EDAP TMS: A Little Medical Growth Gem

Summary

• The company is already growing sequentially, even if 2020 revenues were down on those in 2019.
• Still small in relation to a large and growing TAM, and working on an attractive business model, this is an attractive growth story.
• While the shares aren't cheap, the company is already generating cash and 2021 will likely be better than 2020 due to a receding pandemic and reimbursement tailwind.
• Looking for a portfolio of ideas like this one? Members of SHU Growth Portfolio get exclusive access to our model portfolio. Learn More »

We have been bullish on the shares of EDAP (NASDAQ:EDAP), a French medical device maker. We bought them for our old public portfolio at $2.36 in April last year and when we started our marketplace SHU Growth Portfolio last July, we added EDAP at $3.75 in late August and we haven't had regrets since:

The bull case is fairly straightforward:

• The company produces devices for HIFU (High-Intensity Focused Ultrasound) treatment for prostate cancer
• HIFU can be used against other ailments
• The market is still in the early innings
• Device sales produce recurring revenues in service and parts
• There is progress on the payor front

Much of the fundamentals have been dealt with in previous articles (see here, here and here) so we will be brief here. The company has three divisions:

Source: company IR presentation

Besides their HIFU ablation device the Focal One, they also have some other devices they sell from their ESWL (Extracorporeal Shock Wave Lithotripsy) legacy business (like the Sonolith i-sys) used to remove stones from urinary tracts. Then there is the ExactVu, which is complementary to the Focal One (Q4CC):

the ExactVu has a lot of different capabilities, including being a normal ultrasound, being a device that does MRI fusion images as well as targeted biopsy and then the micro-ultrasound capabilities. So there is reimbursement for the 2 first, but not yet a dedicated reimbursement for the micro-ultrasound, and this is something we're working on.

Focal One + ExactVu

The market opportunity is really pretty large:

Source: company IR presentation

It's non-invasive, precise, produces little to no side effects and the efficacy is often higher compared to the current standard treatment, radical prostatectomy. You can read the interim result of the latest big study here.

Source: company IR presentation

Of the 1.275M new prostate cancer cases a year, 220K are suitable for HIFU treatment of which the Focal One could treat 165K. Management estimates the TAM for the company's HIFU treatment as 3000 devices (which sell for $80K in the US and $60K in the rest of the world) or roughly $3B.

Add to that potential annual revenue (service, disposables, 10% renewal) of $595M and you see why the company has only scratched the surface.

But they are scratching some more as the company sold no less than 8 new HIFU devices (6 Focal One and 2 older Ablatherm) in Q4, but that is inflated as Q4 is seasonally the strongest quarter and there will also have been some catch-up demand as a result of the pandemic.

The momentum has apparently not carried over to Q1 also because the pandemic was still very much present in much of the world and hospitals were hesitant with CapEx. But be aware that quarters can be lumpy and the Covid situation can clear with the advancement of the vaccines.

The company entered into a distribution deal with Ab Medica for the Italian market, the fourth largest medical device market in Europe.

There is also progress from the US payor front as the company's CPT code for Medicare went into effect on January 1, with a 5% increase to $4500 per procedure versus 2020 and an average physician payment of $996, from the Q4CC:

As a reference, a comparable established minimally invasive therapies for prostate cancer, cryotherapy and brachytherapy yield an average payment of $786 and $738, respectively, under the same setting and patient conditions. A radical prostatectomy would pay $1,188 or $1,464 is performed laparoscopically.

Management is also partnering with two reimbursement consultancies, MTP and Argenta Advisors, in order to get the ball rolling for reimbursement for Medicaid and commercially insured front.

The company so far has focused its US marketing efforts on Tier 1 hospitals, but in the face of a receding pandemic and a more favorable reimbursement backdrop, it's expanding to Tier 2 and 3 hospitals, casting a wider net.

Other conditions

Source: company IR presentation

These are:

• Rectal endometriosis
• Liver cancer
• Pancreatic cancer
• Breast cancer
• Gynecology
• Basically, HIFU is a therapeutic tool for any condition requiring soft tissue ablation

These are all more or less in the embryonic stage, apart from the treatment of deep invasive endometriosis, where the French health authority had approved an upcoming phase II clinical trial last August.

That trial got delayed by Covid (and given the recent resurgence in France there might be some new delays, we speculate), but management is recruiting patients for that trial now, with 10 patients already selected.

Q4 results

Q4 results weren't a big surprise given that the company had already pre-announced these some while ago with revenue increasing 28.2% y/y to EUR15.4M and HIFU business revenue growing 50.8% at EUR4.4M.

