EDAP TMS S.A. (NASDAQ:EDAP) Q3 2022 Earnings Call Transcript

EDAP TMS S.A. (NASDAQ:EDAP) Q3 2022 Earnings Call Transcript November 17, 2022

Operator: Greetings and welcome to EDAP TMS Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host John Fraunces, Managing Director of LifeSci Advisors. Thank you, you may begin.

John Fraunces: Good morning, and thank you for joining us for EDAP TMS’s third quarter 2022 financial and operating results conference call. On today’s call, we will hear from Marc Oczachowski, Chief Executive Officer and Chairman of the Board; Ryan Rhodes, Chief Executive Officer of EDAP U.S.; and Francois Dietsch, Chief Financial Officer. Before we begin, I would like to remind everyone that management’s remarks today may contain forward-looking statements, which include statements regarding the company’s growth and expansion plans. Such statements are based on management’s current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in such forward-looking statements.

Factors that may cause such a difference include, but are not limited to those described in the company’s filings with the Securities and Exchange Commission. I would now like to turn the call over to EDAP’s Chairman and Chief Executive Officer, Marc Oczachowski. Marc?

Marc Oczachowski: Thank you, John, and good morning, everyone. I will start by providing a brief operational updates before turning the call over to Ryan Rhodes, our EDAP U.S. Chief Executive Officer for a review of the U.S. business and strategy. And then Francois Dietsch, our CFO, will present our financial performance. Let me begin by recapping a few of the highlights. For the third quarter, we generated total revenue of €12.2 million or $12.3 million, representing an increase of 29.7% over the third quarter of 2021. Through the nine months of 2022 we generated total revenue of €39.4 million or $41.7 million representing growth of nearly 31% over the comparable period in 2021. The increase in quarterly revenue was primarily driven by contribution from our HIFU segment in which we increased revenue nearly 81% over the third quarter of 2021.

We sold 341 machines during the quarter as compared to one machine in the third quarter of last year. During the first nine months of 2022, we experienced to the same high growth of nearly 80% in our global HIFU for revenues, driven by a strong triple-digit growth in our U.S. HIFU revenues, and the solid double-digit growth in our OUS HIFU revenues. We are very encouraged by this notable and global momentum of our HIFU technology. Our Distribution segment also performed very well during the third quarter. We sold 12 ExactVu units during the quarter as compared to five in the third quarter of 2021. These drove Distribution segment revenue to increase 30.9% year-over-year. During the quarter positive changes were finalized for reimbursement in the United States.

This is great news for access to our leading HIFU treatment, and we believe will be a very positive catalyst for our business. Ryan will speak in more details on these changes in a few moments. Our third quarter and year-to-date results together with this increase in reimbursement give us a high degree of confidence that our growth will continue as our HIFU technology is increasingly recognized as an essential platform in urology practices. At this point, I would like to provide an update on our pipeline expansion activities, where we believe HIFU can have clinical utility in indications outside of prostate cancer. As a reminder, we are running a Phase 2 study evaluating HIFU using the Focal One Robotic platform for the treatment of deep infiltrating endometriosis.

All patient treatments for this study has been completed with the last patient follow-up visit finalized in October. We are now analyzing the database on safety, efficacy and pathology outcomes, with the planning of presenting at a major medical meeting in early 2023. The current standard of care treatment of deep infiltrating endometriosis typically involves surgical resection of the bowel or rectum, which is a highly invasive procedure that presents risks to the patient along with significant recovery time. We believe the use of Focal One Robotic HIFU technology could greatly improve the treatment of complex endometriosis by offering patients a less invasive treatment option, without the morbidity and possible side effects associated with surgery.

We look forward to the results from this important study. On another clinical front, we continue enrolling patients in BPH benign prostatic hyperplasia feasibility study using a Focal One Robotic HIFU platform, we have so far treated about two-thirds of the number of patients. We will keep you posted as we move forward in this study. In other activities, we strengthened our financial position during the quarter by raising gross proceeds of approximately $23 million through a secondary offering of American Depository shares. This financing not only enabled us to strengthen our operational initiatives and further diversify our shareholder base, but also added to our research coverage, which we think will further increase the worthiness of EDAP going forward.

