been on the U.S. commercialization of our next-generation prostate disease treatment technology, TULSA-PRO. While that focus continues, we have not forgotten about Sonalleve and its potential importance to our future as a company over the longer term. Like TULSA, Sonalleve combines real-time magnetic resonance imaging and thermometry with thermal ultrasound to enable precise and incision-free ablation of diseased tissue. The major difference between the two therapeutic platforms is how the ultrasound energy is applied to the diseased tissue. Sonalleve uses high-intensity focused ultrasound, where a small area is ablated with real-time MR visualization versus TULSA, where the thermal ultrasound is delivered directionally like a blade, affecting a large volume of tissue quickly. Profound is the only company that has both technology capabilities. One reason we use directional blade ultrasound in TULSA is that in the prostate application, it ablates about 10 times faster than HIFU technology. Up until recently, we have been exclusively commercializing Sonalleve in all U.S. markets for the treatment of uterine fibroids and palliative pain treatment of bone metastasis. In late 2020, we received FDA approval under a Humanitarian Device Exemption for the treatment of osteoid osteoma, a noncancerous bone tumor that primarily affects the femur and tibia of young children and adolescents. Osteoid osteoma causes a dull aching pain that can worsen at night. CT-guided FRA is currently the most commonly used treatment for osteoid osteoma, but it's invasive and exposes young patients to radiation. Sonalleve offers a safe treatment for these patients, providing clinical improvement without incisions, needles, or ionizing radiation exposure. Although the osteoid osteoma market is small, I'm pleased to share that in Q2, we sold two Sonalleve systems to prestigious pediatric health care centers in North America, the National Children’s Hospital in Washington, D.C. and the Hospital for Sick Children in Toronto. These were the first sales of the platform in the United States and Canada, respectively. These institutions will not only use the systems for treating osteoid osteoma but will also conduct clinical studies for other applications with severe unmet needs in young patients, including cancer treatment. Now, regarding TULSA. As you may recall, the TULSA systematic review paper published in March by the Journal of Endourology provided Level 2A evidence, the highest available, supporting TULSA's safety and effectiveness for treating primary, recurrent, and locally advanced prostate cancer, as well as for simultaneous treatment of prostate cancer and urinary tract symptoms typically caused by BPH. This publication completed the clinical requirements for us to qualify to file a CPT Category 1 application, which we did in mid-June. We're cautiously preparing for the upcoming CPT editorial panel meeting in September. Our caution comes from the history of some CPT applications for new technologies like TULSA taking an extra year for advancement. That said, we are pleased that one unique aspect of the TULSA application is that it is cosponsored and filed with support from multiple societies. Additionally, we're glad to see that CMS has proposed a 5% increase in the reimbursement for C9734, the temporary code hospitals currently use for TULSA. The new proposed national payment is $13,274, and this will be finalized by the end of September. We believe that the proposed payment will support the further adoption of TULSA in the near to midterm in the U.S. To maximize the significant opportunities we see for both TULSA and Sonalleve, it's crucial that we continue to nurture the growing interest from physicians and patients in our ablative technologies through generating additional post-market clinical data, participating in relevant medical congresses, and executing our professional marketing initiatives. Regarding clinical data, our CAPTAIN trial, the first Level 1 study ever conducted comparing emerging technologies head-to-head with Radical Prostatectomy in men with prostate cancer, continues to progress well. We have activated seven sites that are currently recruiting patients and have increased the target from eight to twelve sites in the U.S. due to strong interest in participation. We also have two sites in Canada and may add one or two sites in Europe due to similar interest. Most patients in the study are expected to be U.S. based. Turning to medical meetings and marketing initiatives, we've had an exciting few months. For instance, TULSA-PRO was prominently featured at the American Urological Association’s 2022 Annual Meeting in May, where Dr. Ken Goldberg performed a semi-live TULSA procedure during one of the plenary sessions. The AUA designated this activity as AMA PRA Category 1 credit, requiring an unbiased content review. Additionally, Dr. Scott Eggener from the University of Chicago included TULSA procedure data in his presentation. Turku University Hospital's Mikael Anttinen presented updated results from a Phase I/II clinical study on TULSA for BPH treatment, reporting significant improvements in patient quality of life, LUTS, sexual function, and uroflowmetry. Lastly, we unveiled our TULSA-PRO software release 2.11, which introduced two new features to assist physicians in delineating targeted prostate tissue more confidently and optimizing bladder suppression algorithms. At the Society of Interventional Radiology meeting in June, TULSA and Sonalleve received significant attention. Dr. Steve Raman from UCLA presented three-year follow-up data from TACT, while Dr. Busch shared his initial experience with TULSA, and Dr. Karun Sharma reviewed osteoid osteoma treatment data. We also hosted our inaugural PRO-Talk Live event in Chicago, bringing together about 40 physicians, which provided a great platform for education by existing users to future users. Following the positive feedback, we plan to host larger meetings in the future. To summarize, awareness and adoption of our unique ablative technology are continuing to grow. We successfully sold our first Sonalleve system in the U.S. and Canada in Q2, filed our CPT Category 1 application for TULSA in June, and enrollment in the CAPTAIN trial is ongoing. Lastly, while COVID-19 impacted our activities over the last two years, we are adapting and expect to achieve a total of 35 TULSA sites in the U.S. by the end of 2022 while continuing to see an increase in patients treated and accelerating adoption into 2023. This concludes our prepared remarks. Rashed and I are happy to take any questions you may have.

