Greetings, and welcome to the EDAP TMS second quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. A brief 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to John Fraunces, Managing Director of LifeSci Advisors. Thank you. Please go ahead.
Good morning. Thank you for joining us for the EDAP TMS second quarter 2023 financial and operating results conference call. Joining me on today's call are Ryan Rhodes, Chief Executive Officer, François Dietsch, Chief Financial Officer, and Ken Mobeck, Chief Financial Officer of the U.S. Subsidiary. 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 Chief Executive Officer, Ryan Rhodes. Ryan?
Thank you, John, and good morning, everyone. I will start today's call by providing highlights from the second quarter of 2023, and then turn the call over to Ken Mobeck, our U.S. CFO, who will then present the corresponding details of financial performance. I'm pleased to report that we achieved record second quarter and first half revenues, reflecting strong underlying demand for Focal One HIFU technology. Second quarter revenue of EUR 14.3 million was predominantly driven by new U.S. capital placements at leading academic and community hospitals, as well as from increased procedure volumes leading to higher disposable sales. We are very encouraged by the higher utilization trends of Focal One HIFU among our existing customers, which helped EDAP generate strong year-over-year HIFU revenue growth of 63.6% for the quarter. There are several factors contributing to increased adoption.
As a reminder, Focal One robotic HIFU is a non-invasive outpatient procedure that demonstrates excellent oncological control with minimal patient downtime and does not require use of surgery or radiation. Focal One continues to demonstrate strong clinical outcomes and favorable economics that are driving both growth and adoption. In fact, Focal One is now a leading and prominent focal therapy in 6 out of the 10 best hospitals for urology, according to a recent U.S. News & World Report. Focal One HIFU is also becoming one of the fastest-growing treatments within the category of prostate cancer management. Strong Focal One robotic HIFU capital sales continue to lead our top-line performance, with sales of 4 Focal One units in the U.S., including the first system placements in the states of both Kansas and West Virginia.
While we continue to see adoption at leading academic and regional cancer centers, we are also proud to announce the recent sale of Focal One to Memorial Sloan Kettering Cancer Center, which is a top-ranked, world-renowned urology institution. While prominent academic urology-focused hospitals continue to be strong proponents of Focal One HIFU therapy, community hospitals and large urology practices are increasingly adopting Focal One HIFU as a necessary treatment option for their prostate cancer patients. Procedure growth is also an important metric that we follow closely. As noted, Focal One HIFU procedure volumes in the U.S. experienced robust 85% year-over-year growth in the second quarter. Sequentially, procedure volumes grew 29% in the second quarter of 2023 as compared to the first quarter, representing our third consecutive quarter of double-digit percentage growth.
We attribute this acceleration in procedure growth to our strategic investments to grow the Focal One clinical sales team, combined with improved reimbursement rates. While we continue to see favorable impact on demand for higher reimbursement in the U.S., in July, we were also pleased to announce reimbursement approval in Switzerland for the use of high-intensity focused ultrasound in the treatment of prostate cancer, having taken effect on July 1, 2023. Switzerland is a member of the DACH region, including Germany, Austria, and Switzerland, with over 100 million combined total inhabitants. Switzerland has many hospitals ranked among the best 250 in the world, according to Newsweek's The World's Best Hospitals 2023.
Included in this list is the University of Zurich, an active, prominent Focal One site and the leading innovation center for HIFU in the country, and a member of the League of European Research Universities, placing it among Europe's most prestigious research institutions. We have also made commensurate investments in ongoing educational activities, including the live broadcast at Focal One procedure performed by Dr. Andre Abreu and Dr. Amir Lebastchi, Assistant Professors of Clinical Urology at the Keck School of Medicine at the University of Southern California, the first institution to acquire and adopt EDAP HIFU technology. In April, we broadcasted this live event worldwide and discussed its success on our last earnings call. A replay of that procedure is still available to view at our website, focalone.com.