With nearly $67 million of cash, we are well financed to further expand and continue executing on our U.S. Focal One growth strategy while in parallel exploring new indications and other development opportunities. At this point, I would like to turn the call over to Ryan Rhodes, CEO of EDAP U.S. for an update on the U.S. operations. Ryan?

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Ryan Rhodes: Thank you, Marc. First turning to the HIFU sales for the quarter, we had a particular active third quarter highlighted by three additional Focal One sales. These include Morristown Medical Center in New Jersey, Northwell Huntington Hospital in New York, and Willis-Knighton Health System in Louisiana. Morristown Medical Center is of notable importance as it represents our first Focal One sale in the state of New Jersey. Morristown is a leading healthcare provider that has been rated number one in the state of New Jersey by U.S. News and World Report for five years in a row. We even anticipate, like many other highly regarded institutions that have incorporated Focal One into the urology practices, Morristown can become an important reference site for us in the tri-state area.

Turning to Northwell Huntington Hospital, Northwell Health is New York’s largest healthcare provider with 21 member hospitals. It has a very strong reputation as a leading healthcare provider with the ability now to offer Focal One Robotic Focal HIFU to many of its patients. Finally, Willis-Knighton Health System is the largest healthcare provider in Northwest Louisiana, and was ranked the best hospital in Louisiana by Newsweek in their publication, world’s best hospitals 2022. These sales are particularly noteworthy as all three represent large community hospitals. We previously talked about the accelerating momentum we are seeing with community hospitals, which make up about 80% of all hospitals across the United States and these sales further validate that dynamic growth.

In parallel with these sales, we also continue to add to our ever growing pipeline of prospects. With our U.S. team and infrastructure continuing to expand, we believe that we have set the stage for a very active 2023 during which we anticipate converting many of these prospects into Focal One sales and placements. As noted previously, the Focal One sales cycle can vary by institution and in some cases be quite long with the necessity of working through capital, hospital budgetary cycles. We remain confident in the growing awareness of focal therapy led by HIFU as a viable treatment alternative for the management of prostate cancer. Many patients in urologist continue to explore effective, non-invasive treatments beyond the traditional options of radical surgery and radiation.

In the area of reimbursement just a few weeks ago, we learned that the centers of Medicare and Medicaid Services or CMS published its final Outpatient Prospective Payment System rule for calendar year 2023. The final rule increases reimbursement to a hospital performing an outpatient HIFU prostate ablation procedure on a Medicare patient to ambulatory payment classification Level 6, up from Level 5 currently. In dollar terms, this represents an increase on average of more than 90% to $8,558 per procedure, adjusted locally based on the wage labor index from $4,506 per procedure currently. This new increase goes into effect on January 1. Based on this increase, we believe facility payments will now cease to be a barrier for adoption of Focal One technology.

When impacted the reimbursement changes, there have been facilities that have looked to upgrade their focal therapy approach to be primarily robotic HIFU, but had difficulty doing so in the past. We believe this change will help rectify that situation and significantly expand patient access to this procedure. Furthermore, higher Medicare reimbursement often translates into higher commercial reimbursement as many commercial payers follow CMS’ lead on such decisions. As noted, we’ve been successful in driving adoption and sales growth under the existing reimbursement while delivering a positive financial return on investment for hospitals who purchase Focal One. We now believe the move to classification payment APC Level 6 will allow others to acquire Focal One Robotic Focal HIFU technology thus providing more patients access to these needed invaluable treatments.

