All right. Welcome, everyone. I'm Jason Bednar. I cover MedTech here at Piper. Next fireside chat is with EDAP. Very happy to have with us today EDAP CEO Ryan Rhodes, and also CFO Ken Mobeck. Thanks a lot for being back at the conference this year. Really happy to have you back.
Thanks for having us.
Yeah. We'll dive right, just right into Q&A here. We'll start—why don't we start big picture? Ryan, I mean, you always have a pretty good, pretty good response and knowledge about the capital environment. So what is the capital demand and spending environment, you know, look like today? It seems like it's been pretty solid, judging by your results, results from other, other major capital players. But, you know, generally speaking, is, you know, how do you see the capital environment broadly as we sit here today? And then, also for differentiated equipment like Focal One.
Yeah. I, you know, I get this question quite frequently. You know, I think today, you know, hospitals are under constraints and/or pressure to constrain spending in certain areas. I think if you're in a capital equipment space, as we are, premium price capital equipment, you really have to meet an important clinical value proposition. I think the investment from the hospital side needs to be strategic in their mind. That's what's great about our story. We sell something that is clinically necessary. It's in the number one diagnosed cancer in men. It's strategic for a hospital to make that investment and to enjoy first mover market advantage. It has strong and tangible economic reward.
With that said, you know, when we engage with hospitals through the sales process, we see ourselves in a lane of strategic capital, not operational capital. I think that's really important for companies out there that are, you know, selling premium price capital equipment. You've really gotta—you've gotta solve a real problem. That investment from the hospital's perspective needs to be strategic. Those processes will be elongated over a longer period of time, and you're gonna have to defend yourself against other investments they may make. I think notably, we've had some good momentum building. As noted, last quarter, we had 167% growth just in our capital sales, the sales of Focal One. We've gotten better navigating that process as a whole.
Would you say that the capital environment and your navigation of that process, is that consistent U.S., OUS? You think you're further along in one market than the other? I know it's hard from a single quarter, but just, you know, juxtaposing those two together or next to each other, what is it? How do you—how do you see those two markets?
Yeah. You know, I, I when I reference the U.S., I reference what I had just mentioned. When I look at the OUS, I look a little differently. You know, it is region by region, country by country. However, I, you know, on an objective level, you know, we're in a—we're in a new era of treating prostate cancer. It's not the old era where it's just purely radiation, surgery, or active surveillance. Focal therapy is in play and arguably the fastest growing treatment category within prostate cancer. When I look at outside U.S. markets, you know, that capital environment can vary. However, you know, we see an increase in sales in our OUS business, whether it's in markets directly, in Western Europe.
We've made some expansion in our commercial teams to be able to address the U.K., the Nordic region, the Middle East. We're active in a lot of those markets, and we continue to sell in those markets. I would say the sales process can be a bit longer in certain countries and regions, but the value and utility of what we bring with Focal One is real. Again, we're talking about a very common disease, prostate cancer.
Yeah. Take us maybe a step deeper into the sales process. What resonates best with customers? I would assume it's pretty similar, U.S. and OUS, but correct me if I'm wrong. Is it clinical? Is it the economic argument? Is there something else? I mean, what really resonates? Like, what's that aha moment for that account?
Yeah. That's an important question. I'd say, you know, clinically, we're in a new realm of how we treat this disease. Really, it's because of advanced imaging. We can see today in a better way, which improves the fidelity of how we biopsy patients and ultimately risk stratify patients. You know, the aha moment for a lot of physicians is, you know, when I ask them, is there a defined role for Focal therapy in a subset of men diagnosed with prostate cancer, they overwhelmingly shake their head, yes. That's back to solving a problem, meaning we were overtreating this disease with radical treatments, surgery, and radiation. We're in a new realm of treatment.
We went on the clinical discussion, and it always starts there anyway because physicians are providers and hospitals are point of care. Equally though, the disease state is large. We're talking prostate cancer, you know, one that is growing, and, and, and expected to continue to grow. I think on the economic equation, we're in a good place. And when I say that is, you know, we're, we're an outpatient procedure. We're at APC 6. That reimbursement, CMS, Medicare reimbursement will go up approximately 5% in four weeks. We have seen some increases over the last couple of years, but I'm excited to state that there will be a 5% increase approximately going in, in January 1. The economic is there to support the investment from the hospital side. Clinically, the story's real. It's in play.
