EDAP TMS S.A.
Q3 2014 Earnings Call Transcript

Published: 20 Nov 2014

[Operator:]

Good day. And welcome to the EDAP TMS Third Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Carol Ruth of The Ruth Group. Please go ahead.

[Carol Ruth:]

Thank you, operator. In addition to historical information, this conference call may contain forward-looking statements. Such statements are based on management’s current expectations and are subject to a number of risks and uncertainties including matters not yet known to us or not currently considered material by us. And there can be no assurance that anticipated events will occur or that the objectives set out will actually be achieved. Important factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements include, among other uncertainties of the U.S. FDA approval process, the clinical status and market acceptance of our HIFU devices and the continued market potential for our lithotripsy device. Factors that may cause such a difference may also include, but are not limited to, those described in the Company’s filings with the Securities and Exchange Commission and in particular, in the sections Cautionary Statement on Forward-Looking Information and Risk Factors in the Company’s Annual Report on Form 20-F. Okay. Now, may I please turn the call over to Philippe Chauveau, Chairman; Marc Oczachowski, Chief Executive Officer; and Eric Soyer, Chief Financial Officer. Go ahead gentlemen.

[Philippe Chauveau:]

This is Philippe Chauveau. Good morning. Thank you for joining us on our third quarter 2014 investor conference call. I have three opening highlights to share with you

[Eric Soyer:]

Thank you, Marc, and good morning, everyone. I will now take a few minutes to review financial results for the three and nine months periods ended September 30, 2014. Total revenue for the third quarter 2014 was EUR 6.9 million or $9 million, a 24% increase year-over-year compared to EUR 5.6 million or $7.4 million for the third quarter 2013. Total revenue included a EUR 0.5 million or $0.7 million one-off revenue related to the licensing of HIFU patent. Total revenue for the HIFU division was EUR 2.9 million or $3.9 million for the third quarter 2014, a 135% increase compared to EUR 1.2, $1.7 million for the same period last year. As Marc already noted, we recorded sales of three Focal One devices in the third quarter of 2014. Total revenue for the lithotripsy division was EUR 4 million or $5.4 million for the third quarter 2014 compared to EUR 4.3 million or $5.8 million during the year ago period. During the third quarter 2014, the company recorded sales of 7 lithotripsy machines, including high Sonolith i-move devices, one Sonolith i-sys device, and one Sonolith Praktis device. This compares to 9 devices sold in third quarter last year. Gross profit for the third quarter 2014 was EUR 3.4 million or $4.4 million compared to EUR 2.2 million or $3 million for the year ago period. Gross profit margin on net sales was 45.2% in the third quarter of 2014 compared to 40.3% in the year ago period. Operating expenses were EUR 3.1 million, $4 million for the third quarter 2014 compared to EUR 2.6 million, $3.4 million for the same period last year. Operating income was EUR 339,000 or $443,000 for the third quarter 2014 compared to an operating loss of EUR 333,000 or $444,000 in the third quarter of 2013. Net income for the third quarter 2014 was EUR 6.6 million or $8.6 million or EUR 0.26 per diluted share as compared to a net loss for the third quarter of 2013 of EUR 373,000, $497,000 or EUR 0.02 per diluted share. Third quarter 2014 net income included non-cash interest income of EUR 6.5 million to adjust the accounting fair value of outstanding warrants. I need here to reiterate the comments I made in the previous quarters and on those fair value adjustments as they are quite significant to our results and financial statements. As you know for our U.S. GAAP accounting rules, we need to adjust the outstanding warrants book value to market fair value at the end of each quarter based on a number of market criteria, the most sensitive of those being EDAP’s fair price. The significant change in the fair price during the summer has triggered a decrease in the warrant market fair value as of September 30, 2014 and consequently an interest income in the third quarter to account for the amount of that variation. For those of you who are not U.S. GAAP experts, I’m aware that this is indeed technical dragon [ph] and makes the understanding of our results quite confusing. What is important to keep in mind in the matter is that this interest income for expense depending mostly on the downward or upward variation of the fair price is a non-cash accounting adjustment and that our operating results is a more straight forward reflection of EDAP’s performance. Turning now to the first nine months of 2014. Total revenue was EUR 20.3 million or $27.4 million, up 27% compared to EUR 16 million or $21.1 million for the first nine months of 2013. Gross profit for the first nine months of 2014 was EUR 8.8 million, $11.8 million and gross profit margin on net sales was 41.7% compared to 37.9% in the year ago period. Operating loss for the first nine months of 2014 was EUR 707,000 or $954,000, an improvement of EUR 2.3 million over an operating loss of EUR 3 million or $3.9 million in the first nine months of 2013. Excluding FDA-related costs, operating result for the first nine months of 2014 was an income of EUR 0.3 million or $0.4 million. Net income for the first nine months of 2014 was EUR 2.1 million, $2.9 million, or EUR 0.09 per diluted share, as compared to a net loss of EUR 4.5 million or $5.9 million, or EUR 0.22 per diluted share, in the same period last year. Net income in the first nine months of 2014 included non-cash interest income of EUR 3 million to adjust the outstanding warrants to fair value. Of course my previous comments on such fair value adjustments for the three months periods apply just the same for the nine months period. This adjustment is non-cash and the nine months operating loss which was again EUR 707,000 which includes FDA trial expenses is a more relevant reflection of EDAP’s operating performance in the period. The last word on cash, At September 30, 2014, cash and cash equivalents, including short-term treasury investments, were EUR 11.1 million or $14 million. This cash position remained solid. Over the nine months period the company’s operating cash flow before working capital variation was breakeven and the net cash utilization of EUR 2.8 million excluding the impact of the June 2014 fund raise was mostly attributable to investments in working capital related to the increase in HIFU sales. Thank you very much for your attention. And I will now turn the call over to the operator, who will open the line for questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from RK Ramakanth from H C Wainwright. Please go ahead.