In April, we had our largest presence ever at the American Urological Association meeting, with many productive engagements among prominent clinicians, hospital executives, and other stakeholders who validated our leading position in the category of focal therapy. As a reminder, there were multiple Focal One scientific abstracts presented by several prestigious institutions, including the Martini-Klinik in Hamburg, Germany. The Martini-Klinik has the largest prostate cancer treatment program in the world. The AUA abstract, presented by the Martini-Klinik, highlighted 7 years' experience using Focal One high-intensity focused ultrasound in 164 patients with prostate cancer. All treatments were established as primary therapy, and monitoring definitions followed a very strict protocol. The oncologic outcomes showed excellent cancer control, with only 7% significant infield recurrence and 91.5% radical treatment-free survival at 7 years.
On the functional side, very few complications were reported, with 91.5% patients maintaining their baseline urinary continence and 85% maintaining their baseline erectile function. These results were impressive as we continue to further educate clinicians, patients, and providers on the benefits of Focal One robotic HIFU. Additionally, throughout the AUA meeting, EDAP was very busy giving numerous customers the hands-on ability to use Focal One in a simulated prostate ablation procedure. They were able to see in action the robotic positioning system, advanced imaging, and fusion capabilities while setting up a prescribed ablation treatment plan. More recently, Focal One was the only focal therapy invited to present and participate in a plenary panel on innovative robotic systems at the preeminent annual meeting of the Society of Robotic Surgery, held in Melbourne, Australia. I'd now like to provide a brief update on our distribution business.
As previously announced, during the first quarter, EDAP received approval from Japan's Pharmaceuticals and Medical Devices Agency for commercialization of ExactVu micro-ultrasound, enabling EDAP to emerge as a major player in the prostate cancer market in Japan. Japan remains the second-largest market for advanced medical device technology, with prostate cancer being the most commonly diagnosed cancer in Japanese men, with over 100,000 new prostate cancer diagnoses made annually. Following this approval, EDAP had a strong presence at the 110th annual meeting of the Japanese Urology Association, which showcased and officially launched ExactVu micro-ultrasound in Japan. During the quarter, we sold nine ExactVu units. We continue to see ongoing demand for this differentiated advanced imaging technology that is becoming routinely used in performing targeted biopsies for prostate cancer. In parallel, our Focal One HIFU clinical development programs are progressing well.
Last quarter, we reported positive results from the Endo HIFU R1 phase two study in deep infiltrating rectal endometriosis, where patients treated with Focal One HIFU experienced measurable improvement across a broad range of debilitating symptoms. Following these positive results, we are pleased to report that more than 50% of the patients have now been enrolled across six centers in France for our confirmatory phase three comparative double-blind, randomized controlled trial. As noted, the primary efficacy endpoint for this 60-patient study is a level of acute pelvic pain, as assessed at three months post-procedure. If results from the phase three trial mirror those from the phase two trial, we would possess strong clinical evidence to support Focal One HIFU as a new, effective, less invasive, first-line treatment for deep infiltrating rectal endometriosis.
Given how few treatment options are available, Focal One HIFU could become an important new treatment option, enabling patients to avoid the known morbidity and complications often associated with surgical resection of the bowel or rectum. Looking ahead, we expect both growing demand for new Focal One HIFU systems, as well as increased utilization among our existing customers. With EUR 51.3 million, or $56 million in cash and short-term investments, and de minimis debt, we remain well positioned to invest in our sales, marketing, education, and clinical development activities to support the continued expansion of Focal One HIFU.
The strategic and ongoing investments made in the first half of 2023 will support the increased demand in the U.S. marketplace for our technology. With our growing active pipeline for new business, we anticipate continued strong adoption of Focal One technology platform with respect to new system placements and increasing utilization. With that, I will now pass the call over to Ken to review the second quarter financial performance. Ken?
