EDAP TMS S.A.

Greetings and welcome to the EDAP TMS Fourth Quarter and Fourth Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Jeremy Pfeffer. You may begin.

Thank you, Shamali. Good morning, and thank you for joining us for the EDAP TMS Fourth Quarter 2020 Financial and Operating Results Conference Call. On today's call, we will hear from Mark Archikowski, Chief Executive Officer and Chairman of the Board, and Francois 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 would now like to turn the call over to EDAP's Chairman and Chief Executive Officer, Mark Okcikowski. Mark?

Thank you, Jeremy, and good morning, everyone. I will start with a brief operational update and then turn the call over to François Ditch to review our financial performance. As we previously announced on January 20th, we turned in record fourth quarter 2020 revenue, notwithstanding the continued effects of the pandemic. In fact, these results are all the more impressive given that COVID-19 case counts around the world began to rise again midway through the quarter. We generated total revenue of 15.4 million euros, or $18.3 million, driven by the sale of eight HIFU devices during the quarter, including to such renowned institutions as University of California San Francisco Medical Center and Cleveland Clinic. These are in addition to sell to Mount Sinai Health System in New York and Keck Medical Center at University of South California, that we reported during our third quarter report. These are highly regarding institutions and important reference sites for our technology. This represents growth in total revenue of 28% over the fourth quarter of 2019, and 51% growth in high school revenue over the same period. Notably, we generated a sequential increase in revenue every quarter throughout 2020, which again reflects the hard work of the entire EDA team in successfully adjusting to the drastically altered work environment caused by the pandemic. So even as hospitals devoted to treat the many patients infected with COVID-19, interest in a Formula One and executive solution remained high. As you may have seen in our press release presenting the complete financial results for 2020 that we issued yesterday evening, we also managed to maintain high growth margins and continue to perfectly manage our level of expenses during this difficult time. Thanks to our careful management of the business, we were successful in generating positive operating income for the full year. This is a great achievement for our company, particularly as it was achieved in such a complicated environment. This demonstrates the solid foundation that we have established here at EDAP and gives me great optimism for the future. We also managed to increase our cash position to more than 24 million euros, or 30 million dollars, at the end of 2020 from 20 million euros at the end of 2019. During the fourth quarter, we received very positive news on the U.S. reimbursement funds with the publication of final U.S. 2021 reimbursement rules for HIFU, which went into effect on January 1st of this year. And while final rates were consistent with the proposed rule previously reported, it bears repeating. On the hospital payment side, the final rule maintains the HIFU procedure in the Level 5 Urology Ambulatory Payment Classification, or APC. This translates into a payment for a hospital performing a HIFU procedure on a Medicare patient of around $4,500 as a national average, adjusted locally based on the wage index. This represents an increase of around 5% from the payment hospitals received from Medicare for a HIFU procedure in 2020 within the C code context. However, and the most exciting challenge, change, sorry, occurred in the physician fee schedule. For the first time, CMS has established a payment to physicians performing a HIFU procedure on malignant prostate tissue in the US. Based on the relative value unit set by CMS for physicians performing a HIFU procedure on a Medicare patient in a facility setting, this translates to an average payment of $996. As a reference, a comparable established minimally invasive therapy 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 say $1,188 or $1,464 is performed laparoscopically. This is a higher amount, though the average time of performing surgery is much higher than doing a focal one treatment, and far more if it is done as a partial or focal treatment. So globally, and related to time spent, it gives HIFU a very competitive physician statement. We believe having established reimbursement, particularly on the physician side, will continue to be a catalyst toward more widespread adoption of our technology in 2021 and beyond. To further expand and accelerate both reimbursement and market access to HIFU, we recently announced that we have increased our support by partnering with two leading reimbursement consultancies, NTP and Argenta Advisors. With their guidance, we will assist hospitals, physicians, and patients with securing coverage and reimbursement of HIFU, whether Medicare or commercially insured. In parallel, we will work with medical directors and other payer decision-makers toward the creation of universal automatic coverage policies. This is just one example of the investments that we are making to make HIFU as broadly available to patients as possible in our most important market. Outside of the U.S., we took a significant step forward through the signing of an exclusive distribution agreement with AB Medica, who distribute focal volume and exact view across Italy. AB Medica is widely regarded as a leading distributor of cutting-edge medical equipment, including robotic prosthetic surgery solutions. so they are the perfect fit for us. Italy is the fourth largest medical device market in Europe, and we look forward to a long and mutually beneficial partnership. The growing interest in HIFU as a viable alternative to radical surgery is further supported by a large and growing body of evidence demonstrating the significant difference in efficacy in favor of HIFU versus radical prostatectomy. In January, We reported on the results of a study sponsored by the French Association of Urology, or AFU, and supported by the French Ministry of Health. The results were presented at the AFU Congress in November 2020. The study was a multi-center prospective non-randomized comparative and non-inferiority study of HIFU versus radical prostatectomy in men with primary prostate cancer. Between 2015 and 2019, the study enrolled 3,364 patients in 42 public and private hospitals in France, 1,988 treated with HIFU, and 1,376 with radical thoracotectomy, the current standard of care surgical approach. In terms of cancer characteristics, the two groups are comparable with a majority of ISUP Grade II and equivalent median PSAs at baseline. The results of the interim analysis show a significantly better 24-month recurrent free survival defined as the rate of salvage treatment by external beam radiotherapy and or hormone therapy for the patients treated with HIFU compared to the patients undergoing surgery. This significant superiority in efficacy was achieved with HIFU, despite the fact that the patients in the HIFU arm were more than 10 years older on average, and therefore naturally more likely to suffer from these issues. Turning to our endometriosis program, recall that in August 2020, we were granted full approval by French health authority to initiate a Phase II clinical trial of HIFU for the treatment of deep invasive endometriosis, and we quickly completed the first patient treatment just a few weeks later. A total of 38 women will be enrolled in the study and treated at five major hospitals across France and assessed over a six-month follow-up period. During this study, investigators will evaluate the safety and efficacy of HIFU for his pathology. To date, we have enrolled 10 patients at Croix-Rouge Hospital in Lyon by Professor Gilles DuBernard, the lead investigator for this phase 2 trial. Enrollment is continuing, and we are currently in the process of opening four additional trial sites to participate in the study. The advancement of our endometriosis program is consistent with a strategic shift toward HIFU is just one example of a condition that we believe can benefit from these non-invasive technologies. We see significant opportunity to expand our HIPAA pipeline into very large global market opportunities. We look forward to keeping you apprised of our R&D and clinical efforts in exploring HIPAA and other indications. And now, our CFO, François Ditch, will provide some details of our financial results.