[RK Ramakanth:]

Good morning, Marc. Good morning, Eric.

[Marc Oczachowski:]

Hi RK.

[RK Ramakanth:]

Congratulations on the quarterly earnings, glad to see the jump in the HIFU revenues. Talking about HIFU and the PMA, I was wondering if you can help us understand how you plan to go forward with this amendment versus amount of work that needs to be done and what kind of -- what’s the number of patients that have already been treated in Europe who can fall into this new indication that would just help us understand how strong you can get your data base together?

[Marc Oczachowski:]

That’s a great question and actually that’s exactly something on what we are currently working and we’re going to follow again the advice and the different advices and recommendations that the FDA made in the letter. We’re going to work extremely closely with the FDA team, both the clinical and technical team and again work with them on our strategy in collection of data. We are at the same time and we already started a little bit before the letter because again we kind of -- we’re working very close with the FDA and we’re expecting what was in the later. So we started to kind of watch at our European data base; we’ve treated more than 40,000 patients. So now we have to stratify a little bit of data base and see what are the data we can use and we have again a huge choice in about 40,000 patients treated in the last 15 years. So, this is exactly what we are doing now to get out of the data base what could be interested for review by the FDA.

[RK Ramakanth:]

Okay, great. So, is it possible for you to beat the deadline and get this amendment before April or you would really require the full time, the full six months that FDA provided you to get them and then back to them?

[Marc Oczachowski:]

I mean as you know RK this, we really don’t give forward looking statements, but basically I mean we believe the deadline is reasonable. And again, we’re going to work very closely with both FDA and our centers so that we can get everything really as soon as possible.

[RK Ramakanth:]

One more question on this and then I’ll jump back into the queue. What’s with this new indication, is that a bigger patient population that you will be able to serve or what’s the kind of size of the patient population that we could be thinking about?

[Marc Oczachowski:]

Well, if you look at most of our publications and again, we have more than 70 peer reviewed publications on our Ablatherm HIFU results, since 10 years or 15 years, you would see that, yes indeed in terms of risk population is a big group.

[RK Ramakanth:]

Okay. Thank you.

[Marc Oczachowski:]

Welcome.

[Operator:]

Our next question comes from Matthew Pilkington with Steel Partners. Please go ahead.

[Matthew Pilkington:]

Hi, could you tell me which countries you get national health reimbursement on the HIFU machine for a procedure?

[Marc Oczachowski:]

Could you repeat the question, I didn’t hear you very well.

[Matthew Pilkington:]

National health reimbursement country, which countries give national health reimbursement? I think France does.

[Marc Oczachowski:]

Yes, France does; Italy; and Germany as well; and UK, that is -- I mean all the European countries have different ways of getting organized for reimbursement but there is access for reimbursement in the major European countries.

[Matthew Pilkington:]

And approximately, it’s roughly 100% of the procedure or is it partial?

[Marc Oczachowski:]

Now, it’s in most of them.

[Matthew Pilkington:]

Okay. Thank you.

[Marc Oczachowski:]

You’re welcome.

[Operator:]

[Operator Instructions]. The next question comes from Stanley Mazor, [ph] a private investor. Please go ahead.

[Unidentified Analyst:]

Yes. My question was, so right now you’re getting reimbursement from France?

[Marc Oczachowski:]

Actually the reimbursement was kind of announced during summer and it’s in segregation phase. So, we expect this would reasonably start probably early next year.

