Theraclion — Update 25 February 2016

Theraclion was founded in 2004 as a spin-out from a French company, EDAP-TMS1. The company sells a high-intensity focused ultrasound (HIFU) treatment device, EchoPulse, and integrated single-use cooling consumable, EPack, to treat benign breast tissue growths (fibroadenomas) and thyroid nodules. Theraclion sells direct in Europe and has a branch in Hong Kong with distributors elsewhere. US clinical trials started in 2014 with a de novo 510(k) planned. Theraclion listed on the Paris Altenext market in April 2014 raising €9.7m net at €14.50/share, plus a bond conversion of €1.5m at €9.43/share. Cumulative expenditure to Dec 2014 was €19.9m. It has 31 employees, half of whom are in development and clinical roles. An industry experienced CEO, Mr David Caulmartin, joined in September 2014 and Mr David Auregan joined as CFO in December 2015.

Theraclion management expects at least 60 installed units in Europe and Asia by the end of 2017, up from 15 to date with about 100 by 2018. By 2025, Theralion estimates there could be 225 units operating in Europe and 300 in the US. EPack consumable use is crucial with management expecting up to 240 per year per system generating a strong consumable revenue stream. For valuation purposes, we have applied probabilities of 80% to European unit sales, 65% to US unit sales (adding in regulatory risk) and 70% to EPack treatment rates. China and other Asian markets could be much bigger but we cautiously forecast about 60 units in 2025 at a 50% probability. Using a 2% 2025 continuing growth rate and discounting cash flows at 12.5%, the indicative value is €10.09/share. The estimate assumes an average tax rate of 24%. Further funding of up to €10m may be needed between 2016 and 2018 in either equity or loans, implying a diluted value of €7.20.

Theraclion had 2015 sales of €1.76m, up from €0.82m in 2014. There are now 14 units in clinics at 16 sites (four sites share two systems). Cash at 31 August June 2015 was €4.7m after a €4m June 2015 placing and a €1.1m repayable advance from Bpifrance (a government agency) in July 2015. Theraclion benefits from cash R&D tax credits, worth €360k in H115. From 2019, Theraclion could be in profit with strong growth. Break-even is possible in 2018 if use rates are high.

Novel medical device companies are hard to value because sales growth is heavily affected by the rate of change of medical practise and slow buying processes. Market sizes are hard to quantify for benign conditions but the market may expand as EchoPulse offers an effective, non-invasive and fast procedure (using Beamotion). Fibroadenoma treatment may be more of a private cosmetic market in some countries; thyroid is more a medical market and has about half the potential treatments compared to breast therapy. Theraclion has noted a reimbursement barrier in many European countries because EchoPulse does not fall into traditional reimbursement categories (IPO document). Adoption in markets with insurance systems (like Germany) seems faster than in centralised markets like the UK and France. Use in the US could be much higher due to private medicine and wider insurance cover. No definitive timeline is available for a US de novo 510(k) device approval using the 513(f) regulation; we estimate sales from 2019 after a multi-centre trial. The Chinese market could be very substantial but is likely to be very price sensitive beyond the private clinics in wealthy locations like Hong Kong; Korea and Japan are better prospects. Gaining high EPack sales is crucial since this generates recurring revenues from the rising installed base and higher volumes will improve the EPack gross margin to 60% or more. Truffle capital, the majority shareholder, has sold 254,885 shares since October 2015.

EchoPulse is a compact, standalone, CE-marked system for high-intensity ultrasound treatment using a single-use fluid cooling and focusing module: EPack. The EchoPulse device treats benign but troublesome breast fibroadenomas (Exhibit 1) and palpable thyroid nodules (Exhibit 2). EchoPulse is easy to use and leaves no scars, with no infection or surgical risks.

EchoPulse, Exhibit 3, comprises:

The EPack cooling system is disclosed in patent WO2011064209A1. EPack, a sealed bag of special fluid, is inserted into the body of the unit and kept at 10°C. The fluid is pumped through a sealed head cover unit fastened in front of the ultrasound generator in the movable head, which is labelled as the ultra-fine membrane. This fluid:

Each EPack has a radio frequency tag with an identification number to ensure traceability as the technical performance is crucial. The EchoPulse system records the tag and does not allow reuse.

For treatment, Exhibit 4, high-intensity ultrasound is focused into a narrow elliptical zone to heat tissue to about 80°C to kills cells and disrupt tissue.

Theraclion carefully controls the power and precision of delivery. Multiple zones are needed and are successively treated. The treatment region starts 5-11mm deep from the skin and can be up to 23mm deep. Precision is very important. In thyroid nodule ablation there are nearby delicate structures, like the trachea, oesophagus and carotid artery where the beam cannot go within 4mm. In fibroadenoma therapy, the proximity of the chest wall (at least 10mm gap) is a factor.

In a further innovation, Theraclion has speeded up EchoPulse by up to five times using Beamotion technology.2 This potentially allows up to 10 treatments per day. The system was CE-marked in late 2015 and the first two commercial patients were treated in Germany in November. Treating the four fibroadenomas took 11, 15, 16 and 18 minutes, respectively. To achieve an effective reduction in volume of a nodule or fibroadenoma, not all the area needs to be treated as the fibroadenoma can be hollowed out. If used for cancer, a margin around the tumour would also need to be destroyed.

