EDAP's (EDAP) CEO Marc Oczachowski on Q3 2016 Results - Earnings Call Transcript

| About: EDAP TMS (EDAP)

EDAP TMS S.A. (NASDAQ:EDAP)

Q3 2016 Earnings Conference Call

November 17, 2016, 08:30 ET

Executives

Lee Roth - Investor Relations

Philippe Chauveau - Chairman

Marc Oczachowski - Chief Executive Officer

Francois Dietsch - Chief Financial Officer

Analysts

RK Ramakanth - H.C. Wainwright

Stanley Mason - Private Investor

Operator

Welcome to the EDAP TMS Third Quarter 2016 Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. I would now like to turn the conference over to Lee Roth from the Ruth Group. Please go ahead.

Lee Roth

Thanks, Alison. Once again good morning and welcome to the EDAP TMS third quarter 2016 earnings conference call. Joining us today from management are Philippe Chauveau, Chairman of the Board; Marc Oczachowski, Chief Executive Officer; 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 uncertainties and risks that could cause our actual results to differ 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 U.S. Securities and Exchange Commission.

With that, it’s now my pleasure to turn the call over to EDAP’s Chairman, Mr. Philippe Chauveau. Philippe?

Philippe Chauveau

Thank you, Lee. Good morning and welcome to EDAP’s Q3 2016 conference call. I've brief opening remarks to share with you. First our remarkable performance in HIFU division with revenues in the first nine months of 2016 up 79% from year ago period providing clear evidence of growing acceptance of our technology among urologist and patients. Second, we continue to expand our HIFU business particularly in the U.S. where more than 170 urologist have already been trained on our Ablatherm HIFU Robotic device. And finally third, we experienced a 22% year-over-year increase in total revenues and an impressive financial performance of the company in the first nine months of 2016.

I will turn over the call to Marc. Marc?

Marc Oczachowski

Good morning everyone and thank you for joining us on our third quarter 2016 conference call. I'm very excited to share with your today our results for the first nine months of 2016 as well as our latest news. Through the end of September we continued to show significant growth in our HIFU business with a 79% increase in HIFU revenues during the first nine months of 2016 as compared to the same period of 2015. These results clearly demonstrate increasing adoption of HIFU technology. This high growth in HIFU revenues were driven by the launch of Ablatherm Robotic HIFU in the U.S. after it's FDA clearance at the end of 2015 as well as accelerated adoption in Europe and rest of the world of our latest and most innovative focal oriented device, the Focal One.

Q3 as a quarter was even more impressive with a 111% growth in HIFU revenues as compared to Q3 of 2015 and overall growth of 25% in the company's total revenues. In the U.S. we have continued extending our operations and increasing promotion of HIFU to the urology community with a strong focus on building scientific and academic recognition. In September we signed an installation agreement with Duke University in Durham, North Carolina, one of the most prestigious urology clinics in the U.S. Dr. Cary Robertson at Duke was the primary investigator in our PMA [ph] trial and it is intimately familiar with the other Ablatherm Robotic technology and it's significant representatives. These installation is a significant milestone for EDAP and an important validation of our HIFU device as we continue to increase the [indiscernible] of our technology among leading urologist in the United States.

At the same we continue to build and grow a solid pipeline of projects throughout the country including a number of the most prestigious leading academic centers nationwide.

We’re continuing to roll out our comprehensive Ablatherm Robotic HIFU training program and approximately a 170 urologist have entered the program and received certification so far this year. We look forward to further increasing this number as we execute on our U.S. market penetration strategy and as demand continues to grow. In a network to bring the full range of EDAP's HIFU technology to patients and physicians in the U.S. and as announced previously we filed a 510 (k) application for the potential clearance of our next generation Focal One device in April of this year.

The application is under FDA review and we are in close contact with the agency regarding the application. As a reminder Focal One which is used for the ablation of prosthetic tissue is highly complementary to other [indiscernible] and is an ideal solution for cases in which only small area of the prostate is being ablated as oppose to all gland [ph] ablation. Thanks to improvements in imaging systems for mid-year diagnostic and more efficient tumor localization [ph] the focal approach to prostate ablation is gaining traction and interest. As it allows a greater level of control and efficacy with minimum side effects and fast recovery. Last month the New England Journal of Medicine published the results of the ProtecT trial which was a randomized study comparing the 10 year efficacy and side effects of active surveillance, radical prostatectomy and radiation therapy. As expected the difference in side effect was significant with the key surveillance providing better preservation of quality of life. However no statistical difference between the three modalities in depth from prostate cancer of that from [indiscernible] was observed as of 10 years.

