Profound Medical Corp

TSX:PRN

Earnings Call Transcript 2020-Q1

[Operator]

Greetings and welcome to the Profound Medical First Quarter 2020 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stephen Kilmer, Investor Relations. Thank you. You may begin.

[Stephen Kilmer, Investor Relations]

Good afternoon, everyone. Let me start by pointing out that this conference call will include forward-looking statements regarding Profound and its business, which may include, but is not limited to, expectations regarding the efficacy of Profound's technology in the treatment of prostate cancer, BPH, uterine fibroids and palliative pain. Often, but not always, forward-looking statements can be identified by the use of words such as plans, is expected, expects, scheduled, intends, contemplates, anticipates, believes, proposes or variations, including negative variations of such words or phrases, or state that certain actions, events or results may, could, would, might or will be taken, occur or be achieved. Such statements are based on the current expectations of management. The forward-looking events and circumstances discussed in this conference call may not occur by certain specified dates or at all, and could differ materially as a result of known and unknown risk factors and uncertainties affecting the company, including risks regarding the medical device industry, economic factors, the equity markets generally and risks associated with growth and competition. Although Profound has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. No forward-looking statement can be guaranteed. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made, and Profound undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law. On the call today representing the company are Dr. Arun Menawat, Profound's Chief Executive Officer; and Aaron Davidson, the company's Chief Financial Officer and Senior Vice President of Corporate Development. With that said, I'll now turn the call over to Aaron.

[Aaron Davidson, CFO & Senior VP of Corporate Development]

Good afternoon, everyone, and welcome to our first quarter 2020 conference call. On behalf of the management team and everyone at Profound, I would like to thank you for your ongoing interest in our company. And for those of you who are shareholders, we appreciate your continued support. I will turn the call over to Arun in a moment for an update on our commercial activities. However, before I do, I'd like to provide a brief update on our first quarter 2020 financial results. To streamline things, all of the numbers I will mention have been rounded and are therefore approximate. For the 3-month period ended March 31, 2020, the company recorded revenue of $1.6 million, an increase of 6% from $1.5 million in the first quarter of 2019. Expenditures for R&D increased $161,000 for the 3 months ended March 31, 2020, compared to the same period in 2019, due to increased spending and testing for R&D projects and additional systems applications, reimbursement of consultants and option awards to employees. This was offset by decreased salaries and benefits from decreased R&D personnel, lower software and hardware costs and an overall decrease in general R&D expenditures. General and administrative expenses for the first quarter of 2020 were higher by $1.5 million compared to the 3 months ended March 31, 2019. The $1.5 million increase was attributed to salary increases and bonuses awarded to management, options vesting during the period, increased costs associated with being NASDAQ listed including insurance costs, increased software costs for cybersecurity and an overall increase in general costs. Overall, the company recorded a first quarter 2020 net loss of $3.6 million or $0.25 per common share compared with a net loss of $2.9 million or $0.27 per common share for the same 3-month period in 2019. During the first quarter of 2020, we closed an underwritten offering of common shares, including the full exercise of the underwriters' over-allotment option, resulting aggregate gross proceeds of approximately USD 40 million. Net proceeds will be used to fund the commercial launch of TULSA-PRO in the United States and on the continued commercialization of TULSA-PRO and Sonalleve globally. We also retired our $12.5 million in principal amount loan with CIBC almost 30 months ahead of its maturation date of July 29, 2022. This extinguished all of Profound's long-term debt and translates to total estimated net interest payment savings of $900,000. As at March 31, 2020, Profound had cash of $61.9 million. With that, I'll now turn the call over to Arun.