Thank you, Ryan, 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 1.0871 for the second quarter of 2023. Total revenue for the second quarter of 2023 was EUR 14.3 million, an increase of almost 1% as compared to total revenue of EUR 14.2 million for the same period in 2022, and a record level for a second quarter. Looking at revenue by division, total revenue in the HIFU business for the second quarter was EUR 4.9 million, as compared to EUR 3 million for the second quarter of 2022, a 63.6% increase year-over-year.
As referenced, the increase was driven by selling 4 Focal One units in the second quarter of 2023 versus 1 unit sold in the second quarter of 2022. Total revenue in the litho business for the second quarter was EUR 2.2 million, as compared to EUR 3.6 million for the second quarter of 2022. The year-over-year decline in litho revenue was mainly attributed to 6 less units sold year over year, as well as supply chain constraints with a few key suppliers during the quarter. Total revenue in the distribution business for the second quarter was EUR 7.2 million, as compared to EUR 7.6 million for the second quarter of 2022.
The decline in distribution revenue was primarily driven by 9 ExactVu units sold during the second quarter of 2023, as compared to 15 units sold during the second quarter of 2022. Gross profit for the second quarter was EUR 5.7 million, compared to EUR 6.2 million for the year ago period. Gross profit margin on net sales was 39.6% in the second quarter, compared to 43.8% in the year ago period. The decrease in gross profit margin year-over-year was primarily due to distribution product mix, global inflationary price pressure on components with increased manufacturing costs, and continued investments in our U.S. service and clinical application organizations to support HIFU and long-term revenue growth.
Operating expenses were EUR 9.9 million for the second quarter, compared to EUR 6.6 million for the same period of 2022. The increase in operating expenses was primarily due to the strategic and planned build-out of the US team and commercial infrastructure, variable compensation, and increased marketing activities. Operating loss for the second quarter was EUR 4.2 million, compared to an operating loss of EUR 0.4 million in the second quarter of 2022. Excluding the impact of non-cash share-based compensation, operating loss for the second quarter would have been EUR 3.1 million, compared to an operating loss of EUR 0.1 million in Q2 2022.
Net loss for the second quarter was EUR 4.7 million, or 0.13 EUR per diluted share, as compared to net income of EUR 1.8 million or 0.05 EUR per diluted share in the year ago period. Total cash and cash equivalents at the end of Q2 was EUR 51.3 million or $56 million, as compared to EUR 58.3 million or $63.4 million at the end of Q1 2023. We continue to monitor cash flow closely as we invest for long-term business growth, while also remaining cognizant of short-term financial performance. Through our strategic investments, we are confident in realizing the extraordinary opportunity with Focal One HIFU to fundamentally change the emerging treatment paradigm for the management of prostate cancer.
Those are our key financial highlights for the second quarter of 2023. With that, I'd like to turn the call back to Ryan. Ryan?
Thank you, Ken. In summary, our second quarter results continue to reinforce our confidence in the growing demand for Focal One, as well as validating our strategy and execution to drive education and adoption. Sales and unit placements of Focal One are growing, along with increased Focal One HIFU procedures. In closing, we remain optimistic about the remainder of 2023. I would like to thank the entire EDAP team for their dedication and hard work that is driving increased awareness amongst clinicians and patients of Focal One HIFU as an important and growing treatment option for prostate cancer management. We look forward to sharing our progress with you again in the fall, and I will now turn it back over to the operator for questions. Operator?
Thank you. Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you please limit yourself to one question and one follow-up. Again, that's star one to register a question at this time. The first question today is coming from Michael Sarcone of Jefferies. Please go ahead.
Good morning, and thanks for taking my question. So first one is just on the four Focal One system sales in the U.S. I guess, can you just talk more about the sales funnel and how demand is shaping up there? And maybe how you think the trajectory of system placements might shake out, you know, through the remainder of the year.
