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Executives

R.J. Pellegrino – IR, The Ruth Group

Philippe Chauveau – Chairman

Marc Oczachowski – CEO

Eric Soyer – CFO

EDAP TMS S.A. (EDAP) Q2 2008 Earnings Call Transcript August 21, 2008 8:30 AM ET

Operator

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the EDAP second quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) I will now turn the call over to Mr. R.J. Pellegrino of Ruth Group; sir, please go ahead.

R.J. Pellegrino

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. By now you should have received a copy of the earnings press release. If you have not received a copy, please call Zack Kubow at 646-536-7020 and he will fax or email you a copy.

Before we begin, I would like to remind everyone that management’s remarks today may contain certain forward-looking statements. Complete details of factors affecting forward-looking statements can be found in the company’s SEC filings available at the company’s website at www.edap-tms.com and are incorporated by reference for all remarks made during the course of this call. With that, I will now turn the call over to Philippe Chauveau, EDAPs Chairman of the Board.

Philippe Chauveau

Good morning all. As usual I would like to share some opening remarks; first HIFU. HIFU; despite a flat first half of the year, EDAPs HIFU at the standard of care is outstanding and Q3 and Q4 will continue to show this with our RPP aggressive growth program which is up and running in the four major European countries. Further in the U.S. the future of Ablatherm Robotech HIFU as evidence in the progress of our patient enrollment is unquestionably strong. Additionally our new HIFU product pipeline is also excitingly promising.

Second little Lithotripsy; the success of our next-generation Sonolith-I-sys is not proven with robust revenue growth in Q2. Third Chinamed; I am also please that our partnership with Chinamed in Europe is firmly on track and doing well. Finally I would to like reemphasize that our first half of 2008, there is no reflection on EDAPs strength and right future, over to Marc.

Marc Oczachowski

Thank you, Philippe, and thank you everyone for joining us on our second quarter 2008 earnings call. We are encouraged by our Lithotripsy sales growth during the second quarter that has risen by the continued penetration of our next-generation Sonolith I-Sys device.

As outlined in our release quarterly totally lithotripsy revenue increased 47.9% sequentially reflecting the anticipated higher than growth machine sales consistent with our first quarter guidance. After reviewing our strong performance in lithotripsy, I will outline some of our sales and marketing initiatives that we believe will stimulate growth of HIFU sales and then I will discuss our progress on patient enrolment in the U.S. ENLIGHT trial as we advance towards pre market approval submission to the FDA for our Ablatherm Robotic HIFU device.

Let me start with lithotripsy. During the second quarter we experienced strong revenue growth in our lithotripsy division highlighted a 47.9% sequential increase in sales. As mentioned in our earnings release we sold ten machines including two Sonolith I-Sys devices. As anticipated we converted much of our first quarter 2008 backlog into revenue during the second quarter.

At the beginning of the third quarter we have the backlog of eight machines including five Sonolith I-Sys devices. The strength of our current backlog at the mid point of the third quarter leaves us very well positioned to continue with capitalizing on this momentum and drive robust lithotripsy sales in the third and fourth quarter of 2008.

The enthusiasm for Sonolith I-Sys from our customers is enormous as the device provides superior imaging and software systems, as well as user friendly features associated with high efficacy treatment offering the best standards for the benefits of both the patient and the hospital.

Outside of the U.S. we remain focused on increasing the awareness and adoption of our products through aggressive sales and marketing initiatives. During the quarter we capitalized on the opportunities to further demonstrate the advantages of HIFU as a prudent therapeutic option by attending several events with the world’s most renowned national and international opinion leaders in Urology.

EDAP has a very strong presence at both the American Urological Association and the British Association of Urological Surgeons Annual Meeting in addition to other European National Urological Congress. Our presence at these events focus on increasing physician awareness and further clarifying the unique capabilities of the EDAP’s therapeutic ultrasound solution as well as the advantages of HIFU as a fast and proven treatment option for localized prostate cancer.

Both current and potential new users have the opportunity to access the technology and robotize approach while discussing Ablatherm-HIFU's clinical superiority. These events provided us with an excellent forum to showcase the advantages of our non-invasive ultrasound treatment.

We continue to be successful in increasing the awareness and adoption of our products by presenting extensive clinical results, peer-to-peer interactions among urologists and live demonstrations of Ablatherm-HIFU's proven technology. Throughout the second quarter the safety and efficacy of Ablatherm-HIFU's technology has been highlighted and published in several influential medical journals that were selected for review and presented at major medical conferences.

We are extremely pleased that one such placement in the French Association of Urology as designated HIFU as a care for salvage and primary care treatments for localized prostate cancer. This marks a clear milestone for our technology and serves as a cure recognition of HIFU’s clinical superiority and treatment potential. We plan to leverage this study and other scientific publications in addition to specialize and focus media placements throughout Europe to drive increased awareness of HIFU, as a valuable treatment option among current and potential users.