[Arun Swarup Menawat, CEO & Director]

Thanks, Aaron. On the 2019 year-end call, which was about 2 months ago, I talked about what we see as the value proposition of TULSA, particularly focusing on its potential flexibility in treating a variety of prostate disease patients. Today, I will focus on our initial commercial experience in the United States and our market-entry strategy, including the 3 primary market segments or delivery channels. I will also update you on the reimbursement process and its status. As you already know, the first commercial patient in the U.S. was treated in early January, representing the culmination of several years of development. During the first quarter, the first 2 TULSA commercial sites became operational in the United States. Our goal has not only been just to demonstrate that TULSA is a viable treatment for prostate diseases, but also to confirm the value proposition of its flexibility and the ease with which new users could adopt the technology as well as to garner patient feedback on the tolerability of the treatment. Our initial experiences bode well on all of those fronts. Both of the first 2 sites came up to steam quickly and have treated a variety of prostate disease patients ranging from whole gland ablation of prostates with high-risk disease, whole gland intermediate risk disease, partial or focal prostate gland ablations and even ablations of large prostates with BPH. We are satisfied with this start and pleased that what we observed in Europe is being duplicated in the United States. We are particularly happy to learn that the patient feedback on treatment tolerability is very positive. Patients are appreciating that TULSA is a onetime, same-day procedure and have reported minimal pain after the procedure, with many of them indicating the return of their erectile function in as little as 24 hours. We are thrilled with this feedback as it confirms our belief in the long-term potential of our technology. Let me next elaborate further on our TULSA U.S. market-entry strategy, having discussed on our last call its focus on 3 delivery channels. The first channel includes urologists who already specialize in cutting-edge alternative treatment of prostate disease, knowing that today's options do not meet the standard for their patient population. We are delighted that Dr. Scionti in Sarasota, who is considered the leading urologist specializing in ablative treatment, has become an early adopter of TULSA, and that his partners are already beginning to visit him as they consider expanding their practices. Our strategy is to continue to focus on such leading-edge physicians who are already the leaders in ablation therapy and value the TULSA technology for its ability to expand the patient population that can be treated. We will continue to focus on such physicians with the goal of partnering with their local imaging center to create a TULSA treatment center. The second and we believe the most important channel from a long-term perspective is imaging center company. The second U.S. TULSA site, Busch Imaging, in the suburbs of Atlanta represents such an imaging center channel. They're now able to provide a complete solution to their patients from prostate disease MR-based diagnosis to MR-based biopsy and MR TULSA treatment. This complete solution is a strong proposition for the site as well as a comfort to patients knowing that the same doctor they trust for disease diagnosis is now offering TULSA treatment. We are impressed with the speed with which Busch Imaging adopted the procedure, having treated their first 8 patients within the first 2 weeks of installing TULSA. So far, in Q1, we initiated 1 site in each of the first 2 important channels, and both are meeting our expectations. As you know, we also have a multisite agreement with the largest imaging company, RadNet. Their site initiation did get delayed. We believe that it is a 90-day delay. But due to the uncertain times, we plan to remain flexible. The third and strategically very important channel is the creation of Center of Excellence at teaching or opinion leading hospitals. Our pipeline for such hospitals is significant, and none have indicated anything but enthusiasm for TULSA. But because their priorities have been on the coronavirus, new installations are delayed. We do not believe that the delays will last any longer than necessary, and will most likely be 90 days, but because of uncertainty, they could be as long as 180 days. Our plan is to remain flexible during this time and shift our focus to imaging centers. These centers are not directly involved in treating coronavirus patients and generally feel that this is a good time to evaluate new therapeutic options. Our experience in the U.S. is also consistent with what we saw in Europe. The European TULSA imaging center site continued to operate during their shutdown. But 3 of the treating sites did experience a 90-day shutdown. Now that Europe is starting to open again, all of the teaching sites have indicated that they are restarting their TULSA program in the near future, and we plan to support their restarts. In summary, we consider each of these 3 TULSA-PRO delivery channels to be unique and a key part of our strategy to drive adoption. We plan to tailor our Genius support program to fit the needs of each unique channel. For example, we are working with RadNet and the Busch Imaging Center to help educate their urology community and with the teaching hospitals to drive the next generation of clinical publication. We are also working with all channels to provide the appropriate content for their social media presence. In terms of our expected number of sites in 2020, we originally anticipated agreements with about 20 sites by year-end, with approximately 15 of those operational. We now believe that the time to achieve these numbers may be delayed by a quarter, perhaps 2 quarters, due to the COVID-19 pandemic. While we don't have a lot of visibility into the rest of the year at this early stage in the TULSA rollout, I think it's fair to say that revenue impact from these potential U.S. placement delays may well be somewhat offset by higher-than-anticipated [ parse ] system utilization should that continue. Although TULSA is only operational in 2 sites so far, we remain excited by the early success of the rollout in the U.S., particularly the greater-than-expected initial procedure volumes and the variety of patients being treated. We are receiving physician feedback that supports this. One physician said that when evaluating a patient for prostate disease, the question should be, when should I not use TULSA-PRO? Of course, the TULSA-PRO procedure will not be appropriate for all patients, but feedback suggests the TULSA-PRO may potentially be one of, if not the first treatment option that urologists and their patients consider. To further support TULSA awareness, I also encourage listeners to visit our newly launched TULSA-PRO procedure patient website, tulsaprocedure.com. The site has been designed to provide up-to-date information on where the TULSA procedure is available, both within the United States and internationally, as well as contact forms to reach out to each center directly. I also encourage listeners to visit independent patient websites like inspire.com to read unsolicited, unfiltered patient feedback. The URL for the TULSA-specific chat board is fairly lengthy. So rather than spelling out here, I ask you visit inspire.com and simply search TULSA. I'd now like to conclude our opening remarks by providing an update on our reimbursement strategy. As discussed in our last call, in late 2019, we submitted an application for a Health Care Common Procedure Coding System C-Code from the Centers for Medicare & Medicaid Services, or CMS, for the TULSA-PRO procedure. Also, as I had mentioned previously, we see reimbursement as a 3-year process. Since we initiated that process with the C-code application late last year, we have had an opportunity to meet with CMS and also with a number of hospitals. The feedback from these discussions as well as from our consultants is that there is a possibility that an existing code could apply to TULSA. For that reason, we have asked CMS to set our application aside for now and allow the hospitals to decide if they would like to use that existing code. We don't see this as a positive or a negative. Rather, we see this as a continuation of the process. If the existing code does get accepted by the hospital, indeed, it would be a positive because it would move us ahead sooner. If it is not accepted by them, we would resubmit our CMS application with a high level of confidence that a new code would be issued. In either case, we will provide updates as developments unfold.So to summarize, what we're looking forward to in the near term: one, additional TULSA-PRO site agreement; two, expanding TULSA adoption, both in terms of procedure volumes and types of patients treated; and three, progressing TULSA-PRO's reimbursement strategy by pursuing the most appropriate reimbursement code.This ends our prepared remarks for today. With that, we're happy to take any questions you might have. Operator?