Operator, Operator

And our first question comes from Frank Takkinen.

Frank Takkinen, Analyst

Congrats on all the solid operational progress. Apologies for starting off with a little bit of a naive question, I think I may have missed it, but did you guys call out the number of placements that occurred in the quarter and where that stands? I heard the 35 guide, but was just curious where that’s standing at right now.

Dr. Arun Menawat, CEO

Frank, thank you first of all. We did have additional contracts but we did not place additional systems because, as I mentioned in the prepared remarks, we’re really focused on getting the new sites running. But we, as I said in the prepared remarks, are pretty comfortable that we will have at least 35 sites operational by the end of this year.

Frank Takkinen, Analyst

Okay. That’s good to know. I appreciate that. I have one more question regarding Profound and the TULSA reimbursement process. I noticed that it involves a two-code application for both imaging and treatment. Can you explain some of the details of that process? Specifically, who can utilize which codes, such as urologists versus radiation oncologists, and how this might affect the product's commercialization in the long run?

Dr. Arun Menawat, CEO

Yes, Frank. I'm glad to share more details on this. We're collaborating closely with various societies, and one piece of feedback we received was that this procedure could be performed jointly by a radiologist and a urologist. Based on those recommendations, we've categorized these applications into two subsets. One code focuses on the imaging aspects of the treatment that a radiologist can use, while the second code pertains to the catheter insertion, treatment planning, and assessment, which is primarily a urology task. Both codes can be utilized independently by either specialty, or if one physician is handling the entire procedure, that physician can use both codes. This approach allows for flexibility in technology adoption. In larger hospitals, we’re hearing that two physicians often collaborate on this, and they appreciate that flexibility. In smaller hospitals, a single urologist may perform the procedure and will also be able to use both codes. Overall, this represents part of the comprehensive plan in progress. There’s significant analysis happening with the AMA, and we’re optimistic about this transformative technology. We're pleased with the insights we're receiving from independent societies. We’ll see how this develops. Importantly, while many reimbursements have decreased, particularly for other urology procedures related to prostate cancer, our ablative treatment, the C9734, which had a favorable target payment, is set to increase by 5% once everything is finalized by the end of September. HIFU, another ablative procedure, has also seen an increase. We're excited that CMS and other organizations are recognizing the value of ablative technologies, which we believe will support adoption of the C code moving forward.

Frank Takkinen, Analyst

Okay. Really helpful. Maybe if I can just sneak one more. Given all the extra commentary on Sonalleve this quarter, could you maybe just try and frame up how we should be thinking about capital placements in the back half of the year and on a go-forward basis?