The LITHO business grew 10.6% to EUR4.6M while the Distribution business increased by 29.7% at EUR6.4M and gross profit increasing by EUR1.9M to EUR7M.

For the whole year, revenues still declined by 7.2% as a result of the pandemic but the company has come out pretty well and even managed to produce EUR3.8M in positive cash flow, ending the year with a strong EUR24.7M ($30.2M) balance and EUR3.8M in debt.

Valuation

With a market capitalization of $280M, an EV of $255M, and sales of $47.8M, the shares sell at a pretty substantial multiple for a device maker with an EV/S of 5.3.

Analysts expect an EPS this year of $0.21 but that hasn't been updated for the Q4 results (although these didn't vary much from the preannouncement) so the multiple is pretty steep here as well.

Conclusion

The shares aren't cheap, but the company is set to grow again this year on the back of a receding pandemic and a more favorable US payer backdrop. Given that the company is still tiny in relation to its market opportunity and already cash flow positive and has an attractive business model generating some recurring revenues, we see further gradual upside for the shares.

Longer-term, the bull case is likely to be strengthened by the inclusion of other treatments besides prostate cancer.

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Lukas Fierz]

Update: Reason for the sluggish adoption of HIFU in prostate cancer.

Mark Carol, MD, former CEO of Sonacare and now president of the Focused Ultrasound Foundation www.youtube.com/...

“Every hospital performing the (new) procedure must create a “charge master” or bill, reflecting an accurate and complete cost of performing the procedure, if the procedure is to have a payment assigned to it sufficient to cover the cost of the procedure. This cannot be emphasised enough (Remark: Carol earlier in the video says that if even only one hospital does not charge enough this can have the effect that the price is fixed too low FOR ALL HOSPITALS, so nobody can coer tehir costs.)

Prostate HIFU is a case in point in the United States, where disease control rates are equivalent to standards of care like surgery and radiation therapy, but with a side effect profile that is vastly superior, and potential cost savings that range in the billions of dollars if it were used whenever it was appropriate to use it But only about 3000 procedures have been done using this technology since its regulatory authorisation in 2015. This can be laid squarely at the feet of payment not being high enough to allow hospitals doing it to recoup the costs of the procedure and therefore not allowing the procedure to be done.”

[Kevin79]

@Lukas Fierz So it works but it’s currently unprofitable potentially nationwide if even one hospital messes up the charge sheet. This is quite the crummy situation and sounds like it can continue for some time. An investor pitfall if you will

[Lukas Fierz]

@Kevin79 I hope that the cc will give some enlightenment.

[Lukas Fierz]

EDAP updated their website for global management positions and it seems they hired Mohan Nathan as VP of market development. He was also a long standing Intuitive Surgical employee and was also VP of marketing for transenterix.

Together with former ISRG (Intuitive Surgical) executive Ryan Rhodes as Chief Executive Officer of EDAP Technomed Inc., the US subsidiary they seem now to have the manpower for a serious US-push.

[ChrisForte]

@Lukas Fierz "...they seem now to have the manpower for a serious US-push." Spot on Lukas. EDAP has the right technology at the right time, they just need to get US marketing ramped up and they will be very successful. The heavy lifting of developing and proving their technology has been done, now it's time to get it into the hands of the docs. This is a key inflection point all small medical device companies face. It's make or break time. As for investors this is a great time to get positioned.

[Lukas Fierz]

Update:
Dr.Silver from New York explains Focal One and ExactVu: www.kevinmd.com/...

[Lukas Fierz]

News from competition: Sonacare changes name to Sonablate, has new CEO: board member Richard Yang. They raised 70 mio to push international and China sales. HIFU is approved in China for prostatic cancer, while approval for benign prostatic hyperplasia is imminent.
One can add that company has an estimated number of 49 employees (EDAP 250) and its market penetration outside US and UK is negligible up to now (high for EDAP).
sonacaremedical.com/...

[GreenGrowthGeek]

Stock price action over the past 4 months or so is not representing the growth and progress of the company. The recent appointment of a U S CEO is Bullish as well--he's a very good choice for continued market penetration.

[GreenGrowthGeek]

Brutal several months for investors in very small company stocks. Patience with this name--it's a long term winner without a doubt. The growth and the opportunity in this name are spectacular.