This seems amazing and raises important questions about the use of radical options to treat prostate cancer. It is important to realize that although no survival difference was observed, the active surveillance group did show a higher rate of metastatic at 10 years. Metastatic disease often leads to prostate cancer deaths and patients continue to be followed. It appears that better initial disease treatment control but not necessarily radical treatment would be idea. It appears obvious that a partial or focal ablation approach makes the most sense if the disease was confined to non-regions within the prostate. Today, HIFU is the most regressively studied and best positioned technology to fit this new surveillance [ph] strategy for which there is a significant medical need. Importantly this publication also shows that active surveillance is not free from morbidity. Men get older, undergo biopsy and are worried about their disease.

This effects quality of life and has a specific impact on anorectal function. The study found 22% more men were reporting erectile function two years of their initiating IQ surveillance than when they started. Interestingly this is the same rate of erectile dysfunction observed last month's publication of the French Association of Urology hemiablations HIFU study. This hemiablation HIFU study was published in the highly respected and ranked peer reviewed journal, European Urology. This [indiscernible] multi-centered study demonstrated very encouraging data using Ablatherm Robotic HIFU. It aimed to evaluate HIFU hemiablation as a primary treatment for localized unilateral prostate disease. Hemiablation involves treatment half of the prostate where tumor is known to be located while sparing the rest of the gland. The study enrolled 111 patients at 10 different clinical institutions and was convinced and sponsored by the French Urological Association. It showed promising oncologic outcomes with low incidences of side effects.

Confidence [ph] was preserved in 97% of the patients at one year anorectal function was preserved in 78% of patients. Additionally there was no major decrease in the quality of flat score [ph] observed at 12 month and the rate of radical treatment free survival at three years was 89% implying that only 11% of the patients in the study underwent surgery or radiation in the two years following the HIFU treatment. The lead offer of the study Professor Pascal Rischmann confirmed that focal therapy administered using the Ablatherm Robotic HIFU can significantly contribute towards management of prostate cancer with strong quality of life preservation and efficacy.

Turning to the UDS division we recorded steady net sales in both the third quarter and the first nine months of the year owing to EDAP's established position as a leading innovator in the urology community. Our cutting edge technology and comprehensive product portfolio helped differentiate EDAPs process in a highly competitive market. The continued growth in our HIFU business coupled with the stability of the UDS division has combined to drive very strong financial performance year-to-date.

Through September 30, we have achieved a total revenue growth of 22% as compared off the first nine months of 2015, our gross margin improved significantly thanks to an increased revenue contribution from our HIFU business. We remain profitable on an operating basis through the first nine months of the year. Importantly we have invested significantly in initiatives designed to drive the growth of our business but have maintained a strong cash position which totaled €18.8 million as of September 30. This financial strength will enable us to continue investing in the future of EDAP not only through sales and marketing but also research and development. These investments will help us penetrate more of the market while ensuring our ability to bring cutting edge technologies to physicians and patients throughout the world. We are well-positioned heading into the end of 2016 and believe that EDAP is poised for success and as we continue to move ahead.

To summarize we have already recorded sales of equity basis year-to-date through the first three quarters of 2016 our revenue increased by 22% while HIFU revenue increased 79% versus 2015, our solid growth in HIFU revenue is suggestive of the continuing world-wide acceptance of the technology, in [indiscernible] are validating the true significance of HIFU as an attractive alternatives to radical treatment for select patients with prostate malignancies and finally we are focused on advancing our pipeline products and growing our business worldwide. This is truly an exciting time for EDAP and we thank you all for your continued support.

With that I will then turn the call over to Francois to review the financial results.

Francois Dietsch

Thank you, Marc. Good morning everyone. I will first take a few minutes to review our financial results for Q3 2016. So our revenue for the third quarter of 2016 was €8 million or $8.9 million, a 24.7% share value increase compared to €6.4 million or €7.1 million for 2015 and the highest third quarter revenue in EDAP history. The total revenue in the HIFU business for this quarter was €2.5 million or $2.8 million compared to €1.2 million or $1.3 million for the third quarter of 2015. This 111% increase is based on the royalties of sales of equipment. For the quarter of 2016 total revenue for the lithotripsy division was €5.4 million or $6.1 million compared to €5.2 million or $5.8 million during the year ago period, the 4.7% increase. For Q3 2016 the company recorded sales of 11 lithotripsy machines which compares to a total of 9 devices during the third quarter of 2015. Gross profit for the third quarter of 2016 was €3.5 million or $3.9 million compared €2.6 million or $2.9 million for the year ago period.

