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EDAP TMS SA (NASDAQ:EDAP)

Q3 2013 Earnings Conference Call

November 21, 2013 09:00 a.m. ET

Executives

David Burke – The Ruth Group, IR

Philippe Chauveau – Chairman

Marc Oczachowski – Chief Executive Officer

Eric Soyer – Chief Financial Officer

Analysts

Suraj Kalia – Northland Securities

Oliver Garn – PSM

Jeff Cohen – Ladenburg Thalmann

Operator

Good day, and welcome to the EDAP Third Quarter 2013 Financial Results Conference Call. All participants will be in listen-only mode. (Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. David Burke of The Ruth Group. Please go ahead, sir.

David Burke

Thank you, operator. With us today from management are Philippe Chauveau, Chairman of the Board; Marc Oczachowski, Chief Executive Officer; and Eric Soyer, Chief Financial Officer.

Before we begin, I’d like to remind everyone that management’s remarks today may contain forward-looking statements. These 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 uncertainties and risks that could cause actual results to differ from those described in these 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.

Now I would like to turn the call over to Mr. Philippe Chauveau. Philippe?

Philippe Chauveau

Good morning, everyone. And thank you for joining us on our third quarter 2013 investor conference call. I have three opening comments to share with you. First EDAP’s third quarter performance was encouraging, and our fourth quarter as in previous years looks strong. Second, EDAP’s first HIFU Focal One device was sold in Europe, and first treatments are successful. Third, EDAP remains in very close communication with the FDA.

Now I’ll turn the call over to Marc. Marc?

Marc Oczachowski

Thank you, Philippe. And thank you all for joining us for our third quarter 2013 earnings call. I will review recent developments across our business segments, and then I will turn the call over to Eric to discuss the financial results for the quarter. Following Eric’s comments we will be happy to answer any questions you may have.

During the third quarter, we continued to execute our business plans, which is focused on generating revenues from our portfolio a commercialized products, while working towards FDA approval and commercialization of Ablatherm-HIFU in the United States. In addition, we continued to concentrate on our efforts to educate a broader audience on the effectiveness and benefits of our therapeutic technologies.

Recently our Ablatherm-HIFU device was featured in multiple banners and poster presentations at the 31st World Congress of Endourology, probably the largest conference in the world that is dedicated solely to Endourology to liver tissue. This year there was a significant focus on prostate cancer, and in particular using HIFU as a minimally invasive surgery. This provided an excellent platform for our technology to be highlighted by several doctors, including Professor Christian Chaussy from Germany, and Dr. Sebastian Crouzet from France, who presented data they had published earlier in 2013.

These data demonstrate the positive long-term outcomes of Ablatherm-HIFU as a treatment for prostate cancer, and its ability to control cancer with an acceptable morbidity profile. Being featured at conferences such as this not only provide great exposure, but also further evidence of the growing interest in HIFU and recognition of its long-term positive and stable results.

In terms of the FDA approval process for Ablatherm-HIFU, while we don’t have any new information to disclose at this time, I just would like to remind you that our submission was delivered to the agency at the end of January this year, and we have successfully completed the first two steps of administrative review and acceptance of our filing. We now remain in very close and regular communication with the FDA and its review team as we work [Indiscernible] phase of the review, providing detailed answers to their enquiry.

I also think it is important that when evaluating the process -- the progress that we have made with the FDA, there are certain factors that should be considered regarding the timing of the approval process. First, as we have stressed on previous calls, our high-intensity focused ultrasound technology is a new area for the FDA in the treatment of prostate cancer. This requires providing sufficient data and clear detailed answers to all questions to help develop a comprehensive understanding of the reasonable effectiveness and safety of Ablatherm-HIFU in treating prostate cancer.

In addition, it is important that we highlight the numerous patient benefits of this therapy compared to the current treatment options available in the US. Obviously this can be a timely process and in order to ensure that we have presented the best case to the FDA for approval of PMA application, we want to be as thorough as possible in our communications with the agency.

Second, the FDA process for approval of medical devices is generally aggressive. It is not unique to our device. Looking at the PMA applications in 2013 through the month of July just 10 devices have received FDA approval. The amount of time between the acceptance of the application, and the approval of the application has ranged from several months to several years. This is not necessarily a reflection of these companies or the products, but more on the time spent and diligence that is [Indiscernible] by the FDA with the applicants.

