Cabot Small Cap Confidential 261

There is no shortage of great stories in the medical technology field. Today we’re jumping in on one that’s been on my radar for some time.

The company has just begun to commercialize a revolutionary technology for treating BPH and prostate cancer, which affects millions of men around the world. Regulatory approval is in hand across three continents, and revenue growth is in the 80% to 100% range.

There are plenty of challenges ahead, but this company appears to be on the path to enormous success.

All the details are inside. Enjoy!

Cabot Small Cap Confidential 261

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The Big Idea
There are nearly 6 million men across the U.S. and Europe currently living with prostate cancer. Roughly 625,000 more are added to the list each year. That makes prostate cancer easily one of the most common types of cancer affecting men.

Toss in benign prostatic hyperplasia (BPH), a.k.a. prostate gland enlargement, which affects around 60% of men younger than 50 and 80% approaching age 80, and the number of men dealing with some sort of prostate problem goes up exponentially.

While survival rates are relatively good, quality of life impacts are significant. At the low end of the inconvenience spectrum, some men with BPH have urinary tract issues.

At the other end of the spectrum, prostate cancer treatments typically require removal of the prostate gland through surgery, or radiation to kill cancer cells.

Common side effects from these procedures can be urinary incontinence and/or erectile dysfunction. Both are less than ideal, but better than the alternative of ignoring the issue altogether.

Fortunately, progress is being made coming up with less invasive and more effective treatments for BPH and prostate cancer.

One early success story includes the company I’m recommending today, which is developing a technology for ablation of prostate tissue without surgery or radiation.

In simple terms, this technology can destroy cancer tissue in place, and shrink enlarged prostate glands, all while customizing treatment for the individual patient’s needs.

It’s called transurethral ultrasound ablation (TULSA). TULSA involves inserting a catheter into the urethra until it reaches the prostate gland, where it delivers thermal ultrasound technology to heat and ablate tissue.

The data supporting the efficacy of this technology is quite convincing. It came from the TACT Pivotal Clinical Trial, which spanned the U.S., Canada and Europe. Out of 115 patients, 77 of which had intermediate-risk prostate cancer, 110 (96%) reached the trial’s primary endpoint.

Moreover, of the 111 patients who made themselves available for one-year biopsy data, 65% had no evidence of cancer. That result is far better than the 21% rate of significant prostate cancer in intermediate-risk patient populations following radiation and other ablation techniques.

Participants in the TACT trial also only experienced minor impact on urinary, erectile and bowel function after 12 months. Three-year follow-up data, released late in 2020, has shown results roughly consistent at the one-year mark. In other words, this technology is working very well even three years later.

The data has been good enough for regulators to punch the company’s ticket in the U.S., Canada and the EU.

Today, this company is growing revenue in the 80% to 100% range, even with a pandemic. While the procedure doesn’t have meaningful insurance coverage (yet) and commercialization is at the very front end of the curve, the longer-term potential is huge.

In other words, it’s at the perfect stage to be included in Cabot Small-Cap Confidential! The rewards are still high, but the risks have been somewhat reduced.

The Company
Profound Medical (PROF) is an Ontario, Canada-based company that has developed a platform of customizable, incision-free therapeutic systems for the ablation of diseased tissue. The company has a market cap of roughly $500 million.

Management believes it is the only company offering therapies of its kind, which merge three powerful technologies: real-time Magnetic Resonance Imaging (MRI), thermal ultrasound and closed-loop temperature feedback control.

The end result is an extremely flexible therapy, TULSA-PRO, that’s used to treat a variety of prostate cancer and benign prostatic hyperplasia (BPH) conditions by ablating (destroying) tissue, which is slowly resorbed by the body.

Technically speaking, the TULSA procedure is approved in the U.S., EU and Canada for thermal ablation of prescribed prostate tissue using transurethral ultrasound ablation (TULSA). In practice, physicians are finding it has a range of uses spanning low risk, early-stage conditions to more advanced prostate cancer. Use cases are expected to grow as physicians become more comfortable with the technology.