[Operator]

[Operator Instructions]Our first question comes from the line of Josh Jennings with Cowen and Company.

[Joshua Thomas Jennings, MD & Senior Research Analyst]

Congrats on all the progress you made this year. I was hoping to start just on the TULSA-PRO sales funnel. It sounds like it continues to build in all 3 channels, but I don't know if there are any incremental details you can provide about where the sales funnel sits today or pipeline funnel versus 2 months ago at the end of the year '19 call. And then just what can you do here in this COVID era to help cultivate increased demand? And do you have a virtual, I guess, marketing platform? Have some of these urologists been experiencing downtime? And have you been able to reach out to more practices and more surgeons over the last weeks to months?

[Arun Swarup Menawat, CEO & Director]

Josh, thank you. I hope you can hear me okay. Yes. I think the pipeline certainly continues to build. I think we're not quite comfortable giving explicit numbers. But I think that during this time, certainly, even the large hospitals where they are busy with the pandemic, I think the urologists are certainly quite open to listening and learning to the next technology. And yes, we are holding webinars and education programs for these channels. And so we are doing that for imaging centers, small imaging centers. We're doing it for urology communities that are associated with certain imaging centers. And certainly, we're doing it for teaching hospitals wholesale. So I think that is the reason why certainly, the feedback, as I mentioned in our prepared remarks, the feedback certainly is quite positive that as soon as they can and do want to open. In a couple of cases, we do have schedules already in place to get started. But I think I can certainly share with you that, generally, the pipeline is good. And as things open, we feel okay. We feel good. And we certainly will take advantage of the fact that a lot of urologists are interested in learning through virtual, and we are doing those conferences.

