In surgery cutting ones access to the operative field risks infection and bleeding. Minimally invasive surgery reduces but does not eliminate these risks.
Knifeless surgery with highly intense focused ultrasound (HIFU) acts through the intact body surface eliminating the risks of knife, access, bleeding, infection and wound care.
An example of a company pioneering HIFU is EDAP which deals mainly with prostate cancer. In appropriate cases the procedure is effective, but simpler, less risky and cheaper than surgery.
Competiton from Sonacare and Profound has not interfered with EDAPs progress.
Knifeless HIFU-surgery is a disruptive innovation like computed tomography or the balloon catheter. Its growth potential is underestimated and undervalued.
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EDAP (NASDAQ:EDAP) commercializes HIFU (highly intense focused ultrasound) a new form of knifeless surgery, without incisions and scars in the treatment of prostate cancer, endometriosis and liver metastasis. The same technology is applied by other companies in many other fields. According to the very low valuation of EDAP the investing community seems not yet aware of the game-changing nature and the enormous potential of HIFU, which I will set out to explain from a physician's perspective.
The Risks of Surgery
As a medical student in the late sixties, I spent many free hours in the library of the Zürich University Hospital. In a British book about the physiology of surgery, I learned that the actual procedure - such as removing the gallbladder or appendix – is not very problematic.
The danger lies more in opening the body and creating access to the surgical area: this is an injury with the risk of blood loss and infection. There is also the risk of anesthesia. Twenty years ago, Intuitive Surgical (ISRG) introduced the very expensive Da Vinci surgical robot, which performs complex operations through pencil-sized orifices. Because of the above reading I immediately saw the potential, although experts and stock market were reluctant. I invested as much as I could, the stock value increased slowly but a hundredfold.
A Quantum Leap
In the meantime, a new technology makes surgical access and knife completely superfluous in many cases: HIFU, the high-intensity, focused ultrasound. Ultrasound waves are focused through the intact body surface like through a lens and thereby concentrated at a point inside the body where the tissue is killed by heating over 50 and up to 85 degrees Celsius. The skin not being opened there is no need for sterility, asepsis, disinfection and wound care, sometimes not even for an operating theatre or anesthesia. This saves costs.
HIFU technology is a quantum leap, like the balloon catheter or computed tomography and it is disrupting old routines. Due to its novelty adoption was reluctant but it now steadily gains traction and general acceptance among physicians and patients worldwide.
HIFU is developed, applied and commercialized by several companies in many different disciplines: In prostate cancer by French EDAP and US Sonacare. For benign breast and thyroid tumors and varicose veins by French Theraclion (ALTHE.PA). For uterine fibroids and bone metastases by Canadian Profound Medical (PROF) among others. For elevated eye pressure (glaucoma) by French Eye Tech Care and for brain disease by Insightec in Israel among others. For a detailed overview see Fusfoundation's voluminous State of the Field-Report 2020.
Let's focus on the French company EDAP as an example for this exciting global frontier.
EDAP as an Example
EDAP is part and offspring of a technology cluster in Lyon, France which grew around the state laboratory LabTAU (Laboratory for therapeutic applications of Ultrasound) founded 1985 by INSERM (The French National Institute for Health and Medical Research ) and the department of experimental surgery of Lyon university in cooperation with the university's engineering departments. From 1990 on LabTAU researched applications of ultrasound, first for vascular imaging and for crushing of kidney stones. The latter technology was then miniaturized for treatment of prostate cancer. EDAP from 2000 became the commercial arm of these endeavors. Later spinoffs include Theraclion and Eye Tech Care mentioned above.
While EDAP's kidney stone crushers became a solid base with 700 installed devices worldwide the therapy of prostate cancer went through several steps, first with destructive treatment of the whole or half the gland and side effects similar to surgery like erectile dysfunction and trouble with voiding.