Exhibit 5 shows the main indications and suppliers of HIFU systems. This diversity means there is a lot of experience of ultrasound therapy. Some ultrasound therapies use an MRI scanner to direct the beam and to measure the temperature of the treated and surrounding areas, but this involves prolonged use (up to three hours) of very expensive equipment. Note that indications like prostate do not allow using cooling systems so temperature measurement is safer. Only Theraclion treats benign breast and thyroid growths. Both are easily visualised by ultrasound imaging.

Breast fibroadenomas (FA) are benign solid tumours that develop in the fibrous subcutaneous connective tissue of the breast, Exhibit 1. FAs are typically 1-5 or 6cm in diameter, and multiple fibroadenomas in one or both breasts are found in 10-15% of patients. Goehring and Morahia (1997) estimated incidence with a peak of 115 per 100,000 in the 20-24 age cohort, Exhibit 6. 3 However, no systematic epidemiological study seems to have been carried out.

FAs are usually managed conservatively with periodic evaluation. Greenberg 1998 noted that “the probability that a fibroadenoma would resolve after 5 years is approximately 50%, and the “lifetime” of a fibroadenoma is about 15 years”. All lesions require a biopsy and histology to rule out cancer and the rare condition of phyllodes tumour. About half of benign biopsy samples were of FA in a small analysis of US and Japanese patients (Schuerch 1982).4 The decision to treat might be affected by whether the FA is causing pain, breast deformation (a major consideration in teenagers) or is still growing.5 Younger women are more likely to opt for removal (Dent 1998). Note that use of in situ ablation means that detailed histology cannot be carried out to completely exclude cancer.

Theraclion estimates the market at an incidence of 610,000 in the US and 640,000 in the EU. European reimbursement can be up to €2,000 (IPO document). In the US, the treatment will probably be reimbursed as CPT 19105 at $3,579 fully costed in a doctor’s office setting or at $345.92 at the marginal cost in a hospital facility; this is the code for existing products (Exhibit 5).

Thyroid nodules will be left alone unless they are large, over 4cm, or cause pain or obstruct the throat. Autonomous hyper functioning nodules might be treated.6 Theraclion estimates the US market at 106,000 cases per year with 153,000 in Europe, Exhibit 8. The American Thyroid Association statement on thyroid nodules (Bryan 2015) notes that palpable thyroid nodules prevalence is approximately 5% in women and 1% in men. Incidence is about 0.09% per year or about 300,000 new cases in the US. Most will not be subject to any medical intervention. Autopsy and imaging studies frequently (in 30-60% of cases) find small, non-palpable benign nodules but have no clinical significance (Tan 1997). The clinical interest is in identifying thyroid tumours, of which there are about 63,000 cases a year in the US (SEER).

The most recent paper on FA treatment (Kovatcheva 2015) covered 51 FAs in 42 patients. Some FAs had two treatments. The initial volume range was wide: from 19.7ml to 0.34ml. If these FAs were spherical, the indicative diameters would be 3.4cm to 0.9cm with most probably under 2cm. Most FAs are stated to be in the 1-3cm range.7 The immediate effect was a 30% volume decrease after two months in 63% of the FA. As the sites healed, this improved significantly at six months. After a year, 67% of FAs decreased by 60% or more in volume (Exhibit 9) implying a fall in diameter of an average 35% (Exhibit 10).8 At baseline, 29.4% of patients experienced discomfort in daily activities and 35% experienced pain due to an FA. After a year, none experienced discomfort or pain. Persistent three-year volume reduction has been announced but no data were provided.

Thyroid ablation is more complex but clearly effective. For example, Korkusuz 2015 reported on EchoPulse treatment in 20 patients with 16 completing six-month follow-up and three requiring further treatment. The mean volume decreased from 4.96ml ± 2.79 to 2.91ml ± 2.43; this is stated as a 48.7% reduction ± 24.3% (P < .001), Exhibit 11, but arithmetically is 41%. The authors note that the accessibility of the target nodule was a limitation. It appears to us that while the data are excellent, studies to date remain small and the irregular shapes of nodules means that data are varied. As the installed base rises, it is likely that more clinical studies will be published.

The alternatives to EchoPulse for fibroadenomas are lumpectomy, radiofrequency ablation (RFA), laser ablation and cryotherapy. (Exhibit 12) Radiofrequency ablation can be used in thyroid.

According to Theraclion (IPO document) the target EchoPulse market is 5,300 systems with a goal of an installed base of 300 units in the US and 225 in Europe by 2025 (January 2016 management presentation). China and Asia may add another 430 units. Reimbursement of the procedure takes up to three years per country to be agreed. In France, Theraclion has applied for a Forfait innovation grant to evaluate cost effectiveness in a trial, which eventually may speed uptake. In the UK uptake will be affected by a health economic appraisal – even then cash constraints may limit use — although private use has already started with an EchoPuluse on Harley Street. Currently, the leading market for Theraclion is Germany where management estimates there are about 150,000 thyroid treatments per year. In October 2015, the first thyroid patients were treated with EchoPulse. Four insurance companies provide thyroid reimbursement.9 Insurance for fibroadenoma therapy in Germany is more extensive with more than one million people covered through nine insurers. In Italy, one insurer provides reimbursement. Theraclion has offices in the UK, France and Germany. Distributors are being appointed elsewhere. Other territories include Russia and Turkey (one system each delivered in 2014), Egypt with one order for 2016 delivery and Hong Kong where Theraclion has a subsidiary and one unit is under contract.