Yeah, so we continue to see our active pipeline growing. As noted, we have added additional headcount. We're building, you know, a broader coverage model, and, again, our pipeline continues to grow. We have a number of projects in play, and we expect to have, you know, notable sales in both Q3 and Q4. So, we would say openly, the back half of the year should be a stronger, stronger portion of the year. So, currently, again, we've got our team active. We have some deals in process, and, you know, we're excited to close out both Q3 and Q4.
Great. Thanks for the color. Maybe just a follow-up on that. So if you had about 11 system placements in 1H, just, you know, based on your commentary, that means we could see above that for 2H?
Oh, definitely. I would say above that for sure. And, again, we continue to grow the commercial structure, and with that, we broaden the number of hospitals, as I would say, in our active pipeline.
That's really helpful. Thanks, Ryan. And then just, you know, last one for me. 85% procedure growth in the US seems pretty strong. Can you just give a little more color on what you're seeing in terms of the utilization environment, even if it's, you know, trends in procedures per system? And then, you know, is there any way you can, you know, quantify or ballpark the number of procedures you're seeing, either quarterly or annualized in the US?
Yeah, Michael, we don't give out our actual procedure numbers. What I would say is we continue to see increased utilization, both in our install base customers and even new customers that are just acquiring the technology. We track metrics to include time to first case, time from case 1 to case 10, and beyond. So, I think we're seeing the impact our clinical sales team is making, but we're also seeing, you know, the consumer, that is, patients, looking for other options beyond just surgery and radiation. And again, I think in our message, we have a non-invasive treatment option for men diagnosed with prostate cancer. So we continue to create more market awareness, and I think that also will breathe additional momentum into our story.
Great. Thanks so much, Ryan.
Thank you, Michael.
Thank you. The next question is coming from Frank Takkinen of Lake Street Capital Markets. Please go ahead.
Hey, thanks for taking the questions. Wanted to follow up, just one more question on placement expectations in the second half of the year. Ryan, was hoping you could comment on regular seasonality trends. I know I asked about this last call, but was looking for just an update, if you expect that Q3 being a summer month, OUS seasonality more pronounced, and sometimes U.S. seasonality more pronounced as well, with the majority of those greater than 11 implants in the fourth quarter as an expectation.
Yeah, Frank, we don't see, at least as we're going through the quarter, the seasonality we would typically experience in, say, a summer slowdown. We don't see that. I think we see the momentum building. As mentioned earlier, you know, again, our pipeline continues to develop and grow. We've got our team heads down and focused, and I would expect a strong, stronger second half of the year. Again, so I don't see the, you know, the slower Q3 that may be common for other companies or other technologies. I think we have that momentum as we walk into the back half of the year. I think that's where we stand.
Got it. That's helpful. Then on the procedure side, I know one thing you, you've spoken about in the past is related to the disposable ASP with the renewed reimbursement at the beginning of this year, and maybe having a little bit of flexibility to increase that ASP or, or slowly increase that ASP over a number of years. Can you maybe update us on that dynamic and whether or not you still think there's more room to go on the ASP-related disposables?
So great question. I would say, yes, there is an opportunity, and I would say, historically, since I've been in the company, the ASP on procedures has gone up. We continue to look at it closely. We work very closely with our legacy customers, and we've, you know, we've had some price increases, notably, with certain accounts, and continue to see that, you know, average, called average sales price per procedure going up. Now, again, you know, we pay close attention to that, and we monitor, and that also plays true for the new accounts that acquire our technology. So, I'd say we'd say there's room to grow, for sure.
And again, I think we enjoy some additional advantage, advantages from the reimbursement that's in place.
Got it. That's good color. I'll stop there. Thanks for taking the questions.
Thank you, Frank.
Thank you. The next question is coming from Jason Bednar of Piper Sandler. Please go ahead.
Hey, good morning. Thanks for taking the questions, guys. Wanted to follow up, just really on the Focal One placements, and, sorry to ask another one here, but I wanted to check to see just how or whether the rate environment and the broader macro dynamics out there are just influencing the attitude of hospitals, you know, both on the large academic side and the community centers. Are your prospects moving forward at the same pace as what you've seen historically?