Today we believe we are moving through the approval process in a timely manner, and we are doing all we can to ensure that we receive a response on our PMA application as soon as possible. Based on data such as that presented recently at the World Congress of Endourology and in clinical studies published in leading medical journals, we believe there is substantial evidence to validate the use of HIFU as a non-invasive treatment for prostate cancer. In the US, there is a significant portion of the population that is diagnosed with prostate cancer on an annual basis.

There are also hundreds of American patients traveling internationally to get the prostate cancer treated with HIFU. This clearly demonstrates the need and demand for both the urologist and patient communities to have this technology available as part of their therapeutic options and choices. In addition to working towards FDA approval for Ablatherm-HIFU, we continue to structure our US operations via the [Indiscernible].

The company gets more visibility in the market and more exposure with the major players in the US urology world through these efforts. While the third quarter is typically a less active time for sales, we saw sequential growth in our revenues with a more than 20% increase when compared to the second quarter.

This was expected as we had secured several deals late in the second quarter for which revenues were not accounted until the third quarter. Nevertheless, our sales were typical for the season and this in the fourth quarter remains the most critical and crucial of the calendar year due to hospital budget spending and end of the year tax deductions.

At EDAP, our sales team around the world remains focused on securing leads and projects that can be finalized and closed by the end of the year. At the midpoint of our fourth quarter, we have replenished our backlog and currency as 14 confirmed purchase orders in hand and a great pipeline of projects. Again everybody at EDAP is fully committed to closing deals and generating as much revenue as possible as we finish the year.

Finally, I would like to note that we will simply deliver the first Focal One device as scheduled and announced for an order that was received during the summer. As a reminder, this new and innovative device complements our Ablatherm-HIFU device extremely well, and enables us to cover the full market of prostate cancer and to meet all needs and demands from radical treatments to effective focal treatments. It was presented as world premiere during the European Congress of Urology in March in Milan, Italy. Focal One was then cleared and got CE Mark in June this year.

The goal is to start operating this new technology in reference centers this year, and continue working on clinical trials and studies. Further marketing and commercialization will be fully implemented in 2014.

With that I would like now to turn the call over to Eric, who will review our key financials for Q3 of 2013. Eric?

Eric Soyer

Thank you, Marc and good morning everyone. I will now take a few minutes to review our financial results for the three and nine months period ended September 30, 2013. Total revenue for the third quarter of 2013 was €5.6 million or $7.4 million, compared to €5.7 million or $7.1 million for the third quarter of 2012.

Total revenue for the lithotripsy division was €4.3 million or $5.8 million for the third quarter compared to €4.8 million or $6 million during the year ago period. During the third quarter 2013, the company recorded sales of nine lithotripsy devices, compared to a total of 12 devices sold in the third quarter 2012.

Total revenue for the HIFU division was €1.2 million or $1.7 million in the third quarter 2013, compared to €0.9 million or $1.1 million for the same period last year. The company recorded the sale of one Ablatherm-HIFU device during the quarter.

Gross profit for the third quarter was €2.2 million or $3 million, versus €2.2 million or $2.8 million for the year ago period. The three month gross profit margin was 40.3%, a slight improvement compared to last year’s 39.6%, and despite the fact that gross profit in 2013 was negatively impacted by exchange rate variations against the Euro, and mostly due to the sharp devaluation of the Japanese Yen since the beginning of the year.

Operating expenses were €2.6 million or $3.4 million in the third quarter 2013, compared to €2.6 million or $3.3 million for the same period of 2012. Operating loss was €333,000 or $444000 for the third quarter of 2013, compared to an operating loss of €341,000 or $429,000 in the third quarter of 2012.

Net loss for the third quarter of 2013 was €373,000 or $497,000, which is €0.02 per diluted share, as compared to net loss for the third quarter of 2012 of €496,000 or $624,000, which was €0.03 per diluted share.

I will now turn to the nine-month period ended September 30, 2013. Total revenue was €15 million, or $21.1 million, and I need to reiterate here the comment I just made on exchange-rate variations against the Euro in 2013, which had negative impact of €1.1 million in total revenue, and €0.9 million in gross profit over the nine month period.