Bonsoir. Thank you, Marc, and good morning, everyone. Please note that all figures except for percentages are in euros. For conversion purposes, our average euro-dollar exchange rate was 1.1942 for the first quarter of 2020 and 1.1474 for the full year of 2020. The total revenue for the first quarter was €15.4 million, an increase of 28.2% versus €13 million in Q4 2019, reaching a new record level for a quarter of the revenue, despite the ongoing impact of COVID-19 on our treatment revenues. Total revenue in the IFO business for the first quarter of 2020 was €4.4 million, a 58% increase compared to €2.9 million for Q4 2019. During the quarter, we sold six Fouquet ones and two Ablacerbes versus two Fouquet ones during the same period last year. Total revenue in the little business for the fourth quarter of 2020 was 4.6 million euro, a 10.6% increase compared to 4.2 million euro for the fourth quarter of 2019. We showed 16 little 50 devices in the quarter versus 9 in the same period last year. Last total revenue in the distribution business for the first quarter of 2020 was 6.4 million euros, a 29.7% increase compared to 4.9 million euros for the first quarter of 2019, thanks primarily to the exact matching license and distribution agreement. The worst profit for the first quarter of 2020 was €7 million compared to €5.1 million for the year-ago period. The worst profit margin and net sales was 45.8% in the first quarter of 2020 compared to 43% in the year-ago period. The zero-barrier improvement is due to the higher high food sales. Operating profit for the first quarter of 2020 was 1.7 million euros, compared to an operating profit of 0.1 million euros in the first quarter of 2019. Net income for the first quarter of 2020 was 0.8 million euros, an income of 3 cents offshore per digit share, including mainly a non-cash currency exchange loss on U.S. dollar, and regular tax impact, as compared to net loss of 1 million euro of 3 cents of euro per annuity share in the year of the period. Turning to the full year of 2020, total revenues were 41.7 million euros, a 7.2% decrease compared to 2019. As mentioned, the full year of 2020 revenue reflects the impact of the ongoing COVID-19 pandemic and the company's activities. The profit for 2020 was 18.4 million euros compared to 21 million euros for the year-over-period. Cross-profit margin and net sales was 44.1% for 2020 compared to 46.8% in 2019. The decline in cross-profit was mainly due to the low of sales in the IFO business driven by COVID-19. Operating profit for 2020 was 0.3 million euros compared to operating profit of 2.2 million euros for 2019. As Mark mentioned, in this very complicated environment due to the COVID-19, we are pleased to report a profitable year and an operating base. Net loss for 2020 was 1.7 million euros, or 6 cents of euros per annuity share, as compared to a net income of 1.5 million euros, or 5 cents of euros per annuity share in the year-over period. Lastly, we finished the fourth quarter of 2020 with a strong cash balance of 24.7 million euros, or 30.2 million US dollars, using a euro-dollar conversion rate of 1.2229. This represents a 3.8 million euros of positive cash flow generated over the full year of 2020, reflecting very strong cash management and monitoring, as well as COVID-related loans from French, US, and Japanese institutions. These loans were mainly received during the second and third quarter of 2020. And we now turn the call back to Marc. Thank you, Francois.

