Profound Medical Corp. (NASDAQ:PROF) Q3 2023 Earnings Conference Call November 2, 2023 4:30 PM ET

Company Participants

Stephen Kilmer - IR
Arun Menawat - Chairman and CEO
Rashed Dewan - CFO

Conference Call Participants

Rahul Sarugaser - Raymond James
Benjamin Haynor - Alliance Global Partners
Nelson Cox - Lake Street Capital Markets
Scott McAuley - Paradigm Capital

Operator

Good day and thank you for standing by. Welcome to the Profound Medical Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today; Stephen Kilmer, Investor Relations. Please go ahead.

Stephen Kilmer

Thank you. Good afternoon everyone. Let me start by pointing out that this conference call will include forward-looking statements within the meaning of applicable Securities Laws of the United States and Canada. All forward-looking statements are based on Profound's current beliefs, assumptions, and expectations and relate to, among other things, expectations regarding the efficacy of the company's treatment technologies, results of future clinical trials, the ability to obtain coding and/or reimbursement from third-party payers, anticipated financial performance, business prospects, strategies, regulatory developments, market acceptance, and future commitments. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from those implied by such statements.

No forward-looking statement can be guaranteed. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. 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.

For the benefit of those, who are new to the Profound story, I would also like to take a moment to summarize our business. Profound develops and markets customizable incision-free therapies for the ablation of diseased tissue. We are currently commercializing TULSA-PRO, a technology that combines real-time MRI robotically-driven transurethral ultrasound and closed-loop temperature feedback control. The technology is designed to provide customizable and predictable radiation-free ablation of a surgeon-defined prostate volume, while actively protecting the urethra and rectum to help preserve the patient's natural functional abilities. TULSA-PRO is CE marked, Health Canada approved, and 510(k) cleared by the FDA.

In the U.S., we employ a pure recurring revenue model for TULSA-PRO, whereby we charge customers on a per-procedure basis for TULSA-PRO consumables, lease of medical devices, and services associated with extended warranties. Outside of the United States, we primarily deploy a capital and consumable sales and service models separately if the situation warrants that. We're also commercializing Sonalleve, an innovative therapeutic platform that is CE marked for the treatment of uterine fibroids and palliative pain treatment of bone metastases. Sonalleve has also been approved by the China National Medical Products Administration for the non-invasive treatment of uterine fibroids and has recently obtained FDA approval under our Humanitarian Device Exemption for the treatment of osteoid osteoma. The business model for Sonalleve Systems is currently a one-time sale of the capital equipment.

On the call today, representing the company are Dr. Arun Menawat, Profound's Chief Executive Officer; and Rashed Dewan, the Chief Financial Officer. With that said, I'll now turn the call over to Rashed.

Rashed Dewan

Good afternoon, everyone. And welcome to our third quarter 2023 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. For those of you who are shareholders, we'd appreciate your continued interest and support. I will turn the call over to Arun in a moment for an update on our commercial activities. However, before I do I would like to provide a brief update on our third quarter 2023 financial results. The streamlined thing, all of the numbers will refer to have been rounded. They are approximate. For the three-month period ended September 30, 2023 the company recorded revenue of $1.7 million with the full amount coming from recurring revenue, representing an increase of 9% in recurring revenue compared to Q2 2023 and 40% compared to the same period of 2022.

Total revenue in last year third quarter was $2 million with 800,000 of that coming from one-time sale of capital equipment in international markets. Total operating expenses in the 2023 third quarter, which consists of R&D, G&A, and selling and distribution expenses were $7.6 million, a decrease of 18% compared with $9.3 million in the third quarter of 2022. We're heading back down further. Expenditures for R&D were $3.4 million, a decrease of 28% compared to the third quarter of 2022. G&A expenses decreased by 15% to $2 million and selling and distribution expenses were $2.2 million consistent with the same period of last year.

Net finance income for the 2023 third quarter were $1 million compared with net finance income of $3.3 million in the same three-month period of 2022. Overall, the company recorded a third quarter 2023 net loss of $5.6 million, or $0.26 per common share, compared with a net loss of $5 million, or $0.24 per common share for the same three-month period in 2022. As of September 30, 2023, Profound had cashed up $33.6 billion. With that, I will now turn the call over to Arun.

Arun Menawat

Thank you Rashed and good afternoon everyone. Q3 2023 was our sixth consecutive quarter of recurring revenue growth and our rolling four quarter U.S. growth rate is at just over 60%. There are two main drivers of that trend, despite TULSA still currently being predominantly private pay. First, our strategy to focus on educating our surgeons on the flexibility of TULSA, in that it can be used to treat an unparalleled variety of prostate disease patients, continues to show signs of success. Indeed, we saw more and more sites increase the variety of TULSA patients they treated in the third quarter.