During the quarter, we also officially presented our @-REGISTRY program "Ablatherm Treatment"-Registry, the centralized database that collects follow-up data on patients who have undergone Ablatherm-HIFU Treatments. We believe the program launch will serve to further demonstrate the long-term effectiveness of primary and salvage HIFU treatment. We expect physicians to leverage this database for more convenience and wider access to the robust clinical data that supports the use of Ablatherm-HIFU.

Resulting publications will be used to consolidate and more precisely define the true role of HIFU as a proven and valid technology in the modern urology practice. Most importantly, the launch of our @-REGISTRY addresses the treatment and founding of U.K. prostate cancer patients in conformity with NICE guidelines. In the U.K. after computing the stage, NICE reconfirms it’s (inaudible) of Ablatherm HIFU with the @-REGISTRY.

Turning to sales for the quarter our Ablatherm revenue for positive business was relatively flat quart-over-quarter. In response to the stabilization of our RPP sales over the past two quarters, the management team supported by the Board of Directors has implemented an aggressive RPP action program to increase sales efforts in the second half of 2008.

This sales and marketing campaign partly based on the French Association of Urologies definition of HIFU as a standard of care will focus on driving increased educational and marketing programs targeted at patients and physicians in each of our key European markets. In addition, to our more active and aggressive sales and marketing initiatives, we are instituted more flexible and optimum sales programs.

We are confident our actions then will drive RPP sales to the next level and continue to grow beyond. Our efforts in Germany have already resulted in EDAP entering into new RPP contract we signed at our hospital in that deck and a longer-term fixed RPP contract with a well renowned Urological Clinic of the University of Heidelberg effective July 1.

Turning to our HIFU equipment sales while we faced a challenging year-over-year revenue comparison in our HIFU division HIFU equipment sales remains flat on the six month comparable basis in terms of units sold. The challenging comparison was due to the no sales of Ablatherm-HIFU device during the quarter versus two in the second quarter of 2007, which included one high priced system.

As we have stated in the past quarterly revenues maybe infected by fluctuating capital equipment sales from time-to-time. For the first six months of 2008, we have sold a total of two Ablatherm units equal to the number of HIFU devices sold during the same period last year. We are particularly enthusiastic entering the third quarter by the sale of one additional device to Russia in early August which is expected to drive capital equipment and total HIFU revenue in the back half of 2008 and assist in our efforts to increase penetration in Europe.

We have high expectation for the second half of the year and our confidence in the return of capital equipment sales due to our strong pipeline of projects. We are also seeing a positive trend in disposable Ablapak sales for the first six months ended June 30, 2008. Sales are up 15% over the same period of 2007. While this is simply a trend it does show our existing centers of other more Ablapak’s on the six month basis and others experiencing the higher recruitment of patients.

We continue to make progress this quarter with ENLIGHT, our U.S. clinical trial not only with the M.D. Anderson Cancer Center that treated its first localized cancer patients with Ablatherm robot HIFU. This well renowned centers initial treatment marked a significant milestone in our program development. ENLIGHT continues to attract patients and several men asking them to receive our minimally-invasive treatment in the coming weeks. We currently have IRB approval of 12 out of 13 HIFU Phase, and 10 out of 13 tri-effects.

We are pleased with the progress of our ENLIGHT patient awareness program, our marketing initiatives focused on driving patient (inaudible) are being successfully implemented and this is evident by the 68 patients that were referred to participating sites during the second quarter with certain patients in the first quarter.

The process of training and then treating patients is gaining attraction which demonstrates the growing momentum of our marketing initiatives. With this momentum driving the ENLIGHT trial we have seen an increase in the Phase of enrollments, which we believe is a reflection of the unmet needs for a minimally-invasive treatment approach to prostate cancer.

A total of 45 patients have been enrolled in the trial and we plan to treat more patients in the coming weeks. In fact, today we have a patient scheduled for the treatment at our clinical site in Hackensack in New Jersey. We are pleased to announce that two participating centers have treated their first patients in the Cryo arm of the ENLIGHT trial, which marks another significant milestone in our development program.

The treatment of these initial patients also highlights the momentum of our patient awareness program in rising accrual for both arms of the study. During the second quarter and into the back half of the year there are additional patients entering the enrolments training process and we expect continued treatments.

We believe the effects in enrollment is reflective of our efforts to increase patient awareness through our local media outreach and recently implemented drug foods programs targeting patient’s advocacy and center groups in cities where our clinical sites are located. HIFU is an emerging minimally-invasive treatment approach that is continuing to be recognized among the medical community and an effective treatment option with multiple potential applications.

We are seeing the growth in the adoption of HIFU technology highlighted by the French Association of Urology acknowledgement of HIFU as a standard of care for select primary care patients with localized prostate cancer. As existing medical and scientific literature continues to increase recognizing our long-term data and confirming both the safety and the efficacy of Ablatherm we believe HIFU technology is positioned to become the next standard of care in not only prostate cancer, but across other pathologies as well.