Dr. Arun Menawat, CEO

Yes, Frank, those are excellent questions. Our main focus is TULSA, and we are pleasantly surprised by the interest Sonalleve received at the interventional radiology meeting in Boston this June. We are happy to report two device sales this quarter. Moving forward, I suggest a conservative approach; I do not anticipate selling more devices in the U.S. this year for these applications. There is significant interest, but budgeting will be necessary. The two sites will likely provide references to several pediatric sites in the U.S., which we hope will lead to sales in 2023. This is part of our strategic thinking. The capital model we are using for Sonalleve in international markets is recovering slowly, particularly in China, which is still lagging. I remain cautious about this situation. Nevertheless, strategically, we are excited about the prospects and believe it positively impacts the mid- to long-term outlook.

Operator, Operator

And our next question comes from Zach Weiner.

Zach Weiner, Analyst

I just wanted to confirm one thing and then one more broader question. Just the commentary on placements through the second half of the year, where is the expectation there? And then what’s the thought on COVID headwinds and maybe impacting those placements? And I have a couple of follow-ups.

Dr. Arun Menawat, CEO

Sure, Zach, I’m assuming you’re talking particularly about TULSA in the United States and adoption?

Zach Weiner, Analyst

Yes. Yes. Sorry about that. Yes.

Dr. Arun Menawat, CEO

I'm very pleased to see that with the ongoing society meetings and the publication releases, TULSA is receiving much more attention than it has in the past two years. This increased attention is crucial for building awareness. The level of awareness regarding TULSA is significantly higher today compared to just a year ago. Moving forward, we plan to install more sites and are actively addressing the delays we faced previously. We are confident in reaching about 35 sites this year and expect continued growth in usage, which has been increasing in double digits quarter-over-quarter. We anticipate that this growth will persist, and you'll see these developments by the year's end. Overall, TULSA is progressing positively, awareness is rising, and we are receiving encouraging feedback from patients. Expect to see more publications, increased usage and adoption, and additional sites being established. While the current pace is decent, I believe the rate of adoption will improve over time as well.

Rashed Dewan, CFO

And I think, Zach, like another point that we’ve made in the prepared remarks is after a long time, we have had our first PRO-Talk Live recently, and that’s where we brought in like 40 physicians, right? So now that COVID is subsided to a certain extent, you’ll see that those activities are going to pick up where we can get more engaged with our physician base and at the same time, make more physicians aware of the technology and we can educate them and start guiding them towards our technology.

Dr. Arun Menawat, CEO

Exactly. And we’re happy to provide you a lot of color on these things. We’ve had good sites. As you know, the quality of our sites in the U.S. is very high. But a number of users, some of them are using it for mostly for the current failures. Some of them were using for focal therapy. Some of them are using for the whole gland. And when we brought the users together, they could see how others are using it more broadly and so on. So I think these activities would lead to higher usage even at existing sites over time. So that’s why we’re kind of excited that we’re finally able to cross-benchmark, cross-fertilize the knowledge across our users. And many, many nonusers were there, and we got very good feedback that these guys are now ready to move forward with their own adoption of TULSA.

Zach Weiner, Analyst

And if I could just sneak one more in. Your comments on sort of the inflationary pressures that are facing broader med tech space. Just curious what you guys are seeing internally?

Dr. Arun Menawat, CEO

In the broader med tech, to be honest, I don’t have much comments, Zach. I think we have a very one-track mind. We’re very focused on our technologies. And we’re kind of small at the moment. So some of those macro things are not as critical to us. I think the biggest thing as we’ve already described, was the lack of contact and lack of ability to cross-fertilize people. That is what we’re thrilled about. I think I would continue to say when we visit customers, we do not walk out of those meetings with them saying they don’t see the value or they don’t think that they should do it. They should wait more and so on. Generally speaking, the urology community is ready to adopt this technology.

Operator, Operator

Our next question comes from Rahul Sarugaser from Raymond James.

Rahul Sarugaser, Analyst

My first question is about the significance of this quarter for consolidation, including awareness and reimbursement. With the current installed base around 25 and the expectation to reach about 35 by the year's end, the key factor we need to focus on is the utilization rate per device. Arun, I believe you mentioned that it's increasing. Can you provide more details on how you are currently seeing the utilization per device? How do you anticipate it will trend in the future, considering the current C-code environment and the evolving CPT code environment? Additionally, please address the challenges hospitals are facing, especially regarding nursing, which may limit their ability to adopt new technologies?