Gross profit margin and net sales was 43.2% in the third quarter of 2016 compared to 40.2% in the year ago period driven by the strong growth in HIFU sales. Operating expenses were €3.8 million or $4.2 million for the third quarter of 2016 compared to €2.8 million or $3.1 million for the same period in 2015. This increase reflected the sales and marketing efforts on expanding our HIFU business. Operating loss for the third quarter of 2016 was €0.3 million or $0.4 million compared €0.3 million or $0.3 million for the third quarter of 2015.

Net income for Q3 2016 was €1.3 million or $1.4 million, or 4% of [indiscernible] share as compared to a net loss of €4.8 million or $5.4 million of €0.19 diluted share in the year ago period. Net income in the third quarter of 2015 included non-cash interest income of €1.5 million to referencing fair value of the outstanding warrants.

Now turning to first nine months of 2016 results. The total revenue for the first nine months of 2016 was €24.9 million or $27.8 million, 21.8% compared to €20.5 million or $22.7 million for the same period of last year. Gross profit for the first nine months of 2016 was €11.2 million, $12.5 million and gross profit margin and net sales was 45% compared to 41.5% in the year ago period driven by the strong growth in HIFU sales.

The company recorded net profit for the first nine months of 2016 of €0.1 million or $0.1 million compared with the an [indiscernible] loss of €1.1 million or $1.2 million in the first nine months of 2016. Net income for the first nine months of 2016 was €5.1 million or $5.7 million on $0.19 of diluted share as compared to a net loss of €6.8 million or $7.5 million or $0.27 of diluted share in the first nine months of 2016.

Net loss in the first nine months of 2016 included a non-cash interest income of €4.4 million to address the accounting fair value of the outstanding warrants. At September 30, 2016 cash and cash equivalents including short term treasury investments were €18.8 million or $21.2 million.

With that I will turn the call over to the operator who will open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question will come from RK Ramakanth of H.C. Wainwright. Please go ahead.

RK Ramakanth

Few questions let's kind of start from the high level on the HIFU division which is obviously the focal point. How has the HIFU division operationally changed over the last one year since you got approval of the device, what I'm trying to find out is like how has the division changed such that if you just look at your quarter to quarter operational profit, there is a little bit of a decline but obviously things are moving around so if you can example to us how things are changing within the division that will be helpful.

Marc Oczachowski

RK, we have strengthened our marketing and sales initiative and therefore increased our expansion resources and get more people on the field and more actions towards marketing and communication. We have also made some changes in terms of our [indiscernible] industry operations to make sure we’re able to enter as quick possible the demand, to enter the demand as quick as possible with the [indiscernible] quality as well. But these are the main changes and the main investment we have done to follow the growth and also push the growth to higher level.

RK Ramakanth

And then looking into -- on the revenue side of the divisions, once quarter number doesn’t a -- you know it may make a trend I understand that but can you explain to us a little bit how the sales cycle works because if you look at this quarter number compared to the last couple of quarters there is decline and you also said that it was selling of two machines this quarter compared to the four machines that you’ve been doing every other quarter in the last two quarters at least. So if you can help us understand how the sales cycle works and why there are this gyrations and how we should we be understanding that?

Marc Oczachowski

As I've commented earlier we have been benefitting in our HIFU growth in revenue that is recording 79% of growth this year for the first nine months as compared to last year that was mainly due to the opening of the America market, so suddenly contributed a lot to the growth but also I commanded we’re getting some acceleration and traction and market expansion in Europe and rest of the world -- to the good news of the adherence. This being said and to answer your question about the sales cycle we have recorded a number of sales in the U.S. installations very quickly, we called the low hanging fruits and now we are working on a more regular deals and as you know those type of equipments and these type of budgets as well as in the segment of hospitals which we work in focus as I said on academic and university centers there is a lot of administration work that increases the time from starting a deal to closing it and we’re in the middle of that so the sales cycle could vary from one place to the other but it's usually a number of months and sometimes years. So that’s also what I commented saying that we’re continuing to build a very strong and solid pipeline of projects and we’re achieving milestones and steps in all those projects to get them closed as soon as possible.

RK Ramakanth

I know you don’t like to give out guidance and what not, how are last year in the fourth quarter we saw a big bump in the UDS division which actually helped you quite a bit on the sales end, is there anything of that sort that you’re seeing especially now that you’re into the quarter already that we could expect some kind of bump into the fourth quarter?

