EDAP TMS S.A. (EDAP) CEO Marc Oczachowski on Q3 2019 Results - Earnings Call Transcript

Nov. 14, 2019 11:38 AM ETEDAP TMS S.A. (EDAP)
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EDAP TMS S.A. (NASDAQ:EDAP) Q3 2019 Earnings Conference Call November 14, 2019 8:30 AM ET

Company Participants

Glenn Garmont - Investor Relations

Philippe Chauveau - Chairman

Marc Oczachowski - Chief Executive Officer

François Dietsch - Chief Financial Officer

Conference Call Participants

Brooks O'Neil - Lake Street Capital Markets

Sean Lee - H.C. Wainwright

Operator

Greetings, welcome to the EDAP TMS Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please not, this conference is being recorded.

I will now turn the conference over to your host Glenn Garmont, Investor Relations. Mr. Garmont, you may begin.

Glenn Garmont

Thank you, [Arnold]. Good morning and thank you for joining us for the EDAP TMS third quarter 2019 financial and operating results conference call. On today's call, we’ll hear from Philippe Chauveau, Chairman of the Board; Marc Oczachowski, Chief Executive Officer; and François 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'd now like to turn the call over to EDAP's Chairman, Philippe Chauveau. Philippe?

Philippe Chauveau

Thank you, Glenn. Thank you everyone for joining us today. During this third quarter, we were able to sustain the significant momentum that carried us through the first half of the year. We recorded yet another strong quarter in terms of revenue, our strongest third quarter to date and drove meaningful gross margin expansion that allowed us to achieve our fourth consecutive quarter of profitability.

As Mark will discuss in more detail shortly, we achieved these strong results largely as a result of the continued adoption of Focal One among leading health care executions having sold an additional two units during the quarter and none through the first nine months of the year. All our leading indicators remain strong, particularly our growing backlog of potential Focal One adopters in the U.S.

Based on our year to date results, we believe we are well-positioned to finish the year strong with a strong tailwind entering year 2020. As I said last quarter, but best repeating, we remain excited about the potential of Focal One. To disrupt the current prostate cancer treatment paradigm and believe we are well-positioned to deliver strong and long-term value to our shareholders while offering superior outcomes to prostate cancer patients.

With that, I would like to turn over the call to EDAP’s Chief Executive Officer, Marc Oczachowski. Marc?

Marc Oczachowski

Thank you, Philippe. Good morning and thank you for joining our call. As Philippe highlighted, we had a strong third quarter. This is reflected not just in the financial results, but also the progress that we continue to make in increasing our Focal One market penetration in the U.S. and worldwide.

Our results through the first nine months of the year confirm that we are successfully repeating on a commercial plan by generating high growth in both our revenues and margins. Everything looks to be in order for a strong end of the year and significant momentum entering 2020.

We are very pleased with the high rate of growth in our year to date HIFU revenues at the end of the third quarter having increased 67% as compared to the same nine months per year of 2018. This performance was driven by a combination of both machine revenue growth and treatment revenue growth.

The strong traction and momentum during the quarter was mainly due to our continued progress penetrating the U.S. market. The major highlights this quarter was definitely the sale of the Focal One unit to the world renowned Mayo Clinic. The number of machines sold is an important metric, but the quality of each institution also demonstrates the great potential of Focal One.

In this case, this is a very high quality deal and certainly resonate and help influence other centers with which we're currently discussing Focal One deal. This is also fully in-line with a strategy of targeting restaurants and academic centers to continue to build Focal One’s credibility and position in the treatment of prostate cancer worldwide. We continue our efforts to add additional world-class hospitals and centers to our prestigious list of Focal One users, both in the U.S. and abroad.

Taking a step back, and for those who may be new to the story, HIFU allows for the targeted ablation of cancerous prostate tissue, thereby turning the organs and avoiding the very serious side effects that results from surgical interventions, including incontinence and impotence. So a hospital that can offer the latest HIFU technology within the urology departments will be differentiated from other area hospitals that do not offer this capability.

Indeed, the cost benefit analysis for a hospital is quite compelling, in our view. As a reminder, our HIFU business generates a higher gross margin, which has led to a significant expansion of overall gross margin. The gross margin leverage has brought to our bottom line and driven our fourth consecutive quarter of profitability for EDAP.