With respect to indications, approximately 57% were treated for prostate cancer, 32% were hybrid patients suffering from both cancer and BPH, 7% were salvage and 4% were men with BPH only. TULSA is increasingly being used in patients who are diagnosed with prostate cancer but also have symptoms of BPH. We continue to see TULSA as the only viable minimally invasive option for such patients. With cancer grade, approximately 8% were Grade Group 1, 55% was Grade Group 2, 27% were Grade Group 3, and 10% was Grade Group 4 and Grade Group 5. In terms of ablation, around 60% were whole gland, 26% was subtotal, but more than half the gland, and 14% was focal therapy. The prostate size, approximately 2% or less than 20 cc, 38% were between 20 cc to 40 cc, 31% were between 40 cc to 60 cc, 24% were 60 cc to 100 cc, and 5% were over 100 cc. We have been presented this data to you on a quarterly basis and there are two valuable dynamics worth watching.

First, using TULSA our surgeons have a choice of performing whole gland or partial gland therapy and yet 60% of patients treated our whole gland therapies, which tells us that TULSA is mostly about mainstream adoption, as majority of cancer patient population require whole gland therapy. And second, the number of patients being treated, who have both diseases, cancer and BPH is increasing. Treating such variety of populations is only possible with TULSA. That fact not only separates TULSA from the niche, vocal only therapy space, but is also helping the urology community gain an understanding that TULSA is poised to become a mainstream treatment alongside radical prostatectomy and radiation therapy. And that mainstream position for TULSA is coming at an opportune time.

Since we announced the AMAs establishment of three new CPT1 Category 1 codes for TULSA, which will be effective on January 1, 2025, we have started to see a change in market dynamics with providers who were previously reluctant to build on a cash pay model now wanting to establish themselves as TULSA users ahead of the transition to a payer pay paid model. A prime example of this is the Cleveland Clinic. Recognizing our strong clinical data, the flexibility of our technology, and that a CPT Code is on the horizon, we have just signed a master agreement that will include over 20 sites. They intend to start with three sites, including their main site in Cleveland, and their largest prostate cancer site in Western Florida. We're thrilled that one of the leading medical centers in the U.S. recognizes the value of the technology and is preparing 14 months in advance to get many of their sites up and running. Going forward, we anticipate that newer TULSA sites will also be those that are looking to adopt TULSA for its payer pay model and not necessarily to build a cash pay practice.

The second driver of our recurring revenue growth has been our low cost, high impact marketing efforts to educate patients. More and more TULSA-PRO sites are telling us that patients are asking for TULSA by name. The number of fits to the tulsaprocedure.com website, which is designed for patient education has increased by fivefold to approximately 40,000 per month in the last 18 months. Many international TULSA-PRO sites are also informing us that they are getting inquiries through our website. Supporting the efforts, the feedback from patients who have undergone TULSA remains extremely positive, helping to start making TULSA a brand name with patients.

On the product development front, we're also continuing to build the TULSA AI brand aggressively. TULSA AI is a brand name for software modules, where each module is designed to perform a certain intelligent function elegantly. Thermal boost for which we received 510(k) clearance from the FDA this quarter is the first of those. Thermal boost allows a TULSA surgeon to provide extra heat at a tumor region if they suspect that there is extra capsular involvement or protuberance of the prostate tissue into the muscle of the patient. The thermal boost application has already been used by many sites with excellent reviews, both in terms of visibility for later stage disease patients, as well as time savings.

The next TULSA AI module we are working on is the Contouring Assistant. This is about automating the TULSA treatment design, in itself a game changing technology. The module they've already developed and at the moment, we are in the clinical validation phase for FDA submission. The technology is such that users past treatment designs, and recommends a design in a new procedure based upon that knowledge. We are already getting positive reviews from the physicians who are performing the clinical validation. As you know, our treatment and outcomes database will continue to grow and the knowledge of the AI will continue to increase and the proposed treatment design will continue to improve. We believe that this has the potential to also continue to improve outcomes even further and TULSA is the only system that will have that capability. We have a week with the FDA to conduct rigorous clinical analysis, a high bar that is normally set for diagnostic level AI software. Having such rigorous data analysis will give us significant flexibility to market the product in terms of critical outcome and time saving messaging. We continue to expect that we will gain FDA clearance in or around Q2 2024.