[Joshua Thomas Jennings, MD & Senior Research Analyst]

Great. And then just a follow-up on...

[Aaron Davidson, CFO & Senior VP of Corporate Development]

Josh, Josh, Josh, sorry. Aaron. I'd just add, I don't think anyone has fallen out of our funnel. And we've added to the funnel in the course of last quarter. I also think we've had an interesting pivot where we've said, okay, the ones that we thought we could close in the second quarter may not get closed in the second quarter because they're -- the ones that were in opinion leading hospitals who basically shut down. And we pivoted our sales and marketing team to independent imaging centers or independent urologists where there happens to be an imaging chain who is open and ready for business. And timing-wise, we may just replace some of the opinion leading sites we thought would be open in Q2 and may now be open in Q3 or 4. We may be able to replace some of those with independent imaging centers or independent neurologists and imaging chains. So I'd say the funnel is stronger. So when Arun -- Arun, I don't mean to be overly bullish, but I want to be clear that the funnel has been added to and we haven't really lost anyone.

[Joshua Thomas Jennings, MD & Senior Research Analyst]

And a follow-up just in this COVID-19 era. I don't want to make too much of a stretch, but you commented on the volume and the demand that your centers are experiencing in the United States. Could we -- should we be thinking about patients with localized prostate cancer or even BPH seeking out ablative treatments, MRI-guided ablative treatments in imaging centers or surgical centers outside of going to the hospital as there will be this fear factor for patients to go to an epicenter, which hospitals have become of COVID, for prostate therapy. I don't want to get too aggressive. But are you seeing any of that? Or maybe too early, but I just wanted to bounce that off, and then I have one more follow-up.

[Arun Swarup Menawat, CEO & Director]

Yes. Sure. No, Josh, I think that this is exactly how we see it, is very cautiously, certainly, the -- we are hearing of those. We are certainly cautious. So there are pluses and minuses in the last few weeks, for sure. Certainly, the imaging centers, they see this product as significant revenue generator. As I mentioned, the full solution approach becomes very strong proposition for them. We see all of those as positives, and we see that continuing to happen. We are certainly hearing of the fact that patients would prefer to go to some place other than the hospital during this time. We're also hearing that, certainly, in the last few weeks, some patients do not want to travel. So because these are just a couple of centers or we are limited -- we're in an early stage, there are a couple of patients who have sort of said, okay, I'm going to delay it by a few more weeks before I'm ready to travel. So generally, I think the answer is exactly we are cautious, but we are certainly -- there are certainly hints of those possibilities going forward.

[Joshua Thomas Jennings, MD & Senior Research Analyst]

Great. And my last question, just you -- appreciate your updates on the path forward for reimbursement. Can you give any more detail on the existing code, what level of reimbursement does it afford? And any time lines associated with that, the decision by CMS? Or should we be thinking about it? Is it just -- did you describe that center should just use that code currently and that will be reimbursed? Or is there another, I guess, decision maybe by CMS to open up that existing code?

[Arun Swarup Menawat, CEO & Director]

Sure. Sure. So Josh, the -- as I mentioned, we had phone calls -- or we had meetings, in fact, with hospitals, and a couple of hospitals, in fact, suggested certain MR-guided interventional codes. We obviously want to make sure we remain very good citizens with respect to what the CMS guidelines are, and we certainly will follow those guidelines closely. So we have indicated that to CMS that we -- these are the -- this is the information we have. We can certainly share with you that it generally is better to be -- if hospitals agree to be using certain existing codes. And so I think our next step really is to -- as they open and as they start to use it, I think to us, that is the key next milestone. If that happens, I think that it's possible that CMS would simply indicate that this is the way to go. I think, as you know, we are -- hospitals need to make those decisions on their own. And as suppliers of the technology, we should not be talking about a specific code. We have decided not to go beyond this point. But we will certainly -- as it develops, we will most certainly discuss it in our quarterly calls.