You know, we're in nearly 50 academic centers just in the U.S., and we're talking top brand centers, you know, Memorial Sloan Kettering, Mayo Clinic, Cleveland Clinic, the list goes on. We have actually seven hospital systems that have bought or acquired a second Focal One. You know, the story is certainly out there. I'd say the only thing that, you know, that we face, and it's not unlike anyone else, is when you get into the discussion of the investment, you know, how do we buy this? Do we buy this with capital dollars? Do we do some flavor of a creative lease? You know, there's a plethora of options out there for hospitals today. We've gotten better in working with third-party leasing companies.
We have step-up leases as an example, and we have other means to get them into the technology.
Okay. All right. Maybe taking this one step further, we think about, like, what's easy about the process, what's hard about the process. We talked about my sense from your response, the clinical seems like it's easy. It's an easy sell.
Yeah.
The economic, hospitals are always gonna question it, but then you get them over the hump. What about, like, the workflow adjustments or comparing, acquiring Focal One versus other competing technologies? Are those easy conversations or are those hard conversations?
They're relatively easy in the sense that we're defined in a very prominent cancer. And if you think of other investments they may make, you know, this, in their minds, when we present it to them, is strategic for them. So we're, you know, we're faced with the same things a lot of other capital equipment companies are faced. Are you in a Value Analysis Committee or a technology assessment committee? And these, these committees exist in hospitals today just because the increased demand on buying new innovative capital equipment—I mean, think of how many robotic systems are out there. When I was at Intuitive, we were the only robotic system really in the market back in the day. And fast forward today, you've got robotics in, in soft tissue and bone spine and skeleton and neuro, etc., etc.
You really, you know, in thinking through that process, you've really gotta be strong in your value proposition. You know, when we get in front of hospitals, you know, we don't get—we're not buying it. We may see an elongated period of them going through the procurement process, meaning that they're gonna appropriate funds and we're at the top of the list and that kind of thing. We don't typically lose out against other technologies, because, you know, if you were buying a da Vinci today, I would argue, and I worked there for almost 14 years, that that is really an operational capital expense. You've already got a da Vinci system or many of them. This is important because, as I said earlier, we're talking about the fastest growing treatment category within prostate cancer. We're leading that growth with Focal One robotic HIFU.
Okay. If we pick up on the ROI piece or go back to that, how quickly did these—this to your systems, the Focal One pay for itself? Or what are the selling points that you talk about with accounts, in terms of payback? It sounds—everything we've talked about so far sounds like this should be lucrative for hospitals. Kind of the underlying question is, why wouldn't hospitals move quicker if it is as lucrative as it is?
Yeah. That's an important question to ask. I think hospitals are getting better educated on the value and the importance of offering Focal therapy to their patients. I see hospitals getting more up to speed on that. Remember, this is kind of—this is only, you know, in terms of a category, emerged in the last five to seven years. It's been slow because, remember, surgery has been around for well over 100 years, and radiation has been around for numerous decades. You know, I think it's when hospitals realize too that the value here is, you know, we talk about low risk to intermediate risk cancer patients.
Are they best served with a radical treatment or something such as targeted robotic HIFU therapy where we've already shown with some of the new data that came out in the end of last year, the HIFI Study, you know, remind everyone, the largest study of its kind, 3,200 patients, nine centers, comparative perspective. It showed that we meet the criteria of oncologic control. We also know that the FARP, Focal Ablation versus Radical Prostatectomy Level One Evidence clinical paper will likely be published within the next six months. That proves exactly the same things: oncologic control and patients doing better when you leave the gland in place and only treat the cancer. Patients do better both on the sexual function side, preserving sexual function, but also preserving urinary continence. I think our story is early and propagating.
You know, we showed an increase in system sales last quarter. We showed an increase of 15% in procedures. We had sequential growth of 11% quarter over quarter with procedures. I think the market is starting to activate now. I get asked this question a lot about, you know, where are you in the adoption life cycle? You know, if you go to Geoffrey Moore's Crossing the Chasm, I know this life cycle well because I lived through it at Intuitive. We are really in the early part of early adopters. We are in that one-third area of early adopters and moving forward as noted.
I was gonna ask this later, but you brought it up, the FARP and HIFI studies. Is, is are these enough to help you cross that chasm? Do you need other data or is this gonna be the trigger, or kind of the, you know, that vault, if you will, to cross that chasm?
Yeah. I think it's already showing an impact. I mean, the HIFI Study is already out there and there's a dedicated website that talks about it, hifistudy.com. I think the FARP, being the fact that it's a randomized control trial, it's an RCT, which would be very difficult to do today, say in the U.S. I think you would really struggle enrolling patients to do that study. The principal investigator has been congratulated on being able to pull that study off. I think there is adequate evidence. Organically, you know, if you look at our install base of top academic centers, they're all collecting data today and they're all presenting at various meetings, whether in a video abstract or a podium abstract. Some are collecting data for longer-term clinical publications.