Coming back to the dynamic that TULSA is increasingly being used to treat patients who also have BPH, we also announced at our recent Analyst and Investor Day that we are developing a BPH specific application using the core TULSA technology. This new application will also use the TULSA AI automated treatment design capability, which will allow our surgeons to custom design the treatment plan. We believe that the customization capability of TULSA, the fact that there is no blood loss, risking the patient during the procedure, and TULSA’s proven durability due to its profit shrinkage over time will position it as a best in class treatment modality. We are making the information public at an early stage due to the request from our physicians but we are not prepared to talk about further privatization of the technology at this stage, except to confirm that we believe that it will be a faster procedure. We will make timing of the project available by next summer but in the meantime, I can assure you that we're not talking about a project that will take several years to bring to market like it would for a new indication. TULSA is already cleared for the ablation of both malignant and benign tissue and as such, there is a lot of clinical and safety data already available.

To summarize, our team has done extraordinary work in driving adoption of TULSA-PRO so far. We are commercializing an autonomous, robotic technology that is incision free and radiation free, results in no blood loss, doesn't require a hospital stay, and preserves a prostate disease patient’s natural functional abilities. Our AI initiative is advancing the technology further to create a continuous improvement technology which we believe can break the barriers of today's accepted clinical outcomes. We have generated significant positive clinical data in various patient segments that have been confirmed by real world data.

Our hospital and early adopter surgeon partners have become experienced with the TULSA-Pro System and can help to drive future adoption. We are thrilled to have partnered with leading hospitals, as well as provider companies, such as RedNet who have figured out how to use the MR not only for diagnosis but also for treatment and create efficient patient care workflow that also optimizes economics. We have received overwhelmingly positive patient feedback. This is helping new patients to become educated and empowered and our unique ability to customize treatment is a new concept that is resonating well with them and surgeons alike. The AMA has established CPT Category 1 codes that come into effect in January 2025. Our focus on investments in sales, marketing, and research and development is producing meaningful results. We believe TULSA is proving to be the most versatile technology for prostate disease with a total addressable market in the 600,000 patient range, which is greater than that for any other technology that can be used to treat patients with prostate cancer.

We are thrilled that world renowned Cleveland Clinic has recognized the value of our technology, and has just signed a Master Agreement for over 20 sites. We are developing a set of software modules to further improve clinical outcomes, procedural planning, and time efficiency. We received FDA clearance for the first module thermal boost in the third quarter. We are targeting FDA clearance of our second module, a Contouring Assistant later next year, and believe that the clearance will allow us to more confidently enter the BPH space. This ends our prepared remarks for today. With that Rashed and I are happy to take any questions you might have. Operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Rahul Sarugaser of Raymond James. Your line is now open.

Rahul Sarugaser

Good afternoon Arun and good afternoon, Rashed. Thanks so much for taking our question. So congratulations on this Cleveland Clinic master agreements. A couple of key questions there. So you mentioned 20 site with three upfront. So could you give us a little bit more color in terms of how you expect the cadence of that site's deployments to roll out over the next year before -- will it go into 2024 -- 2025 one CPT or will that all be rolled out by then?

Arun Menawat

No, I think Rahul our expectation is that we will get these first three sites going very, very quickly. And I don't think that we will be installing every site before 2025. But I do think that they are going to be educating their physician at all of the sites so that by the time 2025 rolls out, they can get ahead with a pretty good start. But, I think realistically I don't expect that all the 20 sites will be operational before 2025. I think it's possible that they will be more than three by that time but I would say for now, this is about the best that we have in terms of our plan.

Rahul Sarugaser

Perfect, thanks so much for that extra color. So pivoting to the number of sites, you had previously indicated, a goal of 50 sites by the end of this year. I believe there were 38 sites up and running last quarter. Would you possibly get an update on the number of sites deployed?

Arun Menawat

Yeah. So Rahul, in terms of contracts, we have enough contracts to achieve 50, we have a couple of hospitals that are very busy and hospitals that have [indiscernible]. In terms of installs we did in the third quarter, we added -- there's three sites. We are working to get to the 50, it's more about coordination and so on. I think that overall, we remain optimistic to get to that number. And I think 2024, again our contracts are doing very well. So we'll see how it goes in 2024 but I think certainly, we are continuing to make progress in increasing the installed base.

Rahul Sarugaser

Great, thanks very much and one last quick question. You highlighted at the Analyst Day, the expansion in the BPH and provided a little bit more color today, talking about it likely to be a fast procedure. But of course, you said that you are going to be circumspect. But in terms of using the new Contouring Assistance and do you expect to that utility and BPH could potentially be beyond the hybrid or into just extremely large prostates and what are we looking at, in terms of the TAM there?