The 2015 trading update stated that there are now 14 EchoPulse systems in clinics (10 installed in 2015) with clinical users on 16 sites (two units are shared between four sites). Most are direct sales but an estimated three are leased or rented units undergoing evaluation, typically for six months. Theraclion does not plan to lease EchoPulse as there is substantial unmet demand. Production is currently a limiting factor with units being hand-built. An optimised production system should alleviate this in 2016 with, management anticipates, 20-25 sales or leases possible – mostly in H2.

The US regulatory stance has become more flexible in the last few years as the new 513(f) process enables a de novo 510(k) application based on more limited clinical data than a PMA. SonaCare used this route in October 2015, so there seems no reason why EchoPulse could not also be successful.10 The review, excluding questions, takes 120 days. Theraclion has a single-centre 20-patient fibroadenoma study running in the US at the University of Virginia (NCT02078011), which started enrolment in April 2014. When this concludes in H116, a larger multi-centre trial will probably be run with an assumed 12-month follow-up. Assuming that this trial completes recruitment by mid-2017, a de novo application could be lodged in 2018 and approval potentially gained for 2019 marketing. However, this timetable is not yet confirmed. Theraclion might be able to gain an earlier entry to the Canadian market as the process is less onerous.

Novel medical device companies are hard to value accurately because initial sales growth is heavily affected by the rate of change of medical practise and slow buying processes. Market sizes are hard to quantify for benign conditions but the market may expand as EchoPulse offers an effective non-invasive and fast procedure. Fibroadenoma treatment may become more of a private cosmetic market in some countries; thyroid is more a medical market but with about half the potential treatments compared with breast therapy. Theraclion has noted a reimbursement barrier in many European countries because innovative procedures, like EchoPulse, do not fall into traditional reimbursement categories.11 Adoption in markets with insurance systems (like Germany) seems faster than in centralised markets like the UK and France. Use in the US could be much higher due to private medicine and wider insurance cover. No definitive timeline is available for a US de novo device approval. The Chinese market could be very substantial but is likely to be very price sensitive beyond the private clinics in wealthy locations like Hong Kong; Korea and Japan are better prospects. Gaining increased EPack sales is crucial since this generates recurring revenues. Truffle Capital, a majority shareholder, has been selling shares: 254,885 since October 2015, of which 215,000 were to a German investor. Any major overhang may affect share price performance.

For valuation purposes based on 2025, we have applied probabilities of 80% to 225 European unit sales and 65% to 300 US unit sales (adding in additional regulatory risk). EPack consumable use is crucial with management expecting up to 240 per year per system, which could be higher; increased volumes will improve the gross margin to more than 60%. A 70% probability is applied to EPack use rates until sales data become available. China and other Asian markets could be much bigger but we cautiously forecast about 60 units with a 50% probability. An additional marketing cost of 20% is assumed (starting at 10% in 2016) to adjust for distributor margins and for subsidiary costs. On a 10-year perspective, Theraclion is expected to develop into a highly profitable ongoing business, so a continuing value based on a 12.5% cost of capital (Edison standard) and a 2% terminal growth rate is used. A 24% average tax rate is assumed although the French headline corporate tax rate is 33.3%. Using these assumptions, the indicative value as of January 2016 is €10.09/share, Exhibit 13. Further capital of up to €10m may be needed in tranches between 2016 and 2018 in either equity or loans. At a share price of €5.69, the fully diluted value might be €7.20/share – although this number varies with the price.

In 2015, Theraclion generated €1.76m of revenues, up from €0.82m in 2014. Most of the sold units had been classed as inventory and on loan with clinics. One had been a fixed asset so is reported as an exceptional item of €220k. In H1 (not fully published) consumable sales were €5.7k. Rental for systems was a further €32.7k. Separate figures for FY15 are not yet disclosed. Cost of goods (CoG) in H1 was a credit of €42. H1 operating costs were €3.5m comprising €1.9m in purchases and external costs and €1.74m of internal costs. Our forecast assumes 2016 sales of about €6m rising to over €9m in 2017. Theraclion gains cash from R&D tax credits, worth €360k in H115.

The April 2014 IPO on Alternext Paris raised net cash of €8.2m before loans.12 In 2015, €4m of was raised from the issue of 496,938 new shares for a total of €3,97m at €8 per share. A Bpifrance repayable advance of €1.1m was received in July (€0.9m in 2014). Cash on 31 August was €4.7m. The company will require further cash funding in 2016 and 2017; we assume up to €10m. A March 2015 agreement with Kepler Cheuvreux permits the issue of up to 400,000 new shares in tranches over 36 months but remains unused.