Profound’s platform is also used in its second product, Sonalleve, which is approved in the EU and China for the treatment of uterine fibroids and/or palliative pain relief associated with metastases in bone.

Both of these solutions represent a giant leap forward as surgeons, patients and care providers seek procedures that are far less invasive and work better than surgery and/or radiation.

Both products are relatively early-stage in terms of commercial roll out. TULSA-PRO was just approved in the U.S. and Canada in 2019. Sonalleve, which was acquired in 2017, has been around a little longer but is far from being a mature product.

Over time, the shared platform technology should help Profound expand into additional applications where incision-free ablation offers benefits above and beyond traditional methods.

The main customer groups for TULSA-PRO are academic, university and clinical leadership hospitals, as well as private clinics that have MRI scanners. Within these customer groups Profound is targeting three types of end users; early adopters (including forward thinking urologists), independent imaging centers (such as those run by RadNet), and opinion-leading teaching hospitals (Mayo Clinic, etc.).

In concert with the launch of a patient-oriented marketing website, www.tulsaprocedure.com, Profound Medical is inking contracts with medical centers that can offer the TULSA procedure.

Three are currently six centers in the U.S. capable of carrying out the procedure, and one clinical trial site at John Hopkins in Maryland. Additionally, there are seven sites now carrying out the TULSA procedure across Europe, as well as one in Japan. Management says more contracts are in the pipeline and expects 10 centers in the U.S. to be ramping up procedures in the near future.

To support the U.S. launch of TULSA-PRO Profound is also building out direct sales and marketing teams; working with partners Philips, Siemens and GE to distribute capital equipment; and hiring talent. Recent hires include senior executives that previously worked at both Philips and Boston Scientific, and who will lead sales, marketing and reimbursement strategies.

Products & Platform
At the core of Profound’s platform is the concept of using customizable, incision-free therapies that combine real-time MRI (to provide visualization), thermal ultrasound, and closed-loop temperature feedback to heat and ablate tissue.

This translates to a better alternative for patients with respect to clinical outcomes, side effects and recovery time. And it opens up treatment to a wider range of scenarios for men dealing with BPH and/or benign and metastasized prostate cancer.

TULSA-PRO
The TULSA-PRO system is designed to ablate benign and malignant prostate tissue. The system utilizes a disposable catheter that is inserted trans-urethrally into the prostate to permit a robotically driven sweeping thermal ultrasound for continuous ablation.

The technology allows for customized and predictable radiation and incision-free ablation, with volume determined by the surgeon, while minimizing adverse impacts on the patient’s natural functional abilities.

The TULSA system consists of both capital equipment and disposables which are made by Profound Medical. TULSA-PRO can be integrated with many of the MRI systems currently used in hospitals and treatment centers, including those from Philips, Siemens and GE Healthcare.

Consumables include a sterile, single-use disposable ultrasound applicator (UA). This component produces directional ultrasound beams through a linear array of 10 independent ultrasound transducers, each of which is controlled via MRI feedback to deliver heat out to the prescribed treatment boundary. TULSA-PRO software allows the system to sculpt ablated tissue volume to the shape of the patient’s prostate, thereby avoiding unnecessary damage.

TULSA-PRO was cleared by the FDA in August 2019. Since then, most sales have come through partnerships with Siemens and Philips. The cost for the procedure is around $7,010. Total costs billed by the center to patients can approach $30,000.

Sonalleve
Sonalleve is a therapeutic platform combining real-time MRI and thermometry with focused ultrasound. Treatment is delivered from a disc located outside the patient’s body which focuses high-intensity ultrasound energy to targeted tissue. An MRI scanner monitors progress.

The technology was acquired from Philips in 2017 and is CE marked in the EU for the treatment of uterine fibroids and palliative pain treatment of bone metastases. It has also been approved by the China National Medical Products Administration for the non-invasive treatment of uterine fibroids.

Uterine fibroids are the most common non-cancerous tumors found in women of childbearing age. Estimates suggest they are found in 70% to 80% of women, but only about a third require treatment. Symptoms that treatment is necessary include pain, pressure, bleeding and reproductive challenges.