For instance, this week, the end of this week is the Society of Urologic Oncology, which is the elite of elite urologic cancer centers in the U.S. We're in 60% of those centers already with Focal One. They've purchased a Focal One system and we hope to be in 100%, obviously, in the near future. Back to your question, I think we're in a very strong position with the data, in the HiFi study already out there, but equally compelling data that will be presented in a peer-reviewed publication with the FARP trial, though the data has been presented at numerous scientific meetings already.
I think, you know, I think we're in a very strong position knowing that these studies are really a reflection of our technology and the ability to treat patients, efficaciously.
Okay. Thinking about the outside, outside the U.S. market, talk to me about the strategy of what I'd call casting a wide net, going after a lot of different markets, going very broad versus being very concentrated and focusing on, say, just the U.S. or just the U.S. and a handful of maybe European markets. Why is the casting wide net strategy the right one to take?
Part of that is a lot to do with our company's legacy. You know, we were a formidable player in extracorporeal shock wave lithotripsy. So we've already been in the urology call point and we sold through various distribution channels and in our products direct in certain select OUS markets. So we're already in those markets, which is good for us because when we want to expand, we've got a market presence already. I think, you know, that helps us a lot in that discussion. We've also been very clear with our strategy to really focus on our core HIFU business as we've wound down the ESWL, or extracorporeal shock wave lithotripsy business. We're getting out of that business by design and also winding down areas of distribution that the company has had in the past.
We see really the golden opportunity, and most would agree, is that, you know, we have an opportunity to really drive targeted robotic HIFU therapy into multiple areas, and go even beyond the prostate as we know in women's health.
Yeah. I actually wanted, you said it's a, it's a nice entry into the, called the indication expansion. How important is that part of the story to EDAP? Go ahead and I'll ask a follow-up after that.
I think it's, well, we have enough to work on today with prostate cancer and we're still in our infancy of growth. I think when you think broadly, where is HIFU therapy in the future? We already know companies like Insightec are using it in the brain to treat essential tremor.
Yep.
There's other applications being looked at, everything from varicose veins to thyroid disease to, you know, benign nodules in the breast and beyond. I think HIFU holds a lot of promise. If you think of companies like HistoSonics, histotripsy, we're in the same neighborhood ecosystem of histotripsy. I mean, it's in the same world. It's targeted, sound therapy, sound-based therapy to, you know, whether to do bubbles or, you know, create heat from a distance, etc. I think HIFU holds a lot of promise. It doesn't have the toxicity of radiation. It doesn't have the morbidity of surgery. I think with advanced imaging and robotics and AI now coming, I think we have a huge opportunity to apply the technology in multiple indications. I think expanding is always good because it strengthens the value proposition for the hospital to make that investment.
We generate enough, upfront modeling around ROIs for a hospital to make that. If you say, "Hey, we have a women's health initiative with stage four deep infiltrating endometriosis," that, that's a good story as well. Women in this subset of women don't have a very good option. Their option is purely surgery, a rectal resection, partial rectal resection, or a serosal stripping procedure, all based on uterine preservation. We think that HIFU has a lot of promise there and we're excited about expanding indications.
Okay. Can HIFU be a growth story for you even without indication expansion?
Yes.
Okay.
Yes.
All right.
Not, not without a doubt. We have so much upside, especially when we think of prostate cancer, and also BPH, which, you know, we're actively involved in some study work with BPH.
Almost like, you know where my brain's going. I was gonna ask about BPH next. You're, you're gonna be running a larger trial here in the U.S.
Mm-hmm.
I think that's the intent. You're starting the initial feasibility study here, first patient before year end, correct?
Yeah. We're enrolling patients now. We have an open IRB here with a major academic center in New York. We expect to treat 17 patients. While that's going on, to kind of fast track our progress, we have a combined phase I/II study going on in Europe. While that's going on, we're enrolling patients now. We would expect to be treating patients in the first quarter of 2026.
Okay.
here in New York.
Yep.
That's our plan. We've got our best and brightest working on this project.
Okay. After this initial study, what is, what's the path forward? What's next for the BPH indication?
Yeah. I would see we have the IRB as we referenced, expanding that to more centers, and so we have data that we'll be accumulating from the activities in Europe combined with this IRB, but expanding that IRB to a multi-center study here in the U.S., because I think we'll have enough there to be able to say, like, you know, and that might be just an opportunity to get right in front of the FDA just to get a flavor and a preset what they may be looking at as far as data endpoints and what they'd like to see in a study protocol. The good news is we've got multiple activities in play, concurrently to support getting an indication in the not so distant future.