Arun Menawat

Yeah, no I'm happy to provide a little bit more color on that Rahul. As I mentioned, in the prepared remarks, this is more of a request that we were getting from physicians and patients. And when we did some research, what was interesting is that, initially, the paradigm was well some of the technologies in VPS can be very fast, and maybe patients and physicians it matters to them a lot. But as we did the work, what we actually found was that certainly the BPH procedure will be much faster than a cancer procedure. But what they were really interested in was the aspect in terms of the profit shrinkage aspect, but if there is any lingering even early stage cancer, that it could be visualized, and that the whole thing could be taken care of in one sitting with confidence, because there is a good bit of clinical data. And the fact that we have Contouring Assistant, and modifying that. That to be able to do a very quick treatment plan that could be really big customized to each prostate type. And, to be honest, I cannot stress that point enough, because prostate as you know can be smaller than 20CC's and larger than 100CC's. And not just the size, but also the shape really matters. And so to be able to use our technology and really custom design to be sure that none of the vitals functions are affected, and at the same time, enough tissue is ablated to be able to provide the patient with a durable treatment and do not have to worry about and see any cancer at that time, at least. I think that's the value proposition. So I think again, I feel very good about it. I think our team feels very good about it. I think that we will definitely start from the larger prostates, but I think we will over time look towards going into the mainstream as well.

Rahul Sarugaser

Okay, thank you again for taking our questions. We'll get back in queue.

Arun Menawat

Thank you, Rahul.

Operator

Thank you one moment for the next question. Our next question comes from Ben Haynor of Alliance Global Partners. Your line is open.

Benjamin Haynor

Good afternoon gentlemen, thanks for taking my questions. First off for me, I was curious on the hybrid cases that are being done. Are those more kind of incidental where you have a patient that has prostate cancer and also BPH and they would be operated on. Anyway, is it more patients that might have been candidates for watchful waiting and that might be say great group one that are saying, well, let's kill two birds with one stone here and do get rid of the cancer and hopefully solve the BPH as well, any color on that group of patients?

Arun Menawat

Yeah. Ben, I think you're thinking in the right place. If you look at our data that we talk about every quarter, the number of patients who have early stage cancer and also have BPH, that's a segment that has been growing for us. And as you know, cancer is not a monofocal disease. It's a multifocal disease and we can wherever it resides we can get to it. And so the treatment designs that we are seeing for those types of patients are typically in the 50% to 80% ablation range, and they are ablating the tissue that normally causes the symptoms of BPH, and they're most certainly targeting explicitly where the cancer resides, and there's usually they add some safety margin to that so that there's a high level of confidence that the cancer is taken care of and at the same time BPH is taken care of. So it really is both that they look to do, so it's a two for one. And as you might know, there's a large population of patients who are on active surveillance, it's million plus and these patients have also had BPH, many of them. And so that is the initial target market and I think that's where that population that we're starting to see is growing and will be our market entry.

Benjamin Haynor

Okay. That's very helpful. Thank you for that. And then, I appreciate that you may not want to share kind of everything on this just yet, but on the BPH AI, I think it was Dr. Hong [ph] during the Investor Day talking about how if you are going to do a volume similar to what's being done with TRIP [ph] today, you could get a procedure done with TULSA, bringing a similar volume in. I think you said less than an hour if I understood properly. Just curious if that is reasonably accurate. And then also, are the BPH cases that are being performed as we speak, are those informing what ultimately goes into the kind of contouring the system, BPH AI for the automation of the treatment plan down the road?

Arun Menawat

Yes, Ben, I think you're on the -- absolutely, that's the idea, is that we have -- we think we can get the BPH done quite a bit faster with virtually no risk of any blood loss, which means that any comorbidities are not likely to be an issue. And I think, as you said, the base technology of Contouring Assistant will apply, and we are already gathering quite a bit of cured BPH patients as well as the hybrid patients and we'll be able to apply those to the new type of patients. So I think there is definitely enough information to be able to get it. I'm just a little bit cautious because we are certainly very early stage and I just want to make sure everybody recognizes it also. But the technology is there and we're going to invest in getting it out as fast as we can. But we do need to get the Contouring Assistant FDA cleared.

Benjamin Haynor

Okay, that's helpful. I guess I'll leave it there. I mean, we just had the Investor Day, so lots of information already out there. Appreciate the question.