Sonalleve can be much more convenient than traditional surgeries, including hysterectomy or myomectomy, which require in-patient hospital visits and weeks of recovery. In contrast, Sonalleve is an outpatient procedure with no incisions or anesthesia, and recovery just takes a few days.

Regarding bone metastases, which tend to develop in later stages of cancer and irritate nerve endings, Sonalleve provides a more rapid pain relief alternative to strong medicine or radiation therapy, which can take weeks to work.

Recently, the treatment was approved by the FDA under Humanitarian Device Exemption (“HDE”) for osteoid osteoma, a non-cancerous bone tumor that occurs most often in long leg bones of young children and adolescents.

The benefits of Sonalleve for this indication is the same as for others – treatment can be performed without any incisions, needle, or ionizing radiation exposure. Management is evaluating additional indications for Sonalleve.
Growth Initiatives
Commercialize TULSA-PRO in the U.S.: Profound has only recently begun its commercial launch of TULSA-PRO in the U.S. Ongoing work with opinion-leading hospitals and imaging centers (8,000-10,000 in the U.S.), combined with a growing sales force and manufacturing capacity should pave the way for significant growth in the coming years.

Co-Development Agreement With GE Healthcare: In December 2020 Profound announced a non-exclusive, worldwide licensing agreement with GE healthcare in which TULSA-PRO will interface with certain GE Healthcare MRI scanners. This is the third such integration (integrations with Philips and Siemens already exist) and increases Profound’s reach around the globe.

Multi-Center Commercial Agreement With RadNet: RadNet is the leading U.S. provider of diagnostic imaging services and has a network of 340 owned and/or operated outpatient imaging centers. In January 2020 Profound Medical signed an agreement that made RadNet the first multi-side user of TULSA-PRO. This means multiple local urologists can provide MRI-guided TULSA procedures at the same imaging centers they already send patients to for MRI diagnostics and post-treatment monitoring.

Expand Use Cases For TULSA-PRO: As physicians become more familiar with the TULSA procedure and potential they are beginning to branch out and apply the technology to more use cases across BPH and a variety of prostate cancer. This should help push up adoption rates over time.

Gain Reimbursement: Thus far Profound’s treatments have limited coverage or reimbursement from government or third-party payers. On January 10, 2020 the company submitted an application for a C-Code from the Centers for Medicare & Medicaid Services for TULSA-PRO. And to date it has been working with centers to use the proper codes to get some level of reimbursement. Still, for now, many patients are footing a large part of the bill, which can reach close to $30,000. Over time management sees huge potential to improve reimbursement, which will open up the TULSA procedure to far more patients.

The Business Model
In the past, Profound charged a combination of equipment rental and pay-per-procedure for TULSA-PRO. Recently, management switched completely to a pay-per-procedure model, which is averaging $7,710. This allows the company to eliminate capital costs for new centers (which reduces start-up risks for centers) and allows Profound to own more of the responsibility for managing the technology, software and patient experience. This also means the company generates recurring revenue, which is a business model investors like.

For Sonalleve, the company generates revenue from a one-time capital sale and limited recurring revenue. Since this technology is only compatible with Philips MRI scanners in the EU and China, the company’s growth trajectory in the U.S. has been somewhat limited. Over time management will move toward a recurring revenue model with Sonalleve, which should represent upside revenue potential. This may easily take shape in 2021 given that the earn-out provisions that came with the Sonalleve acquisition expired at the end of 2020.

The Bottom Line
Profound Medical reports in Canadian dollars. However, unless otherwise stated all numbers discussed here have been converted to U.S. dollars.

The company began generating revenue in 2017. In 2019 sales rose by 112% to $4.2 million. Through the first three quarters of 2020 revenue is up 115% to $4.3 million. In Q3 2020 revenue was up 338% to $2.2 million. That follows Q2 revenue growth of 100% (to $1 million) and Q1 revenue growth of 5% (to $1.1 million).

In 2019 adjusted EPS was -$2.40. Through the first three quarters of 2020 adjusted EPS of -$0.84 improved from a loss of -$1.00 in the same period in 2019. In Q3 adjusted EPS was -$0.32, a 24% improvement.