[Unidentified Analyst:]

Next year, okay. And when I look at the panel, the advisory panel’s discussion, I found it note worthy that they said that your HIFU was no worse than the current modalities being used. So if it’s no worse than, at least has to be as good as or better than, it can’t be worse than. And I am a HIFU survivor. I truly believe in this procedure. I wish you well and keep up the good work.

[Marc Oczachowski:]

Thank you very much for that.

[Operator:]

And your next question comes from Terry Carlton, [ph] a Private Investor. Please go ahead.

[Unidentified Analyst:]

Yes, good morning. I’ve got a couple of general questions related to the HIFU division revenue stream. The fee per used model that you haven’t placed, what percentage of the division revenue is currently coming from replacement or kit fees on a per use basis?

[Eric Soyer:]

We’re just thinking about kit fees, you mean the consumables on the procedures, right?

[Unidentified Analyst:]

Yes.

[Eric Soyer:]

Yes. Well that accounts for approximately 25% of total revenues.

[Unidentified Analyst:]

25%. And I would imagine going forward; we would expect to see that number increase?

[Eric Soyer:]

Well, 25% that includes consumables and the revenue per procedure model. Well, hopefully with the adaption of the technology we should see that number increase, yes.

[Unidentified Analyst:]

Yes. Does having the government approval in France and reimbursement approval give you leverage to increase your pricing for disposables?

[Marc Oczachowski:]

That will -- well, in France that will most probably increased reduction and the number of treatments in France. And as I commented earlier that’s something we should see an impact on earlier next year, we didn’t see an impact yet, but that should come next year?

[Unidentified Analyst:]

Yes. Thank you, Marc. And one more quick question. I would like to see EDAP making some effort to market use of HIFU device directly to consumers through magazine advertisements and other publications. Are you considering doing these things to drive demand on the consumer end?

[Marc Oczachowski:]

We’ve done that in the past at some occasions and we have also to be very careful about regulations in the different enrolls [ph] about promoting a medical treatment from manufacturing companies. But yes, that’s something we might want to consider depending on the need.

[Unidentified Analyst:]

Thank you very much.

[Marc Oczachowski:]

Thanks. Thank you.

[Operator:]

The next question is a follow-up from RK Ramakanth from H.C. Wainwright. Please go ahead.

[RK Ramakanth:]

Hi Marc. What’s the backlog that you have at the end of the third quarter for both HIFU devices including the Focal Ones and the lithotripsy devices, normally you used to give that?

[Marc Oczachowski:]

We indeed use to give that kind of information, but for competition reasons we didn’t want to -- because we are at the end of the year which is a key period for the company and for recording sales and working and closing deals and projects. So, we wanted to be a little bit more shy on that just for competition reasons. So, we’ll -- we are working on a strong pipeline of projects and on the backlog we had at the end of Q2. And again, we are focusing on closing deals as the end of the year is arriving. So, again we don’t want to disclose all our strategy numbers and projects to the competition by this call.

[RK Ramakanth:]

Okay. And a general on the lithotripsy market, you are holding steady ground in terms of sales and that’s nice to see. But are there any strategies of how to expand that market, is that market expandable at all? And if so, how would you do that?

[Marc Oczachowski:]

So, as we’ve discussed and announced I mean several times this year, a market that is matured, but still very dynamic. So, there is appetite for technology and there is appetite for innovation and that’s what we work on. And again, we continue investing in innovation for lithotripsy as we believe that’s the main way to take market share from competition and taking market share from competition in the mature market that’s the way to grow. And we’ve shown that in the past few years that was possible as we grew our revenues in lithotripsy. So, we’re continuing on that strategy.

[RK Ramakanth:]

Thank you.

[Marc Oczachowski:]

Thanks.

[Operator:]

The next question is from David Jenome, [ph] a private investor. Please go ahead.

[Unidentified Analyst:]

I wondered if you could comment on the acceptance of progress you’re making on in any of the Eastern Asian countries?

[Marc Oczachowski:]

You mean for HIFU?

[Unidentified Analyst:]

Yes, for HIFU.

[Marc Oczachowski:]

Yes. We work on programs there and of course in the incidents of prostate cancer in Asia it’s not as high as in Europe, but yes, we have some installation, we have some of different HIFU devices installed in Eastern Asian countries such as Thailand, Philippines, Taiwan and we are developing and building that option there as well.

[Unidentified Analyst:]

Thank you.

[Marc Oczachowski:]

Welcome.

[Operator:]

And as there are no questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to Philippe Chauveau for any closing remarks.

[Philippe Chauveau:]

There being no further questions, I would now close this call. Thank you everyone for participating on today’s conference call. Talk to you next time. Good bye.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.