Profound Medical Corp

TSX:PRN

Earnings Call Transcript 2019-Q3

[Operator]

Greetings, ladies and gentlemen, and welcome to Profound Medical Third Quarter 2019 Earnings Conference Call. [Operator Instruction]It is now my pleasure to introduce your host, Steve Kilmer of 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 and 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 it 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 the 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 statement, 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 third quarter 2019 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. This is our first conference call as a NASDAQ-TSX cross-listed company. Listing on NASDAQ was a major milestone for Profound. It reflects how far we have advanced as a company and is a natural extension of our growth plan. While we were fortunate to have some U.S. analysts' coverage and institutional shareholders before cross-listing, we believe this listing on a major U.S. exchange will help increase the visibility of Profound to a broader and more diverse investment community audience. For the benefit of those who are new to the Profound story, we would like to start off by taking a moment to tell you a little bit about our business. Profound develops and markets customizable incision-free therapies for the ablation of disease tissue. We are currently commercializing TULSA-PRO, a transurethral prostate tissue ablation system that combines real-time MRI with robotically controlled directional thermal ultrasound and closed-loop temperature feedback control software to provide predictable physician-prescribed ablation of whole or partial gland prostate tissue. The TULSA-PRO system is designed to provide customizable and predictable incision-free and radiation-free prostate ablation while actively protecting the urethra and rectum with water cooling to preserve men's functional abilities. TULSA-PRO is CE marked and received 510(k) clearance from the U.S. Food and Drug Administration in August of 2019. Profound is also commercializing Sonalleve, an innovative therapeutic platform that is CE marked for the treatment of uterine fibroids and palliative pain treatment related to bone metastasis and approved by the China National Medical Products Administration for the noninvasive treatment of uterine fibroids. 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 third quarter 2019 financial results. To streamline things, all the numbers I will cite have been rounded and are therefore approximate. For the 3-month period ended September 30, 2019, the company recorded revenue of $682,000, with $529,000 from the sale of products and $154,000 from installation and training services. This represented recurring revenue growth of 125% year-over-year and 17% sequentially over the previous quarter. As mentioned in today's press release, while we have 2 Sonalleve purchase orders in the end, both sites in China have experienced installation delays, which we expect will push revenue recognition for these sales into the year's fourth quarter. Expenditures for R&D increased $847,000 for the 3 months ended September 30, 2019, compared to the same period in 2018. The increase was primarily due to increased spending in R&D testing to support U.S. FDA regulatory approval, largely analysis of TACT clinical data and TACT renewal fees; additionally, options vesting for employees and increased R&D personnel. General and administrative expenses for the third quarter of 2019 were higher by $289,000 compared to the 3 months ended September 30, 2018. Overall, the company recorded a third quarter 2019 net loss of $6.3 million or $0.57 per common share compared to a net loss of $5.1 million or $0.48 per common share for the 3 months ended September 30, 2018. As at September 30, 2019, Profound had cash of $27.2 million. With that, I'll now turn the call over to Arun.

[Arun Swarup Menawat, CEO & Director]