These early problems were eliminated since 2014 with EDAP's latest generation device "Focal One." The intervention now became accurate to the millimeter, robotically guided by realtime ultrasound imaging which is fused with pre-existing 3D-biopsy data and MRI.
Focal One can eliminate localized prostate cancer and in appropriate cases cancer control with HIFU is as good as with surgery, but largely without the latter's dreaded surgical complications such as impotence and urinary incontinence. A first study was later confirmed also in the US and fifteen more prostate/HIFU studies are now recruiting.
Focal One was rapidly approved and adopted in Europe and worldwide outside USA and UK (see map, which however does not show all installations). Tens of thousands of patients have been treated in many renowned centers in Europe and Asia.
HIFU for prostate cancer is not only a zero-sum game which cannibalizes other surgical treatments. It expands the market by reaching a new segment of patients with localized and relatively benign cancer, which did not yet justify the risk of surgery. Up to now these were managed by "watchful waiting" with controls and repeated biopsies, but with HIFU's low risk they now can hopefully get rid of their cancer once and for all.
First reception in the US was rather hostile and FDA-proceedings tortuous, as described by EDAP's CEO in his paper about "How to survive MedTech's Death Valley." But now they are approved by the FDA and implanted in several US academic centers, e.g. New York, New Orleans, Houston and Southern California. From Jan. 1, 2021, they have a CPT-code which allows insurance compensation also in the US where sales now seem to pick up.
In private conversations one repeatedly hears that there is resistance to adoption by physicians and hospital administrators who do not like to cannibalize todays more expensive procedures. But this will be antagonized by patient demand as was the case in Intuitive Surgical. Patients will not consent to remain impotent or incontinent after treatment - a compelling argument.
The company is not really a start-up, because their kidney stone business is mature and profitable since 15 years. The rapidly increasing HIFU income is generated through sale of devices, maintenance and by consumables, each HIFU-procedure bringing a revenue of about US$1000. Since this year EDAP also has the exclusive and worldwide representation of ExactVu, an ultrasound imaging device for guiding prostate biopsies which has a resolution comparable to MRI and is often sold bundled with Focal One. Royalties from Theraclion generate some small revenue.
EDAP had very high R+D and marketing expenses for HIFU/Focal One. But after having seen an increase in sales and revenues for years the company reached profitability last year with record revenues of €44.9 million, representing a 14.6% year-over-year growth. HIFU full year 2019 revenue growth was 28% driven by 54% growth in US installed base. There was a record 46.8% gross profit margin driven by HIFU growth and the full 2019 was profitable with an operating income of €2.2 million, the year ending with a solid balance sheet of €20.9 million (USD 23.4 million) in cash, €1.4 million of positive cash flow generated in 2019.
EDAP weathered the COVID-crisis rather well. While seeing a reduction in procedures in the first two quarters of 2020 they completed multiple Focal One sales to renowned U.S. and international health care institutions. They announced the first two U.S. publications in the Journal of Urology detailing positive outcomes from U.S. studies of HIFU for the successful partial-gland ablation of prostate tissue and maintained a strong cash position of EUR 15.7 million (USD 17.7 million) as of June 30, 2020. During the earnings conference call the notably cautious CEO saw signs that the key markets in the U.S. and elsewhere were returning to a more normalized environment and was optimistic that a gradual return to pre-pandemic procedure volumes, coupled with continued sales successes, would set the stage for improved financial results in the back half of the year and a strong 2021.
As of Oct. 15th, EDAP is valued around 130 million US dollars. A buyout is unlikely because the patents were developed and are shared with the state laboratory LabTAU in Lyon and the sister companies of the cluster.
Competition comes mainly from two companies: US Sonacare, which is not traded at the stock exchange and Canadian Profound Medical with their transurethral ultrasound ablation of the prostate (TULSA).
Sonacare with its Sonablate 500 concentrates on the US and UK markets and has relatively few devices installed in other regions (see map). This shows that in open markets EDAP's product gets the upper hand. And EDAPs several US sales mean that they are also competitive in the US.