Before turning the call back to the operator to start our question and answer session, I would like to highlight again the fact that despite the challenges posed, the full year 2020 turned out to be extremely positive and constructive for our company. We sustained our operating profitability. We strengthened our cash position, increasing it to 24.7 million euros, and we successfully achieved significant milestones in key strategy projects, such as reimbursement of in the U.S., and the adverse advancement of our endometriosis high school clinical program. Even if the pandemic continues to significantly impact the global economy this year, we feel well positioned to continue achieving great milestones in our clinical sales and marketing programs in 2021. We will now open the call to your questions. Operator?

Sure. And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Frank Tackenden with Lake Street Capital Markets. Please proceed with your question.

Hey, congrats on such a great year in such an uncertain environment. A couple from me today, starting with placements, you guys had such a solid quarter with eight high school placements in the fourth quarter. I was hoping you guys could speak towards your expectations for 2021 in regard to placements. How should we be thinking about trends throughout 2021 given COVID is starting to abate and reimbursement trends are looking more positive?

Yeah, thank you for the question, Frank. Well, it's true that we didn't give, I mean, you know that we usually don't give too much guidance for one looking statement. And as I just explained at the end of the speech right now, we feel the company is well positioned. I mean, we have a strong pipeline of projects. We have momentum. We have good news and achievement in 2020 that are positioning us very well for 2021. but we are not reporting yet any information on 2021 and we'll do so during our call in May.

Okay, that makes sense. In regard to the consultancies, MTP and Argenta, could you take us a little bit deeper into some of your expectations for what those could bring in 2021? And more specifically, do you believe we could start to see some commercial organizations issuing policies?

So actually, as I explained earlier in the previous communication, we increased our support, and we used to work with MTP in the past, so MTP was supporting us and working with us in getting the C code and then the CPT code. Now we have increased, again, investment in supporting reimbursement and coverage by getting Argenta advisors on board. The idea is really to work on different axes of market access and coverage, working on, you know, giving a good and strong and probably deeper support to existing sites or new sites in placing their claim to Medicare, but also in working with the private payers and as well as the MACs to get automatic coverage policies from both Medicare institutions and the different private payers. So we have very strong expectations, and we really want to, again, support the market and get better coverage and increase that coverage. And obviously, the idea and the goal is to get more policies and more coverage from the MACs at Medicare and from the payers and commercial insurances.

Perfect. And then last one for me, a little bit higher-level question about the commercial organization. So I understand you've kind of exercised more of a tempered approach in the United States as you rolled out FOCA I, targeting only the Tier I centers in the U.S. Given the developments around reimbursement, the MTP and ARGENTA developments as well, should we expect kind of a next natural step for you guys to start to place more significant funds behind the commercial organization to start going after the next wave of Tier 2 or Tier 3 institutions to further the adoption of FOCA 1 in the U.S.?

No, you're absolutely right, and that's the plan. As we increase and expand coverage and have more and more payers supporting the technology and paying it, the idea is to expand from the Tier 1 institution to the Tier 2, and that would indeed require a broader commercial organization and network.

Perfect. All right. Thanks, and congrats again on a great year.

Thank you, Frank. And our next question is from Andrew De Silva with B-Riley Securities. Please proceed with your question.

Good morning. Congrats on the strong quarter. Just a few quick ones for me. Just to start, as it relates to the fourth quarter, do you think the strength there was more tied to perhaps pent-up demand from the limited ability of your customers to make capital investments in the first half or the first three quarters of 2020? or do you believe other factors were at play during the fourth quarter? And if you could, since we're at the very end of the first quarter of 2021, did you see the momentum change, or has the momentum from the fourth quarter continued to carry over into 2021?