Thanks, Aaron. Before I review recent corporate developments, I'd like to address third quarter 2019 revenue, which as Aaron pointed out was below our expectations. On one hand, we have seen increasing interest in TULSA-PRO in international markets since publishing the TACT clinical data, existing sites are increasing their usage, and this is reflected by the slightly higher recurring revenues this quarter. On the other hand, as I discussed in our last call, we sold a Sonalleve system in Q2 and originally expected to recognize that revenue in the third quarter. Subsequently, we sold another Sonalleve system, the revenue for which we also expected to be recognized in Q3. Unfortunately, both installations have been delayed by the hospitals' own upgrades of their MR Imaging hardware. The sites have informed us that they do expect to take delivery by the end of this year, which would allow us to recognize the related revenue in the 2019 fiscal year. As I have previously pointed out, revenues at this stage are lumpy, but we expect them to smooth out over time as we progress our U.S. launch of TULSA-PRO, which is primarily -- be driven by recurring revenue model. I'll now discuss key third quarter 2019 developments, starting with updates on our international installations. In July, we sold our first TULSA-PRO system in Japan to Hokuyu Hospital in Sapporo via Japan's Pharmaceutical and Medical Device Act's expanded access program. I'm happy to report that the system has been installed at this site and the first 2 patients were treated in October. In addition, 2 European sites have installed new 1.5T MR-Compatible TULSA-PRO hardware, and each site has treated one or more patients already. The international market has been important for TULSA-PRO, as I have described in the past. We have learned a lot about the full capability of TULSA, and that learning is critical to our U.S. launch. Since receiving 510(k) clearance in mid-August, our top priority now, by far, is the commercialization of TULSA in the United States. We have already visited about 75 U.S. institutions, most of whom reached out to us to learn about TULSA-PRO, including top teaching hospitals, multicenter health care companies and urology practices. There's a lot of interest in adoption of the technology with several of its features resonating strongly with the urologists' community. The first of these is that TULSA-PRO enables urologists, for the first time, to systematically customize treatments based on individual patient's need. This system can be used for whole gland prostate ablation, while allowing the physician to be conservative in the region in which the nerve bundles reside. Second, TULSA-PRO is flexible. It can be used to treat patients who would prefer partial gland ablation of only the disease areas of prostate or in salvage or palliative patients, where the size and shape of the prostate varies significantly from one patient to the next, because TULSA's closed-loop process control capabilities are able to ablate unusual shapes and sizes with precision. TULSA-PRO can even be used to shrink large benign prostates that cause highly symptomatic BPH disease. These patients would otherwise require surgical interventions that are associated with significant side effects. Third, TULSA-PRO is versatile. It can treat a variety of prostate diseases, and urologists have expressed interest in learning to use the technology more frequently. Finally, when referring to TACT data that showed that TULSA-PRO treated prostates shrink by an average of 90% within 12 months, one physician recently described the system as essentially a nonsurgical prostatectomy that allows the physician to minimize damage to patient's vital functions. This is precisely how we view TULSA-PRO's capabilities, and this is promising feedback. I'd now like to focus the remainder of the call on our TULSA-PRO commercialization strategy. The TULSA-PRO launch is targeting both capital sales and recurring revenue. We are focusing capital plus consumable sales on Centers of Excellence, including many of those hospitals that participated in the TACT trial. Many of these institutions will be relatively low volume, while TULSA is a patient self-pay procedure. However, they're best positioned to help drive the system's long-term adoption by participating in additional trials designated to support reimbursement, training the next generation of urologists and presenting their clinical results in medical conferences. Many of these centers prefer to purchase their equipment. And in those cases, we will sell the TULSA-PRO system and also get recurring revenue from the sale of consumables, system servicing and software upgrades. In contrast, we're focusing a recurring-revenue-only model on commercial centers for urologists to use as a patient service. Under this model, we will rent the system to the commercial center on a per-use basis in addition to selling them the consumables. Service and software upgrades will be covered by the rental fee. Under either model, it will take approximately 120 days from purchase order to first procedure, including system installation and physician training. This start-up time will reduce to 75 to 90 days as we gain experience. Although we are very early into the TULSA-PRO launch, we have already made material progress. I'm delighted to report that we expect the first commercial site located in Florida to perform its first TULSA-PRO procedure before the end of this year. In addition, we're talking with several imaging centers who have expressed a desire to implement the TULSA-PRO system placement model and currently expect to execute at least one multisite imaging center agreement within the next 90 days. Finally, after a great deal of consultation with reimbursement experts, we have decided to accelerate our reimbursement strategy for TULSA-PRO and are working to apply for a new technology C-code with the Centers for Medicare & Medicaid Services, or CMS, before the end of this year. If approved, a C-code would provide for a 3-year period of reimbursement for facility costs with patients only required to cover the physician's fee. To put this in perspective, if a C-code is obtained, patients would likely pay out of their own pockets about $2,000 to $4,000 for a TULSA-PRO procedure. While we are excited by the potential receipt of a C-code for TULSA-PRO, we're cautious due to the newness of the technology, and it is difficult for us to predict the likelihood of success. After applying for a C-code, it typically takes about 6 months to get a decision from CMS. As for the long term, we have already reviewed the additional clinical trials, including one for BPH, with our clinical investigators. As part of that plan, we have received approval to extend TACT by an additional 35 patients from the FDA, and we expect recruitment to begin in the first half of 2020. These trials will expand the body of clinical publications and enable TULSA technology's qualification for a specific CPT code. So to summarize, we look forward to, in the near term: first, the first TULSA-PRO procedure performed in the U.S., which is expected before year-end; second, our first multicentric commercial agreement, which we hope to execute by early next year; and third, progressing TULSA-PRO's reimbursement strategy by pursuing both a temporary C-Code and a permanent reimbursement CPT code.This ends our prepared remarks for today. With that, we're happy to take any questions you might have. Operator?

[Operator]

[Operator Instruction] Our first question comes from the line of Rahul Sarugaser with Raymond James.

[Rahul Sarugaser]

So I guess my first question is around your -- the multisite agreements that you referred to within the next 90 days. You referred to these as commercial centers and driving a recurring revenue model per use with the rental fee. Are you able to elaborate a little bit more on sort of the nature of these commercial centers and why a multisite agreement is a potential here?