On a constant currency basis, total revenue in 2013 was €17.1 million, compared to €16.6 million for the first nine months of 2012. Gross profit for the first nine months of 2013 was €6.1 million or $8 million, compared to €6.5 million or $8.4 million for the first nine months of 2012.

Gross profit margin was 37.9% in the first nine months of 2013, and 40.6% on a constant currency basis compared to 39.3% in the first nine months of 2012. Operating loss for the first nine months of 2013 was €3 million, or $3.9 million compared to €2.3 million or $2.9 million for the same period of 2012. And net loss for the first nine months of 2013 was €4.5 million or $5.9 million, or €0.29 per diluted share as compared to net loss of €6.4 million or $8.2 million, or €0.48 per diluted share in the first nine months of 2012. Net loss for the first nine months of 2013 included a €1.1 million currency exchange loss.

At September 30, 2013, cash and cash equivalents, including short-term treasury investments, were €6.4 million or $8.7 million. The company's net cash utilization was €0.9 million in the third quarter 2013, and included €1.4 million of inventory replenishment in preparation for the third quarter 2013 sales activity. Thank you very much for your attention and I will now turn the call over to the operator who will open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from Suraj Kalia of Northland Securities. Please go ahead.

Suraj Kalia - Northland Securities

Good morning Marc and Eric.

Marc Oczachowski

Good morning Suraj.

Suraj Kalia - Northland Securities

So, Marc, forgive me, I joined a couple of minutes late on the call, what was the nature or what is the nature of the questions that FDA is asking on the PMA docket?

Marc Oczachowski

Obviously it is all about the [Indiscernible] I would say it is a mix of technical and chemical.

Suraj Kalia - Northland Securities

And does -- do any of the questions have to do with efficacy of Ablatherm or the HIFU product?

Marc Oczachowski

No. I would say it is more clarification questions. You need to clarify points, and you have to get them to kind of evaluate and integrate the file. So, it is more on methods and it is more -- it is quite variable and it is quite mixed as well.

Suraj Kalia - Northland Securities

Okay.

Marc Oczachowski

I will say, we are not yet at this stage.

Suraj Kalia - Northland Securities

Okay. Fair enough. So, the Ablatherms that you are placing in Europe, Marc can you give us some sense and I know this might be early stages, so we might not have a clear picture, but just roughly if you could give some directional color in terms of utilization for the Ablatherms, what kind of patients, how the centers are viewing utilization, any color would be greatly appreciated?

Marc Oczachowski

Sure absolutely and I think it is a good question because we have seen them along the years different utilization of the Ablatherm and the HIFU in general, and this was one of the reason also we wanted to come out with a new device that would complement the Ablatherm because the trend is easy -- to stay of course on the localized prostate cancer, but it goes more and more towards low-risk patients, and towards partial treatment and some focal treatment as well. So, the utilization is really now, you know, on very low risk patient and again, they try to really work on preserving quality of life in doing -- in the ablation of focal treatment, and we can now foresee a lot of -- increase in the treatment of patients that have failed traditional therapy as well.

Suraj Kalia - Northland Securities

And Marc, my final question I guess, I will just follow up on that, so are you seeing albeit in the early stages, are you all seeing any pull through from patients who were supposedly going to get radical prostatectomies, are you all seeing any pull through for the existing Ablatherms in the field, and I am just trying to, whether it is open, laparoscopic, robotic prostatectomy, don’t matter, I am just trying to see if -- you know, how the trend line is?

Marc Oczachowski

What we see is definitely a decrease in radical treatment and mainly in surgery, because again people are looking to get treated on less invasive treatment, and again they are looking for preserving the quality of life. So, we would certainly see that and we see it in the US as well. I mean, there are less and less people that are, you know, willing to accept from scratch radical surgery.

Suraj Kalia - Northland Securities

Okay. Gentlemen, thank you for taking my questions.

Marc Oczachowski

It was nice talking to you Suraj.

Operator

And the next question will come from Oliver Garn of PSM. Please go ahead.

Oliver Garn – PSM

Good morning, Oliver speaking.

Marc Oczachowski

Good morning Oliver.

Eric Soyer

Good morning Oliver.

Oliver Garn – PSM

How are you doing?

Marc Oczachowski

Doing very well and you?