[Operator]

Our next question comes from the line of Rahul Sarugaser with Raymond James.

[Rahul Sarugaser]

I hope everyone is safe and well as the rest of Profound team. I also want to congratulate you by -- based on the strong cash position that you find yourself in given the worst [indiscernible]. So my first question is, I think I heard you correctly, and you said that the Busch Center in Georgia had treated 8 patients in the first 2 weeks. Now at a significantly higher rate than what we saw out at Sarasota, could you maybe give us a little more color in terms of how that's playing out and how that growth is expected? Because, again, with Florida, with 2 patients every other week and growing the 2 patients every other week, whereas mathematically, there should be, I assume, 4 patients every week. So can you just give us a little more color on that? That would be great.

[Arun Swarup Menawat, CEO & Director]

Sure, Rahul. I think that, again, we're cautiously optimistic. I would say, on the positive side, Busch Center has already been doing -- this is an imaging center, and they've already been doing diagnostic prostate imaging. They have been already been doing biopsy, MR-guided biopsy. So when they added this, it really strengthened the proposition, and they were able to effectively -- even during the phase where we were sending the agreements back and forth, they were able to build their patient pipeline. So I think some of it, what you see is the pent-up demand that they had created to start up strongly. So I think I would say, overall, the concept that a full solution at a imaging center at a data point of 1 in U.S. is working very well. That's how we look at it. We need to obviously gain more of these and get more of them to be able to confirm. But as I said, I do think that we are likely to get at these imaging centers higher volumes than we originally anticipated. Aaron, you might have more comments.

[Aaron Davidson, CFO & Senior VP of Corporate Development]

No, I don't have any additional comments. It's been pleasant to see the start-up rate and the learning curve. With our Genius services support, it's been very pleasant to watch developments.

[Arun Swarup Menawat, CEO & Director]

Yes. Rahul, I would say, in terms of color, I would say, the most impressive part to me is the fact that they have, in fact, treated a whole-gland, high-risk patients. And they -- because they are imaging, they understand how to do this. It was a very quick learning curve for them to do this. And I think, as Aaron said, it was certainly very pleasing to see that.

[Aaron Davidson, CFO & Senior VP of Corporate Development]

And I'd also then just add on 1 more piece. It's also very good to see them treating whole gland, focal and BPH to the broad spectrum of patients in early days. Repeating what we've seen in Europe is a really nice event to see. And that the cash pay patient demand is there. They're limited more by capacity than they are by patient demand so far.

[Rahul Sarugaser]

And that was my third question, so thanks for answering it because I guess I only had 2. So coming back to the CMS -- the questions around CMS and the C-code. Understanding that, obviously, there's now an evolution in that process and that you do want to be responsible citizens in terms of how you access it, could you elaborate a little bit more on what code it is, what the amount of reimbursement would be associated with that code? And what would be a reason for hospitals to say, no, that they don't want to apply that code?

[Arun Swarup Menawat, CEO & Director]

Sure, Rahul. So first of all, the recommendation has come from the hospital. So it's really a decision that the coders need to make at the hospital. And they are evaluating that option. Unfortunately, because these are hospitals, and that's where the delays are, that it is going to take some time before we know if they are accepting the current codes. I cannot give you the specific number because I think that is up to the coders and CMS and so on. So I'll stay away from providing the specific numbers. No C-code or anything at this time. After the events, I think we might be able to do it. But starting today, we won't. But I think, certainly, the additional color is that these are codes that were originally designed for purposes of using MRI guidance for interventional procedures. We, in fact, talk with consultants who were involved in formulation of such codes, and we think that the original intent was in line with what we are hearing from the hospitals. So I think, as I said, we are -- we see this as a process. We think this is a very interesting step. But I think we want to wait until it is in use, and we want to wait until CMS. Then further provides guidance that they will accept the hospital's recommendation before we can believe that this is going to be a big positive or a big negative or anything like that.

[Rahul Sarugaser]

Right. And then if you can indulge 1 quick follow-up question then. So this has seen the dam breaks opened based on the hospitals accepting this code. How does that then flow through to the imaging centers? So I assume it would then also be able to -- how would the imaging centers be able to apply this code then?