[Arun Swarup Menawat, CEO & Director]

Yes, absolutely. So Rahul, as we talked before, our commercialization strategy has 2 prongs to it. The first prong is, as I described in our prepared remarks, we're looking at the opinion-leading sites. Many of them are TACT sites. And there, you have your standard model and you go to the hospital, you present your value proposition and you ultimately sell a system and there's recurring revenue. But the second approach here, which we think is very interesting is the imaging center model, where there are approximately 8,000 to 10,000 imaging centers in U.S. and about 40% of these imaging centers are owned by private businesses. And these businesses cater to their local urology community for imaging of the prostate and other diagnostics imaging. And so what we're working with, we're working with number of these imaging centers, where our system can be placed. And the benefit of this approach is the local urologists -- through that imaging center, multiple urologists can simply bring their patients to the site. So it allows for a new technology to be used by a number of urologists very quickly. For us as the supplier of the technology, the imaging center is well equipped to do these things. They have an MR tech. They have a radiologist. They have the relationship with the urologist. They also have the billing processes in place. They already see the patient for diagnose tests. They see the patient for post-operative care. So that's the model that we think can drive adoption of the technology at a relatively faster pace, and at the same time, drive utilization of a single device. So that's what's we're working on. And because these are businesses, rather than doing one agreement at a time, which is kind of what the hospital model looks like, here we can start to place systems at multiple sites and really drive adoption in a region at a time.

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

And it's a symbiotic relationship with the imaging centers who want to drive utilization. We have a number of these corporate entities who own these imaging centers, who are pretty motivated, because they love the -- or like the idea of driving utilization of their MRI time, filling up those slots, building a deeper relationship with the physician to get the diagnostic MRI business from the imaging centers too. You can imagine how -- if you're going to do procedures there, you're probably going to do your diagnostic MRIs there. So this creates a lot of value for the imaging center as well. So it's a very symbiotic relationship with us, the imaging center and then with the physician, because they're able to adopt it with very low barriers to entry. They don't have to buy the system, you're going to get a lot of help from the imaging center and us. And the learning curve, it shortens the learning curve dramatically when you have an MR tech or a radiologist, an MR person, all there working with the urologist, the learning curve gets shortened. And it depends how much lower risk procedure for the physician to decide to start doing. And so we're very pleasantly learning more and more about this business strategy being very robust.

[Rahul Sarugaser]

Great. That's really helpful. And so just a follow-on question from that then. As you transition sort of from this quasi capital plus recurring revenue model to a more primarily recurring revenue model, whereas before, it was sort of a few hundred thousand dollars of capital equipment and, I think, $3,000 to $4,000 for the disposals, what are the economics associated with the pure play about a recurring revenue model?

[Arun Swarup Menawat, CEO & Director]

So Rahul, our current ASP for the disposables is $4,200. And on a per click basis, we're quoting deals at -- we have to be a little bit careful what we say, Rahul, but we're quoting deals at something in the neighborhood of $3,500.

[Rahul Sarugaser]

Great. That's helpful. And then one last question before I yield my time. So that's fantastic that you're already looking at reimbursement and pursuing a C-code. So I know, Arun, that you said it's hard to prognosticate in terms of the likelihood of getting this within the next 6 months or 6 months after you put the application at the end of this year. But if I can push you a little bit to sort of give us a little bit more clarity in terms of what your expectations would be around getting this reimbursement C-code that would enable that sort of only $2,000 to $4,000 per patient pay.

[Arun Swarup Menawat, CEO & Director]

Sure. So Rahul, the -- over the last several weeks, I've reviewed the requirements for a new technology C-code. And I can tell you, on a technical basis, we meet the requirements. And I think that the other thing I could tell you is that other technologies that are treatment technologies within prostate historically have successfully received C-code. So there's certainly precedent that works in our favor. I think -- and I also think that the process we expect to file by end of November, and we should know by early July where we stand with them. And during that time, we will have dialogue with CMS and so on. So it will be a work in process. And so we will learn as we go and adjust as we go. I think the risk on our end really is the fact that there is newness in our technology or our file. And often, CMS looks for who is using it, how many people are already using it. We do expect that our TACT trial investigators will be contracted by CMS. And so from that perspective, I'm comfortable. But I think the biggest risk, clearly, is the newness and the fact that we don't have a commercial site running today. Now as we evaluate this, we will have commercial sites running. So we're hopeful that they will be able to take that into account. So I hope that gives you some color. And then for the long term, we will conduct the clinical trials that are part of our corporate presentation, and we will begin next year, as we've described before.

[Operator]

Our next question comes from the line of Ben Haynor with Alliance Global Partners.