Oliver Garn – PSM

Perfect. Thank you. I simply want to go to the cash net utilization, which was €900,000, if I get it right, you have an cash utilization of 900 million, but let us say in terms of -- because of the inventory replenishment, your operating cash flow would be positive, wouldn’t it?

Eric Soyer

Yes, it would Oliver. Inventory replenishment is part of operation as well. But, yes you are right. I mean, we had mostly -- use our cash to replenish our inventory, while at the same time we made some progress and decreased some customer receivable for example.

Oliver Garn – PSM

But because you are not providing free cash flow statement, just roughly guessing your cash flow from operations without net working adjustments would have been positive, roughly speaking.

Eric Soyer

Roughly speaking no because as your -- roughly speaking, our operating cash flow will mimic our operating income, since we had a slight loss in Q3, we will have an operating cash flow, which will be slightly negative if you exclude working capital requirements.

Oliver Garn – PSM

Okay. In terms of the FDA approval, if that -- just to understand the timeline, if you are in the case of clarification questions, that sounds for an beginner like, if it is something in discussion of the first quarter of the total discussion, is that -- could you describe that like that?

Eric Soyer

No, because on the first quarter again I mean it was -- the FDA was reviewing, administratively reviewing the file to accept it for filing. So that is what we have done in April.

Oliver Garn – PSM

What I did refer to was calendar rather than to the 25% of the [whole task], so just to understand first -- just generally speaking without going into that case, if the FDA is -- you provide the data and then they check, but in terms of checking, you first want to understand what -- like you clarified a question as you had said, but that is like in the very early stage to understand the total?

Eric Soyer

I get what you mean. But that was indeed done at the first stage for clarification of the structure of the file. And now they are again evaluating and file, the method, and the data that are inside and [Indiscernible], so it is not the early stage question and answer for clarification as you said. I may have mis-explained that earlier, but we are in the next stage of -- that is the real round of questions and answers, and again the questions, and I think that was the question I got is not kind of challenging the clinical results, but we are today more on the structure of the trials, and again the way to interpret and evaluate the data that are getting out of the trials. So that is -- again we are not questioning the results so far. But we’re questioning the -- you know, the -- and discussing again on the normal way with the FDA on the size and the clinical data. So we are not in the early stage of question and answer. We are in the next one.

Oliver Garn – PSM

Okay. Thank you very much.

Eric Soyer

You are welcome Oliver.

Marc Oczachowski

Thank you.

Operator

(Operator instructions) The next question will come from Jeff Cohen of Ladenburg Thalmann. Please go ahead.

Jeff Cohen - Ladenburg Thalmann

Hi, thanks for taking my questions.

Marc Oczachowski

Hi, good morning.

Eric Soyer

Good morning Jeff.

Jeff Cohen - Ladenburg Thalmann

Good morning. So, I guess, for Marc or Eric just two general questions, firstly if you could talk about some theoretical comments as far as US commercialization and roll out plan, early next year we hope and secondly if you can comment on any current studies that are ongoing either in ongoing phase or wrap up phase that you expect to be presented in any scientific conferences in the near future?

Marc Oczachowski

[Indiscernible] first question on the marketing and commercialization, I mean, we are as I said, I mean working on that and again we are benefiting from experience that we built, and we continue building on the lithotripsy side. So, we are getting close to the urology community involved in the US and all the stakeholders, and again, we do work on that. Obviously, it is too early to disclose any strategy and any business model, and certainly for competition reason we would not disclose that. So in essence, we want to kind of get -- maintain a step ahead of the competition, and not disclose before acting.

On the second question for studies, we continue to follow as you know, we have treated more than 30,000 patients with HIFU. We have established a few years ago a database that is called the [actual history], from which we have today more than 16000 patients in treatment. So, we continue to work with our reference centers in Europe, and again one of the strengths of Ablatherm-HIFU and EDAP is that we have been working with reference centers, [Indiscernible] that do research and they do work for -- they continue working and collecting data, and we certainly continue to work on establishing long-term data, a long-term follow up results on Ablatherm to show its stability and strength.

Jeff Cohen - Ladenburg Thalmann

That is great. Thank you very much.

Marc Oczachowski

You are welcome.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Philippe Chauveau for any closing remarks.

Philippe Chauveau

There being no further questions, I will now close the conference call and thank everyone for participating on today’s conference call. Goodbye.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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