A recent article in the publication healthcare business highlighted the financial success hospitals have led by incorporating Focal One HIFU into their prostate cancer program. This article was authored by Dr. Laura Crocitto, Chief Medical Officer and Vice President of the Helen Diller Family Comprehensive Cancer Services at University of California, San Francisco, who is also practicing urologic oncologist. UCSF is a world class institution that is widely known for breakthrough clinical research and medical innovation. Here’s how Dr. Crocitto described the decision to adopt Focal One in the article, “her prior to joining UCSF, I had researched Focal HIFU and I knew this would be a game changer for men with localized disease. It would also round out our cancer services.

In fact, it would give UCSF a way to non-invasively treat localized prostate cancer, while preserving patient’s quality of life and giving them the greatest opportunity to treat their cancer while avoiding common side effects of sexual impotence and urinary incontinence – also associated with standard procedures, radical prostatectomy and radiation. Our proposal exceeded expectations even though we projected a 2.1 year return on investment. The focal HIFU device paid for itself in the first year. To this day I consider the acquisition of Focal HIFU one of my major contributions to the Helen Diller Family Comprehensive Cancer Center and UCSF”. This case study conveys a very powerful message on the favorable clinical and economic results of Focal One and this allowed our U.S. team to amplify its efforts.

September was Prostate Cancer Awareness Month and we participated in numerous events in partnerships with hospitals to raise awareness of Focal One Robotic HIFU to more patients. We also presented at important medical meetings such as the 2022 Society of Robotic Surgeons Meeting in Orlando, and the 2022 meeting of the Frontiers in Oncologic Prostate Care and Ablative Local Therapy or Focal 2022 in Los Angeles, several speakers presented on Focal One Robotic HIFU in their experience. In addition, a particularly significant event was urologist led webinar, led by Dr. Timothy Daskivich and Dr. Ken Ki, at Cedars-Sinai Medical Centre in Los Angeles. They spoke live to colleagues from across the United States about their experience in adopting Focal One HIFU and presented numerous case studies to assist others in beginning a Focal HIFU practice.

In September, we hosted a urology expert panel, and live Focal One technology demonstration in New York City that was attended both in person and virtually by over 100 people representing major financial – institutions and investors. In closing, the significant investments we have made in building our U.S. team and support infrastructure are paying dividends with growing awareness and improve reimbursement for focal therapy. We are well positioned to lead this category of growth with a combination of the most advanced HIFU technology increased validation with major medical centers and growing sales and clinical momentum. And now our CFO, Francois Dietsch will provide some details of our financial results. Francois?

Francois Dietsch: Thank you, Ryan and good morning everyone. Please note that all figures except for percentages are in euros. For conversion purposes, our average euro dollar exchange rate was 1.0017 for the third quarter of 2022. Total revenue for the third quarter of 2022 was €12.2 million a 29.7% increase as compared to total revenue of €9.4 million in Q3, 2021. Looking at revenue by division, total revenue in the HIFU business for the third quarter of 2022 was €3.5 million as compared to €1.9 million for the third quarter of 2021 and increase of nearly 81%. We sold three Focal One unit in the third quarter of 2022 and one unit in the third quarter of 2021. Total revenue in the LITHO business for the third quarter of 2022 was €2.2 million as compared to €2.5 million for the third quarter of 2021.

We sold two lithotripsy devices during the third quarter of 2022 versus three in the year ago period. Total revenue in the distribution business for third quarter of 2022 was €6.6 million as compared to €5 million for the third quarter of 2021. A 30.9% increase was primarily driven by 12 ExactVu units sold during the third quarter of 2022 as compared to five units sold during third quarter of 2021. Gross profit for the third quarter of 2022 was €5 million compared to €3.6 million for the year ago period. Gross profit margin and net sales was 41% in the third quarter of 2022 compared to 38.4% in the year ago period. An increase in gross profits year-over-year was driven by the higher sales effect and fixed cost. Operating expenses were €7.2 million for the third quarter of 2022 compared to €5.5 million for the same period in 2021.