[Benjamin Charles Haynor, Analyst]

First off for me, just knowing that you met with about 75 accounts so far with the -- it sounds like the majority are reaching out to you. It doesn't sound like there's been necessarily a lot of pushback on the TULSA-PRO system. But if there has been any, what has that looked like?

[Arun Swarup Menawat, CEO & Director]

I think the meetings have been evolving. And you're right, there have been incoming calls. We've not had to do prospecting. I can tell you, there is evolution of the meetings. So when we were -- prior to the 510(k), a good bit of time we were spending was really on the clinical data and explaining clinical data and providing some kind of a comparative narrative in terms of other technologies and providing the customization capabilities of our technology. What's interesting is that, I would say, in the last 6 weeks in particular, majority of the time that we spent -- and these meetings tend to be a couple of hours, half day, multiple meetings at each hospital. We -- majority of the time is actually being spent in them understanding fundamentally what the technology entails. And I find that to be very, very promising, because it is unique, because what we talk about is the fact that it's transurethral. There's water flowing in the catheter, so the source from which the ultrasound is delivered, there is -- it's a closed spot. And then the other end of it, the outer edge of the prostate is 55 degrees sharp. And the warm spot is in the center of the prostate. And they are really taking the time to understand the uniqueness of how energy is delivered and how it's a sweeping action. And then they always begin to ask question, what else can we do with it. And when we talk about the variety of things that we can do, I think that begins to resonate. So I think most certainly, the meetings are quite positive. The biggest pushback that we get is, as you would expect, is how quickly can reimbursement happen.

[Benjamin Charles Haynor, Analyst]

Well, it sounds awfully encouraging thus far. Just thinking about the meetings that you have had and the kind of the customer can see you lay it out there, whether it be it the commercial centers, the teaching hospitals or the imaging centers, is there a certain group that seems the most anxious to move relative to the others? I mean, at least the way that I'm parsing what you've talked about so far in this call and towards the end of the last call, it sounds like perhaps imaging centers are getting a little bit more excited than the others? Or am I reading that wrong?

[Arun Swarup Menawat, CEO & Director]

So I think both have these, the teaching hospitals, a number of them have indicated that men's health is an important part of their practice and that a new technology of this caliber is important to them. And many of them have indicated that they will budget for this system for next year. So I don't expect that -- these are big hospitals, I don't expect that they will appeal to us tomorrow or anything. But I do expect that the traditional way of selling the tech, where you go to the hospital, they get interested and they budget for it and then you follow the process, I think that is likely. That is certainly -- we're in the early stages of that. But I agree with you. I think that the imaging center, the thing that is unique is that it is more than adoption of TULSA technology for them. Because certainly, they want to make money doing the TULSA-PRO procedure. But for them, this is more strategic. This is about continuum of care of prostate. So they want to be able to use the MR from, as I said before, diagnosis to biopsy, to treatment, to post-treatment. And then that gives them a much more sticky relationship with the urologist that they really want to cater to. So it improves their relationship with their own customers. And then the other part of this is that they also recognize that these are elderly men who will need care of several things. So a good experience of this type is important to them. So I kind of feel like we're a little bit lucky in the sense that we're in the right groove that it is more than just prostate disease, it's a bigger objective for them.

[Benjamin Charles Haynor, Analyst]

Okay. That's very helpful. And then lastly for me, and maybe I'm overthinking this a little bit and I haven't had a chance to look through completely the CMS final rule for the physician fee schedule here too closely. But I saw that the American College of Radiology is out there, saying that radiologists are going to get dinged for about $5 billion in reduced reimbursement over the next 10-or-so years starting in 2021. Do you think that even adds to the incentive of some of these diagnostics radiology/imaging centers to seek out things like TULSA-PRO?

[Arun Swarup Menawat, CEO & Director]

So Ben, I think generally -- and I think the caveat is it always takes longer than we all think. So I think we want to be very careful on how quickly we get there for sure. But I do think that generally, this technology is fitting the right groove in the sense that overall, this is going to be less expensive, because we're in the MR suite as compared to the very expensive equipment for radiation or very expensive operating room. We're significantly less expensive compared to the current technologies that are the mainstream technologies. And the fact that on the other end of the spectrum, the fact that this is a day procedure and it's a single procedure, so even though I do think radiation is evolving and I think that the number of treatments needed will actually reduce, which is part of the reimbursement conundrum, because if you reduce the number of treatments, it will reduce the total reimbursement to the sites. I think from that perspective, I do feel we're in the right groove. And I think that part of the interest level that we see is related to all of that.

[Operator]

[Operator Instruction] It appears there are no further questions at this time. I would like to turn the floor back to Dr. Menawat for closing comments.

[Arun Swarup Menawat, CEO & Director]

Perfect. Thank you so much, and we look forward to updating you for our year-end call early next year. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.