Profound Medical's transurethral ultrasound ablation of the prostate (TULSA) was pioneered by engineering behemoth Philips and technically it is wonderful: They use not focused ultrasound, but parallel directional ultrasound which is emitted by a small transurethral probe guided by real time MRI. The parallel Ultrasound is not concentrated in one point but bundled like the rays coming from a car headlight and they drill so to say their path into the tissue as far as one lets them go. That's why TULSA needs urethral cooling so as not to burn the urethra, as well as local tissue temperature measurement, to control the reach and extent of the tissue destruction. With HIFU, heating and tissue destruction remains concentrated in a predetermined point, therefore urethral cooling and tissue temperature monitoring is neither essential nor an advantage. TULSA has a distinctive advantage in the case of very big prostates where it can treat the anterior parts which would be beyond the reach of HIFU.
There are, however, several caveats: In their advertising Profound Medical give horrible and misleadingly high complication rates for their HIFU-competition, e.g. erectile dysfunction in 58 percent. These numbers are often quoted in the internet but they are obsolete because they apply to early devices and not to current HIFU-machines. Moreover, Profound Medical is years behind EDAP with fewer studies, fewer installations, fewer procedures, no insurance coverage, small revenues and big losses.
Moreover, their procedure lasts longer and needs not only a surgeon, but real time MRI and a radiologist during the procedure, which is expensive. According to CFO Davidson in the second quarter earnings call 2020 the hardware alone costs over US-$ 7700 on a per procedure basis, bringing the price of the whole treatment to US-$ 30'000 compared to around US-$ 25'000 for Focal one. Therefore, Profounds market might be narrower than the HIFU-market, limited to special cases in academic and highly specialized centers. In view of these limitations one has some difficulty to understand their current high valuation of US-$ 330 million compared to EDAPs mere US-$ 130 million. One could argue that it should rather be the inverse.
EDAP has survived "MedTech's Death Valley." Its prostate cancer treatment is now implanted in top academic and teaching centers worldwide despite competition. Other institutions must follow if they want to remain competitive. The endometriosis and liver cancer trials are well underway and first results are convincing. Regulatory and patent hurdles for new competitors are very high. One can hardly imagine how further growth could be impeded by company-specific factors or factors inside the MedTech and medical ecosystems.
The main downside seems to be the global economic, ecological and financial fragility: Economies stumble worldwide, being only maintained in "dead man walking"-style by fraudulent money printing. The danger of sectorial or global collapse is omnipresent. This said the health industry was relatively safe in previous crises and one can hope that its growth sectors can maintain some value and dynamics even in face of Armageddon.
This is about growth. To estimate the potential, one can take the example of Intuitive Surgical whose Da Vinci surgical robot was also a disruptive technology. From 2000 to 2004 their shares hovered below 10 around 7 and from then they rose to over 700 today. Although the robotic procedure is much more expensive patient demand forced the introduction.
Compare HIFU: The procedure is not anymore minimally invasive like ISRG's Da Vinci but not invasive at all, that's not only a quantitative but a qualitative leap. Unlike ISRG's Da Vinci the method is generally not more, but less expensive than surgery. This means that there will be less resistance to reimbursement by insurances.
Demand will be driven by patients who do not want to remain impotent or incontinent after treatment, a compelling argument. Presently, EDAP is successfully adapting HIFU for endometriosis and liver metastases, both huge patient segments with unmet needs. Given the success with prostate the hurdles for adopting will be significantly lower.
EDAP is now at the stage Intuitive surgical was in 2004: If the evolution of Intuitive Surgical is anything to go by the shares of EDAP will follow a hockey-stick curve and multiply their value in a relatively short term, say the next two years and then more later. EDAPs shares cost so little - somewhat over US$4 - that they can be viewed as options on an increasing share value.
Disclosure: I am/we are long EDAP. 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.