The increase was primarily driven by the ongoing build out of the U.S. team and commercial infrastructure and included €0.4 million of non-cash impacts related to share-based compensation programs. Operating loss for third quarter of 2022 was €2.1 million compared to an operating loss of €1.9 million in the third quarter of 2021. Excluding the impact of the non-cash share-based compensation, operating loss for Q3, 2022 would have been €1.7 million compared to an operating loss of €0.9 million in Q3, 2021. Net income for the third quarter of 2022 was breakeven or €0.00 per diluted share as compared to a net loss of €1 million or €0.03 per diluted share in the year ago period. As of September 30, 2022, the company held cash, cash equivalents and short-term – investment of €68.3 million or USD66.8 million as compared to €47.2 million or USD53.4 million as of December 31, 2021.

In September we had gross proceeds of $23 million to a secondary offering of American Depositary shares. And I will now turn the call back to Marc.

Marc Oczachowski: Thank you, Francois. In summary, we are very pleased with our performance in the third quarter and year-to-date and I believe this sets us very successful very – for a very strong end of the year. Both U.S. capital placements, treatment volumes and pipeline growth continue to reflect the efforts of Ryan and his team and I believe the increase in reimbursement will significantly amplify the efforts. We will now open the call to your questions. Operator?

Q&A Session

Operator: Thank you. Our first question comes from the line of Michael Sarcone with Jefferies. Please proceed with your question.

Michael Sarcone: Hi and thank you for taking my questions.

Marc Oczachowski: Hi Michael.

Michael Sarcone: So the first one was just on, hi – the finalized Medicare reimbursement, you know, Ryan had briefly mentioned continuing to add to the funnel. I was hoping you could just talk about, what kind of impact that finalization has had on your conversations with customers and how they’re thinking about system adoption. And any kind of quantitative color, you could provide just on what that sales funnel looks like and, and how you think conversion to placements could play out over the course of 2023?

Ryan Rhodes: Yes, so the way I would answer that a few things. Notably, we work with hospitals, commonly with some proforma analysis. And we’ve done that historically with the current reimbursement APC Level 5. So now we have an opportunity to revisit those analyses. And obviously, this looks much more favorable at the facility level. So I think it really does help us – helps us a lot in the community hospital setting. I think what we do have to be aware of again we normally go through a buying process hospitals have those buying processes in place. The question is, do we expedite through that process? I wouldn’t say that at this point. But I would say that we look favorable when they do the analysis, and they look at reimbursement at a facility level.

And I think this does open up more opportunity for us to have more conversations. And of course, go back and revisit customers we spoke two months ago or a year ago and look at the numbers again. It helps us in that area. It also helps us in other areas of the company to also include our recruiting efforts. I think this is a great story on all fronts, but most importantly allows for more patient access to this very important procedure.

Michael Sarcone: Great thank you, that’s really helpful. And just my follow-up question, can you just give us an update on where you stand in terms of the U.S. commercial organization build out, whether that be headcount and how you’re thinking about that and how you expect to ramp that or if you need to ramp that in 2023?

Ryan Rhodes: Yes, we’ve made an ongoing effort to adding new headcount and talent in our commercial structure. That is part of our growth plan as we exit the year. We’ll continue on that process, but also continue on that process throughout 2023 as we scale up our business. So we’ve notably added a number of high talent individuals to the team. And we’ll continue to do that as we exit the year and embark on 2023 to take advantage of this new opportunity.

Michael Sarcone: Great, thank you very much.

Ryan Rhodes: Thank you.

Operator: Thank you. Our next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Jason Bednar: All right hey, everyone. Thanks for taking the questions. Maybe just a follow-up there on the reimbursement update, and you know, some discussions that were made there in the prepared remarks. I mean – what’s the right way to think about the very positive update on the reimbursement – front, but balance that against conversion cycles that are maybe taking a little bit longer for hospital CapEx items or lot of hospital Capex items out there? Are you are you seeing that, the effects of the macro when you go in and try to close these Focal One sales or is this just one of those – one of those cases where unique technology really good reimbursement update, and you’re almost going to proceed almost unaffected?