Our solid IP portfolio coupled with events experiencing HIFU and almost 17,000 treatments performed at more than 190 centers leaves EDAP strongly positioned to benefit from the expected growth of HIFU in the medical community. We will continue to leverage our expertise and strong pipeline of R&D projects aimed at achieving improved therapeutic solutions. To reiterate Philippe’s earlier comment, we are all extremely confident in EDAP’s bright future.

I will now turn the line over to Eric, who will review our second quarter 2008 financials; Eric.

Eric Soyer

Thank you, Marc, and good morning everyone. I will now discuss our second quarter 2008 financial results. Our second quarter financial results reflected seasonal HIFU device sales fluctuations, partially offset by strong revenue growth across our Lithotripsy business driven by the anticipated increase in machine sales.

Total revenue for the second quarter of 2008, was EUR 5 million compared to EUR 5.9 million for the same period of 2007. This figure was primarily impacted by a challenging year-over-year revenue comparison due to no sales of Ablatherm-HIFU system versus two in the second quarter of 2007 including high-priced units.

Total revenue for the HIFU division was EUR 1.6 million in the second quarter of 2008, compared to EUR 2.8 million in the same period of last year. On the six months comparable basis, HIFU capital equipment sales remained flat in terms of units sold with two machines sold. As Marc noted in his comments, we have implemented an aggressive RPP program in response to the stabilization of HIFU RPP sales in the first and second quarter of 2008 but we are confident our action plan will drive RPP sales in the second half of 2008.

Net sale for the Lithotripsy division, was EUR 3.3 million in the second quarter of 2008 compared to a EUR 3.1 million in the year ago period. Consistent with our first quarter 2008 statement indicating that seven machines were in backlog, including two Sonolith I-sys devices, the increase reflected higher machine sales as we converted much of the backlog into revenue and sold ten lithotripsy devices during the second quarter of 2008.

As Marc noted, our current backlog of eight machines including five Sonolith I-sys devices strongly position us to continue driving lithotripsy sales in the third and fourth quarter of 2008. Similar to the patents we experienced during the quarter we expect to convert the majority of our backlog into revenue during the third and fourth quarter of this year.

Our gross profit for the second quarter was EUR 1.9 million compared EUR 2.3 million in the year ago periods. Gross profit margin of 37.9% in the second quarter 2008, compared to 39.5% in the year ago periods was based on lower HIFU capital equipment sales. On the six months comparable basis gross profit margin remained flat at 41% while HIFU gross profit margin increased to 62.3% from 59.9% in the first six months of 2007.

During the second quarter we dedicated a portion of our resources to continue the progress with our U.S. ENLIGHT clinical trial for Ablatherm-HIFU to support FDA approval. This program resulted in the planned increase in our operating expenses to 3.3 million in the second quarter of 2008, flat from 3.1 million in the year ago periods.

Operating loss for the second quarter 2008 was 1.4 million versus 0.7 million in the year ago periods. While the net loss year-over-year was mainly attributable to lower gross profit to machine sales by EUR 0.4 million and EUR 0.4 million increase in the U.S. operations to exempt 58 clinical trials of Ablatherm-HIFU.

Net income in the second quarter 2008 was EUR 0.9 million or EUR 0.10 per diluted share, compared to a net loss of EUR 0.7 million or EUR 0.08 per diluted share in the second quarter of last year. Net income for the most recent quarter reflected a EUR 3 million non-cash financial gain related to the accounting adjustment of our convertible debt and outstanding warrants to fair value.

At June 30 this year, cash and cash equivalents including short-term treasury investments totaled EUR 13.4 million or $21.1 million. As expected during the second quarter, our cash burn was EUR 2.1 million including the 0.5 million for our FDA clinical trials, 0.2 million for debts in our REGISTRY payments, 0.2 million for capital expenditures and 1.2 million for our current Ukraine and Asian operational activities.

Again our cash position remains strong and consistent with our trends. Our clinical trial is fully funded and we are especially pleased with the recent momentum of our patient awareness programs which have continued to drive the true (inaudible).

With that, I will now turn the call back to the operator to answer any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator instructions) There are no questions at this time. I will now turn the conference back over to Mr. Marc Oczachowski for any closing remarks.

Marc Oczachowski

In conclusion, we are pleased with the strong sales performance of our lithotripsy division in the quarter and believe our reverse backlog as of June 30, 2008 leave us well position to drive increased sales growth in the second half of the year. We have identified a plan of action to increase our RPP sales efforts and are already encouraged by the sale of one Ablatherm-HIFU device in August. We continue to make progress on our U.S. ENLIGHT clinical trial and expect treatment volumes to ramp up as we moving to the third quarter. Thank you again all for attending the call.

Operator

This does conclude today’s conference call. You may now disconnect.

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