[Lukas Fierz]

Update: Takeaways from CC and recent CEO podcast:
Best Q1 ever, beat revenue, positive earnings, growth of procedures despite COVID. Ablatherm not anymore manufactured but sometimes refurbished and sold second-hand. Of the 1500 urological departments in the US, about 150 are top-tier or academic centers, these are still the main targets for sales, about 15 have a Focal One already. Focal One costs 600'000-650'000 US-$, procedure needs a kit of 1200 US-$. ExactVu costs 200'000, installed base of 100 worldwide, but market for such a diagnostic device is bigger than for therapeutic devices like Focal One. Recruitment for endometriosis phase II study will be finished this year with results 2022. Not sure if this results in CE-mark of if phase III-study needed.

The 28 mio raised go mostly into US for significantly increasing manpower for studies and pushing sales and insurance coverage (for the latter they have installed a hotline).

Conclusion: As any successful technology HIFU enters a steepening part of adoption curve. Not only will sales and revenues grow, but - more significantly - also their growth rate will grow, this justifies the injection of new capital by adding value and rising share price. I am confident that all this will translate into a sustainable double digit share price already this year.

The share price is so low that I consider EDAP a very safe investment. On the downside I have to admit that the voice of the CEO and especially the CFO at the conference call are barely understandable, they should purchase better mics.

[Lukas Fierz]

Update: 1h-podcast with EDAP's CEO:
www.medicaldevicesuccess.com/...

[Lukas Fierz]

Update: From EDAP-Website, Investors information:
EDAP TMS SA is presently accelerating adoption of HIFU (High-Intensity Focused Ultrasound) for prostate tissue ablation in the U.S. and for treatment of localized prostate cancer in the rest of the world...

[Lukas Fierz]

Piper-Sandlers report on EDAP, overweight, price target 13:
ml-eu.globenewswire.com/...

[B'n'B]

@Lukas Fierz Interesting report. Thanks for posting. Tallies both with my enthusiasm for the product (I’m an owner of the name) and my reservations about the stickiness of the incumbent technologies (see my earlier post). On balance, however, this report should support the thesis.

[Valleywood]

@Betternotbigger You may be in the same position as I. I had DaVinci prostate cancer (radical prostatectomy) removed in the neighborhood of 8 years ago. Both you and I know that if EDAP and/or PROF can gain traction with medicare and insurance companies that they will have explosive growth. Both you and I wish that those options existed when we needed them.
I do not agree however that there will be the same resistance to change from manual surgery to robotic assistance that we experienced with ISRG introduction. Robotic surgery then was new and unproven. Today however, young surgeons have much more open minds to robotic assistance than surgeons of 20 years ago.
I own both PROF & EDAP. Hedging bets. But the adoption of them both will achieve critical mass and then growth will be surprising.
In fact, I went to my urologist just yesterday for my 6-month blood test. Always a sense of relief when good news comes. Meanwhile, good luck to us both going forward for our health. And good luck to both these companies and we, the stockholders, will do just fine.

[B'n'B]

@Valleywood Great to hear you had a happy result. I know just what you mean about that little dose of apprehension that comes with every blood test. And best of luck to you with both names - but more for EDAP since I only own that currently!

[Lukas Fierz]

STOCK OFFERING: USE OF PROCEEDS (from EDAP's prospectus, form 424B5)

We estimate that the net proceeds of this offering, after deducting underwriting discounts and commissions and our estimated offering expenses will be approximately $25.6 million.

We intend to use the net proceeds from the sale of the securities offered hereby for the implementation of our global strategy and action plan to accelerate the market penetration and adoption of HIFU in the United States, to advance our development programs, and for working capital and other general corporate purposes.

We cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. Due to uncertainties inherent in the product development, manufacturing and commercialization processes, it is difficult to estimate the exact amounts of the net proceeds that will be used for any particular purpose. In addition, the amount, allocation and timing of our actual expenditures will depend upon numerous factors. Accordingly, we will have broad discretion in using these proceeds.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments.

[B'n'B]

I’ve been watching this name for a little while now and I’m surprised that, in the comments attached to a number of Seeking Alpha threads, no one seems to mention the elephant in the room: Intuitive Surgical. While their robotic ablation tools are more invasive then the products offered by EDAP or Profound Medical, the results achieved, be that in tumour excision or in the avoidance of unwanted side effects like ED, represent a high bar to clear. Then factor in the very high level of investment made by hospitals in installation and training on its devices and you have a very sticky competitor. How do I know this? Well, I was unfortunate enough to be diagnosed with prostate cancer three years ago, and of sufficient advancement as to require the ablation of one of the nerve bundles (which control sexual function) as well as the entire prostate. The operation was deemed a success at the time, although, once you’ve gone through a cancer diagnosis, you never feel secure in deeming it gone for good. And, despite the removal of one of the two nerve bundles, I’m relieved to say that all is working so far with some minor chemical assistance. In the light of that personal experience, and having reviewed the efficacy rates for the newer procedures, I question how quickly the incumbent can be dislodged. I’ll be very interested if anyone can link to data or make comment comparing EDAP (or PROF) to ISRG.