[Arun Swarup Menawat, CEO & Director]

Right. So there is a separate process for imaging centers. And we are in the process of evaluating that process also. And I think, again, today, I don't have an additional update for you, Rahul. But I think as that grows, certainly, we'll keep you informed on a quarterly basis if the development take place. But I think part of the reason why we talk about the 3 channels, part of the reason why this hospital is the right place to start is because they have that credibility. They have the infrastructure to be able to evaluate all of these. They have the relationships with insurance companies and so on. And so we want to be able to sort of establish the beachhead through that channel first and then use that as the guiding principles for the other channels.

[Operator]

[Operator Instructions] Our next question comes from the line of Brian Gagnon with Gagnon Securities.

[Brian Joseph Gagnon, Senior Partner & Portfolio Manager]

Aaron, first for you. I've never known you to be overly bullish about anything. So it's nice to hear you excited about the pipeline. All right. So the website looks great. Will you be adding new centers when they start treating patients or when they sign contracts or when they begin marketing? Have you thought about that?

[Arun Swarup Menawat, CEO & Director]

Yes, we have, Brian. So that website, number one, it's -- we made it clear on the website that it is a Profound-driven website. And our goal is not to have every site on our website, every treatment site. Our goal is to really only have those sites that are actively recruiting patients and treating. And as time goes on, we will set up threshold of minimum treatment that each site would have to be doing in order to qualify to be on that site. So it is really designed for patients where they can see active places. We will more than likely will have some sections on where clinical trials are going on as well. But we certainly do not plan to add sites at the contract phase.

[Brian Joseph Gagnon, Senior Partner & Portfolio Manager]

Okay. On the C-code, are there a certain number of procedures that need to be done either at a hospital or at an imaging center to be successful here? I know in the past, some places needed to submit 5, 10, 30 procedures before CMS would really kind of take a look at it.

[Arun Swarup Menawat, CEO & Director]

So the typical rule of thumb, that guideline from CMS tends to be minimum 100 patients running. We think that we will be able to meet that guideline. And so I think from the perspective of volume, we're not as concerned as we were last winter.

[Brian Joseph Gagnon, Senior Partner & Portfolio Manager]

Okay. And then when it comes to virtual training, how are you handling this? Was the system developed with the idea of proctoring remotely and being able to do this training in this wonderful world we're living in the last 8 weeks?

[Arun Swarup Menawat, CEO & Director]

So we are -- as you can imagine, even though we are at 2 sites, we are most certainly, through our Genius program, providing -- we actually have a person typically at the site because we have some amazing people in the company who are driving and staying there, and the volume has been there. But we are -- I think our clinical team is doing a great job of using networking software where they have full visibility of the computer screen. The fact that this is primarily driven by a computer screen, they have full access to the computer screen and the urologist or the radiologist have full ability to video conference with our clinical expert to provide -- to be able to answer any question that they might have. So the remote proctoring actually working very well. We will continue to add additional features into our software as time goes on. But what we have today, it's working very well.

[Brian Joseph Gagnon, Senior Partner & Portfolio Manager]

Terrific. Good forward thinking. And lastly, on the coding and MR-guided interventional procedures, is it reasonable to think that, that coding could be based around another company that's done brain procedures using MR-guided interventional?

[Arun Swarup Menawat, CEO & Director]

I think that the key to this is certainly MR-guided interventional because the way the reimbursement procedures typically work is that they are cost plus. And one of our obviously key question and key message to CMS is that, indeed, this is an MR-guided intervention. So I think that to your point, I think if it is an MR-guided intervention, then certainly, it's in the same ballpark as what we should be in.

[Aaron Davidson, CFO & Senior VP of Corporate Development]

It's in our best interest not to be too specific on this.

[Operator]

We have reached the end of our question-and-answer session. I would like to turn the call back over to Dr. Menawat for any closing remarks.

[Arun Swarup Menawat, CEO & Director]

Thank you so much for attending the call this afternoon, and please be safe. And we look forward to our next call for the second quarter. Thank you.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.