We'll know more on BPH next year.
Yeah. Yeah. I think next year will be very, very, yeah, we'll provide some updates on that, on the progress.
Okay. All right. Great. Ken, I want, I wanna bring you in, you know, talk a little bit about some of the financials, the, you know, the fourth quarter outlook here and also on the margin side. Thank you. Last update coming out of the third quarter call sure seems like fourth quarter's gonna finish pretty strong. I think you usually do a pretty good visibility on install schedules. You know, is, I guess, is that a fair way to characterize it when you're guiding in, in November that you have, you know, pretty good line of sight as how the rest of the year's gonna play out, at least for, again, your, your installs here?
Yeah. Good question. When you look at where we're at this year, right, we feel very comfortable we're in the guidance range that we gave, that if you look at, we guided HIFU revenue up 26%-34% and our non-core business down 25-30%. As Ryan referenced earlier, we're really focused on the HIFU segment going forward. We really feel that is the growth engine for the company. It's also accretive to our gross margin by focusing. When you look at our three categories of revenue today, our HIFU margin this year has trended to the high forties. Our ESWL urinary stone business is tracking in the low 40s, and our distribution business is in the low 30s. We feel very good as we focus more on HIFU.
It's going to drive incremental revenue that will be accretive to the company's margin profile, which was 42% in third quarter. I think it's showing we are validating our strategy because when you look at gross margins in the Q3 of 2024, margins are up from 39% - 42%. We also, historically, Q3 is our down quarter. As we reported last quarter, we did see an uptick in Q3 versus historical trends. Yeah. I would also mention.
Yeah. Please.
In April of this year, we launched Focal One Eye, which is a new platform, both with improvements in a number of areas, hardware, software, and also making sure that that system is capable for future applications such as endometriosis. With that said, we raised our average selling price. I am excited that our ASP in the U.S. is around $650,000. We have also put out an announcement around our recent 510(k). Part of that 510(k) is improvements in the platform technology that will enable us to unlock more value in terms of performance, but also be very directed to improving gross margin as we roll into 2026. There are a number of strategies behind that 510(k) clearance that we had just recently announced. We are excited about Focal One Eye.
You know, it is by far the most capable platform of its kind in the market. We can integrate with PSMA PET now. We have some other activities going on with AI. Our customers that are using the technology now, who have moved to Focal One, have been very happy with the performance and the capabilities of the system.
Great. Yeah. In summary, I think those things, the other thing we're doing is as we move from non-core to our core business, we're not growing operating expenses at leaps and bounds. We're basically taking some of the spend from those areas, focusing them on Focal One and HIFU. Long term, we'll see our revenue and margins going up, and we'll start seeing our operating losses shrinking. That's very important to us as we look at our financial performance going forward. Real quick, we're almost out of time. I just to follow up, you mentioned gross margin opportunities by virtue of the recent 510(k). Can you elaborate a little bit on what that looks like and maybe capturing the response, like how do HIFU gross margins?
I get the mixed dynamic for the company, but what's the path for HIFU gross margins moving higher?
Yeah. The good news is, obviously, the more we sell, the more procedures we do. We, you know, maintain price or even increase price, as we did with Focal One. Reimbursement, just as a note, I mentioned earlier, is going up 5% in four weeks. There's always a question of is there an opportunity for a price increase? There's always an opportunity for a price increase, and the value and utility is there to support it. I'll turn to Ken and really, you know, back to your question. I think when we think of margin improvement, I think, you know, I'm really happy with the strategic things we've done internally and as referenced, the 510(k).
I think when we get into the midpoint of next year or in Q3, we'll start really seeing a big improvement on margin. That's by design. We've increased the capabilities of the system, but margin improvement. I think you'll see a combination of, you know, the ability to reduce the cost of bill of materials while you're increasing the average selling price.
Yeah. Ryan's got it exactly right. We're working with a few strategic suppliers we announced last year. We'll be moving to that new supplier. We're gonna see some mid-single digit improvements in margin. Our absorption in the factory is gonna get better as we produce more units. We're very focused not only on driving revenue, but how can we optimize our cost structure? That's gonna lead to performance on the top line with gross margin and on the bottom line reducing our operating losses.
All right. Excellent. We are out of time. Thanks so much, Ryan. Again, great session here today.
Thank you. Thank you.
Thanks for having me.
Thanks for joining us.