Arun Menawat

Yes. Thank you, Ben.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Frank Takkinen of Lake Street Capital Markets, LLC. Your line is now open.

Nelson Cox

Hey, this is Nelson Cox on for Frank. Apologies if I missed it, but last quarter you mentioned seven signed purchase contracts and 15 late stage prospects. Can you maybe update us on those two buckets?

Arun Menawat

Yes, I'm happy to. I think, what I was saying earlier when Rahul was asking a question, we have enough contracts to be able to get to the 50 sites. And, the problem with these numbers and so on, the reason I'm saying it the way I'm saying it is you can tell from the prepared remarks we have another major agreement with a number of sites. We also have a couple of other leading hospitals that we've signed with, big name hospital, cancer hospitals. So it isn't about the pipeline. It's not about the number of contracts. I think the message that TULSA is a versatile technology and that all these capabilities is getting there. So I think for us, the next stage is really streamlining the installation process, streamlining the startup, and ultimately, really I think we're going to be in this transition phase at the moment when everyone is sort of waiting for 2025 when the reimbursement starts to kick in and so on. I think for us, it's really more about that dynamic at the moment. I think we will get the number of sites going. And I think these things that I'm talking about in terms of streamlining the startup process, so that's going happen. It's just, it's starting to happen. I think there are still a couple of sites where the MR installations are delayed. And so that, a couple of them, which were supposed to have happened in Q3, didn't, but they will happen in Q4. So I hope I've sort of answered your question, but I hope you can see why the number of contracts is not an issue for us at this point.

Nelson Cox

Yeah, no, that makes sense, thank you. And then one more quick one. With you skewing more heavily toward whole-gland with your early users, how do you think about this concept over a long period of time, do you think there could be a time where you only do HEMI or whole given you can effectively cover an area with limited quality of life risk?

Arun Menawat

Yeah, I think that's a very good question actually. One of the things that we have watched is, there has been this paradigm, let's say of latest technologies are for focal and things like that. And we have if a surgeon wants to do focal, we've always said, hey, you can do focal with this. But what we have witnessed over the last several months is that surgeons on their own are in fact ablating more of the prostates than they used to when they started out. What I mean by that is that more often than not focal therapy can certainly ablate the index lesion properly, but there is always a risk that if you do not ablate enough of the prostate or that because it is not a monofocal disease normally, that there is cancer lingering around somewhere else. And so I think what we have watched is that the amount of ablation of the prostate, actually we're watching them surgeons increase. Because they're getting more confident that they can save the vital functions and they're feeling more comfortable that they can go more towards higher volumes of ablation. And so I think you're right in the sense that, I think as the physician community or the surgeons become more and more comfortable, chances are they will be ablating more of the prostate than less.

Nelson Cox

Well, congrats with the Cleveland partnership and thanks for taking the questions.

Arun Menawat

Thank you.

Operator

Thank you. [Operator Instructions]. One moment for our next question. Our next question comes from the line of Scott McAuley of Paradigm Capital. Your line is now open.

Scott McAuley

Good afternoon. Thanks for taking the question. Just one for me on risk staffing. As we ramp up these installations and support the early adopters to continue to start using it, do you expect you have the personnel capacity to support your pipeline or do you think you're going to have to expand the HR base to help make sure everyone's up to speed quick enough?

Arun Menawat

Yeah, Scott, I think that's a great question. I think that, to be honest, we have a great team, to be honest. And I think that I've seen them in the crunch time install three sites in one week. So I know that we have the capability to do it. We are certainly also managing our cash very carefully and you've seen from Rashed’s presentation that in every function except for sales, our costs are actually -- our spend is actually down compared to a year ago. And at the moment, our expenses on the sales and marketing side are about the same as what we had this time last year. So the way you might think about this is that incrementally as the schedules for installations increase, we will add people to our sales, marketing, and service functions. And we're trying to be a little bit ahead of that, obviously, to make sure our people are trained. So I think, anticipate that incrementally quarter-over-quarter, that's where the increase will be. But certainly the revenue should catch up to that and the revenue should be perhaps, three to six months behind, as we add the revenue and the sales and marketing functions. So that's how you might think about it. Just a little bit further, so we hire a little bit earlier, but we think we can now start adding people based upon the rate of installation growth.

Scott McAuley

That's great. Appreciate it. Congrats, and again thanks for taking the question.

Arun Menawat

Thanks, Scott.

Operator

I am showing no further questions at this time. I would like to turn it back to Dr. Menawat for closing remarks.

Arun Menawat

Excellent. Thank you so much for your time and thank you for being part of this evolution. Talk to you next time.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.