Dr. Arun Menawat, CEO

Yes, I’m pleased to provide more details on this important topic. When we launched the product, we focused on three main channels: early adopters, imaging centers, and teaching sites. Although teaching sites may not have high volumes, they have been effective in delivering podium presentations, which we are starting to see, and supporting the CPT application. We are achieving these goals, and it’s not just about same-store sales right now. With face-to-face interactions and collaboration, teaching hospitals are sharing their experiences about treating various types of cancer and catering to cash pay customers. Different sites have unique approaches for follow-ups. From our recent Pro-Talk Live and various society conferences, we see that these sites are communicating and learning from one another rather than relying solely on their own experiences. I expect same-store sales to increase over time, reflected in our recurring revenue, driven by a greater number of sites and increased usage at each site. While I advise caution and suggest it won't happen in just one quarter, I believe the upward trend is already visible. Conversations with universities indicate a strong desire to enhance usage, and I anticipate that the adoption rate will grow quarter-over-quarter. It may currently be somewhat linear, but I expect it to accelerate toward a more exponential growth pattern.

Rahul Sarugaser, Analyst

That’s insightful, especially regarding your strategy and how it's reflected in the podium presentations on the CPT code. Following your final comment about these factors leading to increased utilization, which in turn affects revenue, it seems like 2022 has been a year of reconsolidation, building awareness, and preparing for reimbursement. Looking ahead to 2023, as you continue to assemble these key components, including reimbursement, awareness, and a solid established base in teaching hospitals, how should we anticipate the revenue growth for 2023? Additionally, considering your current cash position of around $53 million and a quarterly burn rate of about $7 million, could you provide some insights into your revenue projections for 2023 in relation to your cash situation and any potential strategies to address any funding gaps, whether through debt or other means?

Dr. Arun Menawat, CEO

I don't have enough visibility to provide guidance for next year yet. However, by the end of the year, I believe we may have enough insight to offer more information about revenues for 2023. I see Q2 as the first solid quarter, and we acknowledge the need to reach that point as soon as possible. We feel confident about our projections, and when we're ready to share that information, we will. Our cash position remains strong, and I don't expect our burn to increase. Our gross margins are in a decent place, and as revenues rise, gross margins should also improve since manufacturing relies on volume. As we increase production, costs will decrease, and our overhead will stay relatively constant. We're at a pivotal moment, and while I wish I could provide more clarity now, I prefer to wait until we have the necessary data to share.

Rahul Sarugaser, Analyst

Perfect. If you don’t mind, I have one more question. Based on your insights about the CPT application and mentioning the support from multiple societies, could you share more details about those societies? What else contributes to your optimism regarding this application, considering it is one of the key catalysts this year?

Dr. Arun Menawat, CEO

Sure. I’m happy to provide more details. There are two critical aspects to consider. First, I am extremely proud of our team. Key data came in on time, and our commercial team effectively connected with various societies, helping them understand our technology and clinical data. I believe our team has performed exceptionally well in this regard. While I can’t disclose the names of the societies due to confidentiality agreements, I can share that we are working closely with multiple societies to address the discussions about coding and framing the application. Our collaboration has gone very well. As you know, I rely heavily on data. A noteworthy piece of data is that significant innovations face rigorous scrutiny from the AMA, often taking more than a year for approval. I acknowledge this reality and aim to collaborate with the AMA while maintaining realistic expectations. An important point is that our C code is currently being reimbursed, and its rates have actually increased by 5%. If this continues and is finalized, it will remain at that level. We are in a strong position to drive adoption because patients are willing to pay, sites are eager to adopt, and our C code is not only functional but also being reimbursed. We are in a solid position, so that's the information I wanted to share.

Rahul Sarugaser, Analyst

Great. And congratulations to your team for their yeoman’s work.

Operator, Operator

And we don’t have any questions at this time. I’ll turn it back to Arun for closing comments.

Dr. Arun Menawat, CEO

Thank you so much. And again, thank you for your interest in Profound and we look forward to our third quarter meeting. Thank you again.

Rashed Dewan, CFO

Thanks a lot.

Operator, Operator

And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.