I think on the fourth quarter, you're absolutely right. There is first, and as we always say, there is first a seasonal effect in the sales of capital equipment such as the one we are offering and usually fourth quarter are always bigger because that's in most of the cases the end of the fiscal year and investment has to be made if they were not made before in the year so we usually have more investment done by hospitals or or or or private hospitals at the end of the year And this year, I think that seasonal phenomenon has been completely increased and amplified by the COVID-19 effect of the first half of the year, which was extremely slow due to that new crisis happening worldwide. So we got a usual strong quarter, but it was again amplified by the crisis. Now turning to the momentum, I think, you know, by entering in 2021, and as I said before, The pandemic impact is unfortunately not over, even though, you know, the vaccine things and the improvement that we have seen, there is still a very strong lack of visibility in the worldwide economy. So investments are still very, I would say, very slow or very, people are getting shy in spending the money at the beginning of the year, like it was last year, like it is usually, but again, the sentiment might be amplified a little bit this year. So we see something similar from what we've seen last year in terms of appetite for investment. Though the momentum in the technology and, again, the number of interests or interested institutions that we have in our pipeline is continuing to grow in the U.S. as well as the rest of the world.

Okay, and just to recap what you're saying, so basically, while the pipeline is as large as it's ever been and interest is continuing to grow, the first quarter of 2021 is likely to have more of an augmented seasonal impact than you would typically see because of COVID-19 and the second wave that effectively took place during the winter.

I think the seasonal effect in general over the year, last year and maybe this year, at least in the beginning, will be amplified, yes. Okay.

Okay. Great. And then I know you provided hospital facility fees before, but are there any significant differences in HIFU reimbursement between the hospital facility fee and then, say, an ambulatory surgery center, an ASC facility fee? And there's been positive. pipeline development now, as you referenced with focal one, are you able to maybe tie that to reimbursement, or is it just initiative that took place before final reimbursement was put into place in January?

I think that's a bit of both. And again, you know, the fact that the CPT code got in execution at the beginning of the year was not a surprise. I mean, that's something we've known for a long time, so everybody was prepared, and the hospital as well. So I think, you know, it didn't come as a breaking news. It was known for almost a year since we got the grant from CMS on the CPT code. And the difference by law, I would say, the difference between the payment in a hospital or in an ASC is still the same and has always been the same for all procedures.

Okay, wonderful. And this is the last thing, if you could just refresh my memory on ExactView. How exactly does reimbursement work there? And do you have a dedicated reimbursement or are you working on obtaining dedicated reimbursement for ExactView?

No, we don't have it. Well, we don't have a dedicated reimbursement for the micro ultrasound capability of the ExactView. And today what what our sites are using is the reimbursement for ultrasound or and or the reimbursement for targeted biopsy or MRI fusion Capability of the device, you know exactly exactly as 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 a the micro ultrasound capability. So, there is reimbursement for the two first, but not yet a dedicated reimbursement for the micro ultrasound, and this is something we're working on.

Okay. All right. Great. Thank you very much for the context, and best of luck going forward, and congrats on a strong finish to 2020.

Thanks a lot, Andy.

And our next question is from Arthur Hay with AC Wainwright. Please proceed with your question.

Good afternoon, everyone. This is Arthur for RK, and thanks for taking my question. I have two questions. First of all, could you guys give us anecdotal color regarding after the implement of the code, the safety code? Is there any feedback from when doing your discussion with the payer?

I was trying to understand exactly the question. And as we said before, I mean, now that we have the code, we are increasing and accelerating our market access strategy, and that includes discussion with payers and more particularly medical directors at max level as well as private payer level. If that was the question, that's the answer.

Thanks for that. And my second question is regarding the gross margin. Is the fourth quarter gross margin could be at the run rate for the 2021, or if you can give us more color on that part? Thanks.

It's difficult to answer. Again, we don't give forward statement, Yeah, I mean, it could be at the run rate if we get the same sort of mixed product. You know, the gross margin is pretty affected between the three divisions. So, yeah, the mix remains the same, and the momentum itself is about the same. That should be consistent. But in any case, it shouldn't be far from what we've seen in the previous 2020, as usual. Thanks.

Thanks for taking my question. You're welcome.

And we have reached the end of the question and answer session. Now I'll turn the call back over to Mark Artsachowski for closing remarks.

Thank you, operator, and thank you, everyone, for joining us today. We'll keep you informed and posted of further developments, and we'll be pleased to discuss our start of 2021 during our next earning call for Q&A results. You all have a good day.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.