Our goal is to continue to improve these metrics and further enhance our profitability as the mix of HIFU revenue to overall revenue continues to grow. Beyond the U.S. market, we've continued to expand strong momentum with Focal One. In particular, during the third quarter, we finalized the sale and delivery of the Focal One device to Moscow State University of Medicine with Professor Dmitry Pushkar, Head Professor of Urology, who is also considered to be the leading urology expert in Russia.

This is a very high-quality sale, too, as this center is certainly one of the top urology centers in Russia and one with international influence as well. Of note, this is our first Focal One sell in Russia, where the potential of HIFU is well known. Our first generation of HIFU devices very – we’re very successful in Russia, as we have an installed base of approximately 20 devices there. We expect to see more deals in this part of the world in the coming months.

HIFU is the most advanced ablation technology available, and we remain focused on further developing this technology. With HIFU continuing to gain recognition among surgeons and with the enhanced awareness of the Focal One system since gaining FDA approval last year, we're also focused on duplicating the HIFU performance through other ablation indication.

[As it's just profusely,] we're making good progress in our clinical investigation using Focal One to treat deep rectal endometriosis. And we are in ongoing discussions with the French authorities to get approval to initiate a Phase II clinical trial, designed to show the safety and efficacy of our technology. We will keep the market updated on our progress and the start of the history in our future HIFU updates.

We believe the [city] could start early next year. We are confident that our Focal One device and its unique HIFU technology will bring a non-invasive, safe and executive solution to these many women affected with endometriosis. The goal here again is to potentially avoid a difficult and highly invasive surgical procedure and minimize the Ablatherm side effects.

Also, just a few weeks ago, we showcased our brand-new Endo-UP Endourology Platform at the 2019 World Congress of Endourology [indiscernible] in Abu Dhabi. Endo-UP is a new conceptual product designed for the complete management of urinary stones. The treatment paradigm for urinary stones continues to evolve, and with Endo-UP, we have combined a fully dedicated Endourology table with X-ray and ultrasound imaging systems, an integrated Shockwave generator and Holmium laser source.

This is a unique all-in-one concept that will allow surgeons to choose from among multiple stone treatment strategies, including Extracorporeal Shockwave Lithotripsy, Ureteroscopy, Percutaneous Nephrolithotomy or even a combination of approaches.

We believe the idea of adding all the tools instantaneously available to surgeons, providing surgeons with the ability to select the best approach or combination of approaches depending on the patient and the stone, represents a true breakthrough and furthermore reinforces of position as a leading innovator in the area of therapeutic ultrasound.

The first presentation of this new and innovative concept at the WCE, a gathering of leading experts in Endourology and lithotripsy from around the world was very successful, and we received a lot of great feedback from these thought leaders. We validated the great potential of Endo-UP concept and now our R&D, manufacturing and regulatory teams are working tirelessly to advance this from concept stage to a commercialized product, which takes to get the first units produced and sold in 2020.

Turning to a UDS division’s financial performance, Q3 was also strong with 21% growth in revenue. This growth was driven by both our extra-corporeal shockwave lithotripsy and distribution revenues. UDS available revenue increased a rather 24% during the third quarter of 2019, as compared to the same period in 2018.

Finally, overall, global revenues increased 27% at the end of the third quarter of 2019, as compared to the same period of last year, and our gross margin driven by the strong HIFU performance increased from 42% to 48%. Again, the third quarter of 2019 was a fourth consecutive quarter of profitability.

In summary, we are very pleased with every aspect of our third quarter results. The reported revenue growth and gross margin extensions speak to the significant unmet medical need that we are able to address with Focal One. We're excited with our current growth trajectory. And with further clarity on reimbursement, we anticipate good things to come.

And now, our CFO, François Dietsch, will provide a review of a financial results. François?

François Dietsch

Thank you, Marc, and god morning, everyone. Please note that all the figures, except for the percentages, are in euros. For conversion purposes, our average euro-dollar exchange rate was $1.1008 for the third quarter of 2019 and $1.1201 for the first nine months of 2019.

As Marc alluded to earlier, our third quarter financial results saw the continuation of many very positive trends that have characterized our year so far. Of particular note is the continued strong growth in our HIFU business, which contributed to record revenue results for the third quarter, while also raising significant gross margin expansion and maintaining bottom line of stability.

Getting into the numbers, total revenue for the first nine months of 2019 were €32.9 million, a 27.1% increase, compared to the same period of 2018, which was driven by a 67.8% HIFU growth and a 13% increase in UDS revenue.

