EDAP Prepares Prostate Cancer System For U.S. Market

| About: EDAP TMS (EDAP)

EDAP TMS (NASDAQ: EDAP) has been doing extraordinarily well throughout the last few months, having risen nearly 68% in value since the turn of the year and over 10% just last week.

I believe this is due to increased attention for its prostate cancer treatment system Ablatherm HIFU, which had its pre-market approval application submitted on January 31st, 2013.

This PMA submission was built up on the data collected in the Phase II/III ENLIGHT study (fully concluded in 2012), and miscellaneous follow-up data that the company has collected from prostate cancer patients that have undergone HIFU therapy.

If you consider that Ablatherm has already been approved in 2006 by the EMA, it seems very likely that the FDA will also give this therapy the nod due to its established safety and efficacy profile, as well as significant unmet need for HIFU treatment in the US prostate cancer population.

Prostate cancer incidence is expanding too - with 238,000 new cases of prostate cancer expected for year 2013 (according to the company's latest estimates). This makes prostate cancer one of the most lucrative treatment indications in the cancer space, with an estimated $5 billion/year in annual revenues. It is also projected that healthcare reform and continual jumps in prostate cancer incidence could double the size of this market or more by 2020.

EDAP, which is only valued at $45 million for the time being, has very obvious appreciation potential in the long run depending on the overall success of Ablatherm, although these medical device companies can have peculiar performance.

For one example in the prostate cancer space, we can look at Accuray (NASDAQ: ARAY), the company that developed and now markets the CyberKnife system. CyberKnife is a non-invasive robotic surgery system that has shown particularly phenomenal performance in treating prostate cancer. Despite this, it is ridiculously expensive - hence there are only a few operational CyberKnife systems out there. On top of this, Accuray is currently negative on earnings after FDA clearance for their products. Rational investors should obviously be trying to find businesses that will generate substantial income on top of other things, like social good.

While it's too early to tell what we should be expecting from Ablatherm following its highly probable go-ahead from the FDA, we should realize that it's unrealistic to expect the system to perform as a drug does. This means that we really can't use the sales data from Johnson & Johnson's (NYSE: JNJ) prostate cancer drug Zytiga, Dendreon's (NASDAQ: DNDN) Provenge, or anything of the sort for good fundamental analysis of Ablatherm and its prospects. Other "automated system" developers, like Accuray, make for much better comparison.

It will certainly be tough for Ablatherm to generate enough sales revenue in the United States to offset its ~ €2.6 million/quarter worth of expenses, although investors may be pleasantly surprised throughout the next few years if the company sees success with its marketing strategy.

The main issue that I notice is that the system has not been generating nearly enough net revenue from the European market. €6 million/quarter give or take, is not enough to bring the company to profitability when you consider the cost of goods sold (COGS), which takes away the majority of the profits. Especially concerning is the cost of selling the system, which may be taking too many employee hours to make it worth the company's effort in certain cases.

The US healthcare market should generally be more lucrative than Europe for EDAP's system, although investors should determine whether or not they believe that US performance will be improved drastically enough to warrant an investment in EDAP. I think investors should also weigh in the possibility of a share dilution in H2 2013, which fits in with the timing of the company's cash burn rate and cash stockpile as well as the idea that they will need extra cash prior to the launch of Ablatherm in the United States.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.