I may know the answer just based on how you responded to Frank's question just there, regarding business strength here in the third quarter, but I just wanted to check to see if that's a dynamic at all that's influencing conversations you're having and whether, you know, business actually might even be, you know, stronger than what you're seeing in the third quarter, if not for some of these macro factors.
Yeah, we don't really see any headwinds related to that. You know, I know with interest rates going the direction they're going, we have not seen the impact on that. You know, we are in a category of disruptive capital equipment. However, we're also in the category of strategic capital. So again, hospitals, as you know, routinely buy capital equipment. But again, you know, adding Focal One and adding focal therapy, or in our case, robotic focal HIFU, we see it as a strategic initiative, and we work very closely with our hospital customers as we move through that buying process. So again, I don't put us in the category of operational capital. We are strategic capital. And I
You know, again, you can back it up in the state of, hey, it's clinically necessary to offer something today, we believe, in focal therapy. It's also strategic for a hospital, and it can bring strong economic reward. So, we have that in our, in our narrative.
Yeah. Jason, the only other thing I'd add regarding your question is we have seen in the hospital environment, in the purchase environment, they're taking time in approving their purchases, okay? We had a few systems get stuck in the buying process in Q2, we see going through in Q3. So if anything, they're just taking a really good look at these purchases before they buy them.
Okay, so maybe just a longer sales cycle, but not actually influencing the yes or no decision.
Exactly.
Perfect. Okay, that's very helpful. I also wanted to ask kind of on the gross margins. They're a little bit below what we were looking for. I know you called out some of the factors that were, you know, influencing some of that softness, but maybe if you could just add any more color on the distribution side, that was probably the bigger miss in our model. But then any other directional, you know, guidance you can give? I know you don't, you know, offer formal guidance, but any color on how to think about whether it's segment or company-wide gross margins going forward, and, you know, whether we're at a trough here or if we need to contemplate additional service investments that may still then weigh on those gross margins going forward.
Yeah. So, good question, Jason. You know, the one big thing was our distribution mix, you know, this quarter. So, you know, I look at that as kind of timing related. We're always going to continue to make investments to grow the company forward. You know, our operating expenses are continued to, were continue to grow, but we're monitoring them closely, right? We really need to invest in areas that's really going to drive the sales funnel. So as well as, you know, on the COGS line, we've got to build some support to, you know, get the tools installed and serviced as well. You know, we did see a little bit of inflationary price pressures that we're gonna that we're monitoring. Obviously, you know, we're looking at solutions to that.
And then, you know, just going forward, you know, I do see when the mix gets stronger, as Ryan noted, you know, we do expect Focal One to pick up here in the second half. And then, you know, as we noted earlier in the year, too, we increased our prices as well, our list prices for Focal One. So I do see margins picking back up, you know, versus where they ended up in Q2.
All right. Very helpful. Thanks so much.
Thank you.
Thank you. The next question is coming from Swayampakula Ramakanth of H.C. Wainwright. Please go ahead.
Thank you. This is RK from H.C. Wainwright. Good morning, folks. You know, with increasing volume growth, as you stated, about, you know, 85% year-over-year and 29% or so quarter-over-quarter, when would you expect this to be reflected in your consumables growth, revenue growth? Just trying to get an idea in terms of, you know, the cadence of that, that revenue flow.
Yeah, RK. First thing, you know, again, we build, we build programs. So when the system is placed, you know, there's a training event for the team, we call it an onboarding process, and so that, you know, can take some time. It really depends on each hospital, they're individual, but we do everything to shorten that timeline. So I think, you know, when we'll see more of a notable impact over time is certainly as we place more systems, but also as systems get used to using the technology and, you know, have clinical use and patients treated clinically and successfully, I think just organically, you're gonna see, you know, an increase in same-store sales.