Gross margin for the first nine months of 2019 were 48.2%, an increase of 5.9 percentage points, as compared to the first nine months of 2018. This growth was driven mainly by the increase in the percentage of HIFU revenues to overall revenue. As a reminder, our HIFU business carried higher gross margin. And as HIFU revenue continues to increase as a percentage of our overall revenue, we would expect to see overall gross margin continue to expand nicely.

Operating profit for the first nine months of 2019 was €2.1 million, compared to an operating loss of €2.2 million in the first nine months of 2018. Net income for the first nine months of 2019 was €2.5 million or €0.09 of earnings per diluted share, as compared to a net loss of €1.4 million, or a loss of €0.05 per diluted share in the year-ago period.

Turning to the third quarter of 2019, total revenue for third quarter was €10.3 million, an increase of 26.7% versus €8.1 million in Q3 2018. Again, this was a new record level for the third quarter.

During the quarter, we sold two HIFU devices close to very prestigious and influential healthcare centers in the U.S. and Moscow. Reference centers are a critical part of our non-core strategy and we believe is to Focal One placement will add significant tailwind, as we continue to build our sales pipeline, both in the U.S. and globally. By comparison, we saw zero Focal One unit during the third quarter of 2018.

Gross profit for the third quarter of 2019 was €4.7 million, compared to €3.4 million for the year-ago period. Gross profit margin on net sales was 45.3% in the third quarter of 2019, compared to 41.5% in the year-ago period. As noted earlier, the but best repeating the increase in gross profit contributed to our fourth consecutive quarter of overall company profitability.

Operating profit for the third quarter of 2019 was €0.3 million, compared to the operating loss of €0.7 million in the third quarter of 2018. Net income for the third quarter of 2019 was €0.8 million or earnings of €0.03 per diluted share, as compared to a net loss of €0.7 million, or loss of €0.03 per diluted share in the year-ago period.

Lastly, we finished the third quarter of 2019 with a strong cash balance of €17.7 million or US$19.3 million using a euro-dollar conversion rate of $1.0905.

Let me now turn the call back to Marc.

Marc Oczachowski

Thank you, François. Again, we are very excited and encouraged by the following: one, the high growth rate of HIFU revenues; two, the fourth consecutive quarter of profitability for EDAP; and three, a full pipeline of potential sales activity, which we believe sets the stage for strong full-year results and positive momentum entering 2020.

Again, we remain in the early stages of commercializing Focal One, but the positive feedback we continue to receive from urologists for this novel technology continues to be encouraging, as we focus on growing this franchise in the U.S. and in key markets around the world.

I will now turn the call to question-and-answer. Operator?

Question-and-Answer Session

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Brooks O'Neil, Lake Street Capital Markets. Please proceed with your question.

Brooks O'Neil

Thank you, and good morning. Congratulations on the terrific results, and I'm particularly excited that other people in Minnesota can recognize the power of your technology.

Marc Oczachowski

Good morning, Brooks. Thanks.

Brooks O'Neil

Yes. So, Marc, can you give us a little more color on the Mayo order? I'm particularly interested to know sort of a little color about the number or the sort of the state of the doctor advocates within the Mayo in terms of enthusiasm for your machine and how that might translate to other reference centers around the United States?

Marc Oczachowski

Well, I mean, we did a regular sale to the Mayo Clinic and actually, the machine was delivered to the Scottsdale Mayo Clinic in close to Phoenix. This is where they apparently had the most volume of prostate cancer treatments. Of course, I mean, they were very excited and enthusiastic in giving the machine, that's why they signed the contract and purchase order.

We are now very anxious and very excited in getting started in the first cases. We don't have yet fixed date for that, but the machine was delivered and installed and we waiting for them to get trained and start the first patient, but there is a very high-level of excitement among the urologist of Mayo Clinic and more specifically, the team in Scottsdale.

Brooks O'Neil

Great. That's very helpful. Secondly, you mentioned, obviously, continued progress with endometriosis and if I was listening correctly it sounded like your primary effort, right [indiscernible] concentrated in France, do you have plans to work on that indication in the U.S. anytime soon?

Marc Oczachowski

Absolutely, I mean the ambition again here is global, but again the clinical trials for logistic reasons and research reasons as well are being done in France and as I said, we are discussing with the French authorities to get the approval of starting our second study Phase 2 trial here in France and we have good hope that this could get started somewhere next year probably at the beginning of the year.