Marc Oczachowski

As always and as we have discussed that a few times in the Q4, in the medical device and in hospitals budget and expenses is usually high quarter because everybody tried to close the year and close the deals for the year to start a new year on new basis so we certainly -- we’re certainly working hard and focusing on trying to get deals done in the Q4 which usually is a very high season for sales in our business and again I mean we’re mid-November we are selling in the middle of our final strength and everybody in the Company is focusing in closing deal and making happen delivery installations before the end of the year.

RK Ramakanth

And then the last question for me is on the cash position, last quarter you ended with almost €22 million and in current quarter you reported €19 million so could you help us understand what's the cash usage and also on your total debt at this point?

Marc Oczachowski

On the cash and this is something as well that we are used to see most of years first of all -- in the last quarter in Q3 we got a lot of deals closed in the last month in September due to holiday period in July and August so we have a number of receivable that are waited from those sales but also we -- Q3 year-over-year [ph] quarter where we invest a lot in -- using buying step ups and buying -- using our supply chain to prepare for the end of the year which is as I said usually high season of sales so we have to get prepared for that and that’s using some cash. So we have a usually low point of cash position at this time of the year, at the end of the quarter introduced two major events.

RK Ramakanth

And what's the total debt?

Marc Oczachowski

What do mean by total debt?

RK Ramakanth

Both short term and long term debt?

Francois Dietsch

In fact it's mainly valuation so it's non-cash debt.

Operator

[Operator Instructions]. Our next question will come from Stanley Mason, a Private Investor. Please go ahead.

Stanley Mason

I've few questions, the Focal One how is that coming along with the FDA and have you had numerous questions from them which have stopped the clock or is it moving it wasn’t expected to move?

Marc Oczachowski

So far it's moving the way we expect and we are active and in continuous discussion with the FDA on the file. Again as I said as well we filed the submission in April of this year which is not long ago and as a reminder when we got a last week [indiscernible] which is very common, got 510 (k) it took us a year or so. We are in the middle of the process right now and again we’re working on it and trying our best to be as fast as possible to make it as short as possible.

Stanley Mason

Okay and as far as revenue from European like France and Germany paying for the procedure. I miss the point on that what is that revenue up?

Marc Oczachowski

It is part of the driver for the growth so it's going well and growing.

Stanley Mason

Okay, what percentage is that up this quarter compared to last?

Marc Oczachowski

We don’t have the specific number, I mean region by region right now but the specific quarter total HIFU revenue were up 111% as compared to Q3 last year.

Stanley Mason

Okay, so that’s an indication of growth, more procedures is being done that’s a main point that I was trying to make. Okay. And I guess the other -- so that’s a procedure increases and I guess that’s really all I have those are only my question but I was just hoping to see that Focal One, so with Focal One you’re working with them but every time they ask a obviously they stopped the clock and when you look on the internet for filing this application, the normal timeframe is between six and nine months is what I see.

Marc Oczachowski

As I said before there is no rule, although they have some guidances on that and a question doesn’t stop the clock all the time, it all depends, it may stop it may not. So again we’re in the review. As I said for lithotripsy which is much more common, it's been approved by the FDA for more than 30 years. The last device we got 510 (k) on lithotripsy it took us a year. So I think we’re still good in time and again we’re trying our best to make things, going the smoother way so we could get Focal One together with other term available in the U.S. very quick.

Stanley Mason

Okay, my last question is in the U.S. are you seeing any reimbursement from any insurance companies? I realize that many of them have not recognized it but are you seeing some facilities getting summary imbursement after the fact for HIFU procedures?

Marc Oczachowski

Yes, absolutely we have seen patients that have been treated getting reimbursed after the case is done. There is no yet standard reimbursement or code even though we’re working on that but as you know and as we have explained in previous calls this is taking time and this is a complex task but we have seen on functional basis some patients getting reimbursed partially or totally as the procedure is done.

Stanley Mason

The position to always part of the DaVinci that did a procedure, I can't remember in what hospital but it was reported back I don’t know maybe five or six months ago. Has he continued to use the Ablatherm?

Marc Oczachowski

Absolutely and most of them after the -- the beginning is always a little bit slow due to training and education but then as they move forward most of them will ramp up in the number of cases as they get more comfortable in using the machine so it's going well in existing centers.

Operator

Ladies and gentlemen this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Marc Oczachowski

There will be no more questions. I would like to close this call. Thank you very much for participating in today's conference call. Goodbye.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!