And we have a dedicated team, both a clinical sales team and applications team, that work very closely with our customers. So I think as you look outward, you know, it takes a while, but, you know, notably, based on percentage increase, we see, you know, an increase of procedures, and that is both in our legacy accounts as well as, you know, we are placing more systems. So I think over time, that'll be something to look closer at. And again, you know, we are very focused on our procedures, as noted, and we continue to resource that team accordingly.
Thank you. I'm just trying to get an additional color on the sales cycle timing. You know, with the, with reimbursement in place, and you stated, you know, in an answer to the previous question, that the sales cycle is becoming a little bit longer because they're trying to take a closer look. Any additional color, you know, why that is so? Is that more on the financing side of things? Or, you know, I'm just trying to understand what is making that sales cycle longer. Is it more administrative stuff? Anything at all.
Yeah. It'd be fair to say today, hospitals that are looking at making investments in new innovative capital equipment, they, you know, typically go through their own pro forma analysis. So, you know, those pro forma analyses, you know, vary by institution. And, you know, some institutions move faster than others. Some may slow down. They just, you know, wanna do their due diligence. And, you know, again, we're adding, in many cases, it's a new revenue-enhancing service line. And with that said, you know, they just wanna look at the numbers and run some calculations. As we have said in the past, we have favorable economics, and, typically, you know, when we go through that process, you know, it leads up, you know, ultimately to a sale.
So, again, I think it varies by institution and as Ken had referenced, and it's not for every hospital. I think, you know, some will always move faster than others. But, we're accustomed to going through that process, and we pay a lot of attention to it. You know, if it slows down, we're active with our customers, kind of working shoulder to shoulder, to make sure we answer any questions they have, or we can help them fully appreciate and understand the financial return from their investment.
Thanks for that. And then on the Swiss reimbursement, with that in place, you know, how long do you think it could take for it to reflect on your sales? And how big is the Swiss market or associated countries along with Swiss?
So, as noted, we first off, you know, Switzerland is a country, you know, with essentially three languages, right? You have the German side, you know, Zurich and the Cantons, you have the French side, and then you even have an area of Italian influence. And so, I think back to the reimbursement, we've been active in Switzerland over the years. As mentioned, we have a very prominent program at University of Zurich with Professor Daniel Eberli. And we have other systems placed, you know, in the Geneva market, et cetera. So, you know, to really say how big the market is, I mean, there's a handful of hospitals that are well known and prominent, and some of those we're actively working with.
I can't give you a hard number, but I would say this: our sales teams are active in the market. We know our customer base, both the legacy base and our target customers, and we're resourced well to go after that business. And, you know, I'm excited. I think this is, you know, notable, in a country that is small. Switzerland is not a big country, but a country that is, that has influence in Europe.
So last question from me. On the litho business, you know, you stated, there was some supply chain issues. Is that pretty much limited to the litho business, or, you know, can it bleed into other divisions as well? And, you know, how long do you think the supply chain issue would last within the litho business?
Yeah. So the supply chain is, and it's not so much related to us, it's the componentry that they would bring together or purchase alongside of our proprietary lithotripsy technologies. So, I don't think it's a long-term thing. In fact, we, you know, those sales are just delayed until they have the ability to purchase the other components that work alongside our lithotripsy technology. So, and I don't see really any spillover into any other areas of our business today, as stated today. So again, I think it just, you know, we had some sales that were ready, but, you know, they need to get their the additional components added, as noted. And, we don't see any impact in our other distribution business at this point.
Thank you. Thank you, Ryan, for taking all my questions. I appreciate it.
Thank you, R.K.
Thank you. At this time, I'd like to turn the floor back over to Mr. Rhodes for closing comments.
I want to thank all who participated in today's call. As a reminder, we will be presenting in New York at both the Morgan Stanley and H.C. Wainwright investment conferences in September. In November, we plan to participate in the Jefferies Global Healthcare Conference in London, and we look forward to speaking to all of you again in November on our third-quarter earnings. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.