Brooks O'Neil

Okay. And then perhaps for François, congratulations on the profitability and the continued sequence in profitability, do you think you can maintain profitability as you begin to scale the HIFU business over the next 12 months?

François Dietsch

As explained, the profitability is directly linked with the expansion of HIFU and the gross. We have a year or so, as long as the momentum on HIFU will be maintained we will maintain profitability.

Brooks O'Neil

Okay great. Thank you very much and again, congratulations.

Marc Oczachowski

Thanks, Brooks.

Operator

Our next question is from Sean Lee, H.C. Wainwright. Please proceed with your question.

Sean Lee

Good morning guys, and thanks for taking my questions. My first question is on the Endo-UP system, it just sounds like a very innovative and convenient way for [indiscernible] so, what additional steps are there before you can bring this up to production and commercialization?

Marc Oczachowski

Like I said, we were very pleased to have the Endo-UP presented in the quite specialized work [indiscernible] few weeks ago. Now, we are polishing I would say the end of the development working on the regulatory approvals of [C-markings] and others so that we can get it sold and commercialized. So, these are the next steps to get it sort of proof for commercialization, which again we expect to get that – so we can get started and deliver the first unit in 2020.

Sean Lee

Okay. So, you expect to file for [C-mark] soon?

Marc Oczachowski

Yes.

Sean Lee

Okay, great. And my second question is on the CPT hold for HIFU, I know you guys were assigned a CPT hold by the American Medical Association back in June, so I was wondering what is the progress towards on that front to getting a reimbursement, especially from the CMS? Have you been collecting data on valuation, what’s the process expected to be like? If you could provide a bit more color that would be great?

Marc Oczachowski

Sure. We are not collecting data. Actually, that’s being done by the AUA and the AMA, I mean that’s part of the process and we noted in doing that of the summer and we’ve got, I mean so far we got no feedback on the valuation or the registration itself, but we know that that is a work in progress and we will definitely bid the market as soon as we have some information about that. The next milestone would be officially the inscription of – in the security book of that security code and that will be the CPT book registration will be next year in 2020. So, we will also keep the market updated as soon as we know something there.

Sean Lee

Great. That’s all I have. Thanks again for taking my questions.

Marc Oczachowski

Thanks Sean.

Operator

[Operator Instructions] Our next question is from [Scott Gamble, Gardner Financial]. Please proceed with your question.

Unidentified Analyst

Good morning. I have two questions. I know it is early, but with some of the HIFU systems you placed earlier this year, do you have any – have you noticed any change in utilization rates? Can you talk about that a bit?

Marc Oczachowski

Well usually it stopped. When a new system is based in the hospital, they usually get started with the training program, which again is pretty straight-forward and easy, and they usually have a little time where they wait to see the first results and the first feedback of the first safety and then they ramp up the number of cases and that’s what we are starting as well in the U.S.

Unidentified Analyst

So, we are still in that bill segment of the time.

Marc Oczachowski

Sure.

Unidentified Analyst

Can you mention as to when you might or you would expect to see, again some of these early adopters kind of move into where now they are – everyone is trained and you start to see or able to start measuring utilization rate consistently? Do you think that’s going to occur next year sometime for instance?

Marc Oczachowski

Sure. And again as we are building the markets, it’s going to be sort of linear because we will have experimented users and we will have also new users so it’s going to be a combination of both, but we definitely again see the increase in utilization as they get more – as they get first trained and then more confident in the use of the device.

Unidentified Analyst

Okay. My other question is about with the – some clinical work coming up in the ramping on your sales with Focal One, do you feel comfortable with the cash position the company has at this time. Do you think that’s adequate to carry us through this next year?

Marc Oczachowski

Yes. Like we’ve been saying in the past, I mean, we had a pretty solid cash position of about – almost $20 million, which get us – cash efficient to run our current marketing sales and development programs.

Unidentified Analyst

Okay, great. Thank you.

Marc Oczachowski

Thanks Scott.

Operator

We have reached the end of the question and answer session and I will now turn the call back over to Marc Oczachowski for closing comments.

Marc Oczachowski

Well, thank you operator and thank you again everyone for joining us today on our third quarter conference call. We are looking forward to a very active and strong fourth quarter and we will keep the market updated as we have some further views and announcements. Thank you very much and you all have a good day.

Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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