On January 5 management announced preliminary Q4 2020 results. Revenue is anticipated to be up 32% to $2.8 million in the quarter, bringing full year 2020 revenue up 76% to $7.4 million.

Looking out into 2021 there are a lot of variables with Covid-19 and the ongoing commercial launch of TULSA-PRO in the U.S. as well as the ongoing push to commercialize TULSA-PRO and Sonalleve globally. Taking it all in a fair estimate of 2021 revenue growth rate is somewhere in the 80% to 100% range. The high end implies 2021 revenue of $15 million.

As of the end of September 2020 Profound had $110.4 million, including $46 million from a secondary offering completed in Q3. This capital is being used to fund the commercial rollout of TULSA-PRO.

Risk
No Insurance Coverage: Currently, there is limited reimbursement for the TULSA procedure. In time it should gain reimbursement but until then the potential patient pool will be somewhat limited and that could turn some investors away.

Regulatory Risk & Trials Required To Gain CPT Code: Profound is expanding the TACT trial and planning new trials as it seeks publication in more medical journals and ultimately gaining a CPT code, which will help with insurance coverage. In order to gain the broadest coverage possible these trials will need to show positive results with both mid-level and advanced prostate cancer. While the data is good so far trials always carry risk.

Cadence of New Treatment Centers: A big part of this growth story relies on more centers being signed up in the U.S. and getting familiar with the TULSA procedure. If Profound runs into any roadblocks, revenue growth could be impacted.

Reliance On Centers With MRI Scanners: The TULSA procedure requires a center with an MRI scanner that’s compatible with Profound’s equipment and software. While there is a long runway of potential centers now this requirement could be a limiting factor at some stage.

Micro-cap Stock Without Profitability: Profound Medical is a small, early-stage company that’s not yet profitable. If investor risk appetite wanes the stock could suffer, even if the growth story is intact.

Competition
The TULSA-PRO system’s primary methods of competition are physician surveillance, radical prostatectomy, radical prostatectomy, radiation therapy, cryoablation and trans-rectal high intensity focused ultrasound (HIFU). The main competition for Sonalleve include hormonal medications, progesterone releasing intra-uterine devices, surgery (hysterectomy and myomectomy) and uterine artery embolization.

The Stock
Trading Volume: PROF trades around 90,000 shares daily on the Nasdaq, which equals roughly $2.25 million. Heavy days are 200,000 shares, and there have been eight such days since last July. It is possible our subscriber group could move this stock if there’s a concerted wave of buying so please be sure to space out your purchases, especially if PROF trades materially higher soon after Issue publication.

Historical Price: PROF has traded on the Toronto stock exchange since 2015 and began trading on the Nasdaq on October 29, 2019. The stock was very strong once it hit the U.S. exchange, but fell from 20 to 6.5 when the market crashed last March. The recovery has been relatively consistent, albeit with a few pullbacks in the 12% to 27% range. PROF responded very well to news of the RadNet and GE agreements, and shares broke above their pre-pandemic high of 20.6 in the first days of 2021. Since then the stock has traded as high as 28, largely shrugging off the market’s volatility last week. A current pullback of roughly 10% looks normal and appears to have opened the window for new investors to move in.

Valuation & Projected Price Target: We’re not investing in PROF because it has an attractive valuation – this is all about growth potential. That said, to walk through the exercise, the company trades with an EV/2020E revenue multiple of roughly 55. Assuming revenue doubles in 2021, simple math suggests the stock should also double in order to trade at the same multiple a year from now, all other variables staying constant. That’s a fair “best guess,” so our starting 12-month price target is roughly 50.

Buy Range: Buy below 30 in the near-term. Larger purchases below 25, and especially closer to the 50-day line at 22, are especially attractive, assuming there is no negative fundamental news catalyzing such a pullback.

The Next Event: Management should present official Q4 2020 results in the beginning of March.

Updates on Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

The next Cabot Small-Cap Confidential issue is scheduled for March 4, 2021.

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