[Lukas Fierz]

@Betternotbigger ISRG's DaVinci is not better than manual prostatectomy if you compare the adverse effects of erectile dysfunction and incontinence. It only has a little less blood loss, somewhat faster healing and shorter pain and is more expensive. Manual prostatectomy and DaVinci are for higher grade and/or more extended prostate cancers.

Some prostate cancers are lower grade and localised and they are candidates for the many focal therapies, of which HIFU and EDAP's Focal one are one variety. The advantages are that this is faster, cheaper, mostly outpatient, has significantly less complications and faster healing. However it needs surveillance after operation and some patients can have recurrences and need a second intervention of some kind.

Therefore focal therapies are a competition for ISRG in selected patients. Focal therapies are also used in some patients which up to now were not operated upon and had only "active surveillance". Experienced centers say that an average of 15 percent of all prostate carcinomas are amenable to focal therapy.

[B'n'B]

@Lukas Fierz Thank you for the detailed and authoritative reply. If I understand you correctly, cases like mine, where the cancer had spread to the prostate capsule such that a little extra (margin of safety) had to be removed entailing the loss of one nerve bundle, are too far advanced to be candidates for focal therapy. Is that right?

And HIFU and/or Tulsa are more suitable for treating less advanced prostate cancers along with other conditions like BPH?

[Lukas Fierz]

@Betternotbigger Thats how it is. Seems that HIFU is slowly establishing itself for suitable cases. TULSA is more complicated and expensive, therefore it would only be cost effective it it would produce better results. But the relative advantages of both techniques are far from clear.

Concerning BPH I know that TULSA is used, while I did not come across HIFU-trials but I did not specifically look for them. However I'm not sure if one really needs the high powered and high precision TULSA-technique for BPH, there being simpler methods.

[Lukas Fierz]

Update: Initial multicenter registry study: micro-ultrasound (ExactVu, distributed worldwide by EDAP) had comparable or higher sensitivity for clinically significant prostate cancer compared to multiparamtric MRI, with similar specificity. Micro-ultrasound is a low-cost, single-session option for prostate screening and targeted biopsy. Further larger-scale studies are required for validation of these findings. pubmed.ncbi.nlm.nih.gov/...

[Adambombfx]

Another well done article Mr Shu ! You have been spot on with this stock since your 1st article on Oct.17th 2019.

Below is a copy and paste of what I wrote in response to your May 19th 2020 EDAP article when the stock was trading at $2.17.

" I remain long EDAP and have not finished adding to my entries. I was able to add more last week at $2.09 as we have been trading in the $4.00 range since last year up to Feb. of this year when all tanked down. Perfect entries at these levels and partnered with Exact Imaging on May 11th makes me even more bullish on EDAP. Thanks for the article Mr. Shu, always look forward to them. "

With stock picks like this All should know and understand why the Shu Growth Portfolio has 60%+ portfolio returns !

I tell people all the time both publicly and when they message me privately asking if I run a stock recommendation service that I DO NOT ! and I always strongly recommend if they want a excellent marketplace service and who are looking to find small companies with multi-bagger potential whilst mitigating the risks through a portfolio approach, they need to check out Shareholdersunite Shu Growth Portfolio.

No wonder why I keep hearing great things about your service,with stock recommendations like EDAP, anyone can have multi bagger returns.

Congratulations Mr Shu for an outstanding market place service that not only provides great stock picks but also offers the sorely needed guidance that any new investor needs to navigate these markets. The amount of time and energy that you put into your service is remarkable and I can only imagine the amount of questions you must get on a daily basis.

My hat off to you for your valuable contributions to the Seeking Alpha Community !

Adambombfx

[Shareholders Unite]

@Adambombfx You're too kind Adam, many thanks, and congrats with your EDAP (and a host of other) winnings!

[GreenGrowthGeek]

Large position in EDAP and a small position in PROF currently. EDAP should have very strong growth over the next several years. It's really a no brainer as wouldn't almost anyone prefer knifeless surgery that is less invasive?

[blacklabsmatter]

thnx Shu.. speaking of device makers.. have you looked at ndra? disruptive tech.. huge tam for nafld just waiting fda approval which should be any day now

[Philip Marlowe]

What do you mean "pretty substantial multiple for a device maker"? I am sure you will discover that medical device makers tend to sell at high multiple considering theirs is a pretty cozy business with high barriers to entry.

Take for example Boston Scientific. The largest medical device maker I could think of at the top of my head. They have about 50 bln market cap. Sells at EV/S multiple of 6.3. Which is very much higher than EDAP's 5.3.

Boston Scientific revenues fell 7% in q4. EDAP's rose 28%. Boston Scientific is a large company serving mostly stable markets, that will have to rely on acquisitions for most of its growth going forward. EDAP TMS is a small fast growing company with all organic growth that is just beginning to take over an enormous market with a new device with proven competitive differentiation.

If you look at any industry the fast growing technological disruptors (as long as they are proven to be disruptors and to be fast growing) are selling at much higher valuations than the large legacy companies.

But here disruptor EDAP is actually cheaper than the legacy co.

Look at a company that is considered to be a disruptor. Intuitive surgical. ISRG is actually larger by market cap than Boston Scientific. ISRG is selling for EV/S of .... wait for it ... 18.5! Three and a half times EDAP! ISRG's growth is much lower than EDAP as of Q4 but they are genuinely believed to be a disruptor and will probably grow at faster rate after COVID goes away. But still, much pricier than EDAP.

So I think EDAP is dirt cheap here.

You are right that it looks kind of pricey on EPS terms, but again it is a growth company. One has to pay to enable growth even organic growth. This is especially true in the medical device industry where it is very difficult to convince doctors and large hospital administrators to drastically change their treatment methods.

But investors are happy to pay for these growing costs as they know that they mean stable high margin revenues in the future. Difficulty of getting new business now means barriers to entry in the future.

Again look at the quintessential medical device growth company -- ISRG. Their forward P/E is 57, vs EDAPs 29. Again, EDAP looks dirt cheap.

Why is it so cheap? I am not certain. Honestly, probably because they are French. People are not used seeing disrupting innovation coming from the French. Also, EDAP did not come from the Silicon Valley innovation factory where there is a vast, rich, and sophisticated community of investors, commentators, venture capital firms etc., that are well versed in pumping tech stocks. Anyways, whatever the reason, EDAP is a dirt cheap high growth disruptor.

[Shareholders Unite]

@Philip Marlowe Not sure Boston Scientific is the right comp here, but in any case, it's always a good sign writing a bullish article not being bullish enough..

[Lukas Fierz]

@Philip Marlowe EDAP is at the stage where ISRG was in 2004. Until now they confirmed my expectations. I bet on double digits this year and passing 20 next year and then so on. These growth prospects are rather safe, as long there is no catastrophe - climatic or economic. .

[Lukas Fierz]

If I remember correctly their Focal One device does not sell for EU 60'000 and US-$ 80'000, its ten times more EU 600'000 or US-$ 800'000.

[Shareholders Unite]

@Lukas Fierz It's from their latest IR presentation

[Lukas Fierz]

@Shareholders Unite Must be a typo.

[ChrisForte]

Shareholders Unite, I'm really happy to see you still covering EDAP. You've been right all along on them. The shares are up almost 300% since you started coverage. Grateful for your always excellent and candid insights.

As you stated the TAM for this small company is huge including sales, disposables, and services. Like many small medical devices the roll out towards becoming the treatment gold standard can appear slow at first but the ramp can be fast and durable.

Present day treatment for prostate cancer can be nightmarish - HIFU offers a great alternative for many patients and the demand for it is inevitable. Surgeons will be compensated well for using HIFU and once they get this efficient procedure incorporated into their treatment armamentarium they won't go back.

[Shareholders Unite]

@ChrisForte Thanks Chris, appreciated and yea, nightmarish, I can imagine. This seems a much better idea and it's effective too.

[D. Rider]

Writing this from Europe here (the Benelux region): invest in EDAP knowing patience will be required. As in several years patience. If you can do that, you'll be fine. If not and you are daytrading this, well, the best of luck to you because you're going to need it. The reason revenues declined weren't because of the pandemic (the too easy and catchall explanation); the reason was HIFU education in relation to it being adopted at hospitals. There's a few hiccups getting hospitals fully on board with HIFU, and this is getting worked out and hopefully will be worked out over the next 16-20 months. if so, the company (and stock) will do fine over these next five years.

The best of fortune to us all

[Shareholders Unite]

@D. Rider Well, they could not do in-person demonstrations and the revenues declined only in H1 so I still think it's pandemic related, but in any case, that's mostly in the rearview mirror now as they are growing again.