Mixed diagnosis but obstacles partially overcome. Speculative interest in breast cancer. Estimates revised, target price of 7 (vs. 9), BUY maintained

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1 Update POTENTIAL MASKED BY A TIMID START After yesterday's conference call on the potential of HIFUs in breast cancer and after revisions to our estimates, we adjust our Target Price to 7 (vs. 9). We update our estimates of financing requirements ( 20m vs 10m), which negatively affects our valuation. Despite a slow start in its target markets, the group laid the foundation for more upbeat prospects in the medium term. As the the fog lifts in its historic markets, the company is studying new indications (Basedow s disease or breast cancer in combination) that at this stage are not valued in our TP. We maintain our BUY recommendation. Thibaut Voglimacci- Stephanopoli tvoglimacci@ Martial Descoutures mdescoutures@ Mixed diagnosis but obstacles partially overcome After having successfully completed the first two phases of its strategic development (scientific, clinical), Theraclion has run into difficulty in converting this scientific promise into commercial success. The stock s poor performance over recent months reflects the weak growth in installed systems (29 EP) systems and the still limited treatment frequency per installed system. Nevertheless, these setbacks should not overshadow the company s numerous accomplishments that are laying the foundations needed for future commercial success. Among the obstacles slowing the adoption of the HIFU technology in the non-invasive treatment of FA and TN, we had identified (i) limited reimbursement and (ii) difficulties in entering new markets (China and the United States). In this regard, Theraclion has made rapid progress since 2014, with (i) an exceptional expansion of reimbursement on the German market as well as the obtaining of Forfait Innovation status in France, implying regular reimbursement in the future, and (ii) the creation of a joint venture in China followed by the launch of a pivot clinical trial in the United States. In parallel with these successes, the company has continued to demonstrate the clinical effectiveness of Echopulse through numerous publications of clinical results in specialized reviews demonstrating the advantages of the use of Echopulse compared to other traditional treatments. Speculative interest in breast cancer Theraclion has also launched a clinical study in breast cancer in the oncology area. This study is being conducted by the University of Virginia and will evaluate the Echopulse/Immunotherapy (pembrolizumab) combination. This study represents one of the principal short-term catalysts as it could take the company into another, significantly higher valued dimension. At this point and given the early stage nature of the clinical study, we integrate this indication in our valuation as a free option. Estimates revised, target price of 7 (vs. 9), BUY maintained We have lowered our forecasts for the installed base in 2025 (680 vs. 930) and the average frequency of treatments (190 vs. 250). Additionally, we have pushed back the entry into the US and Chinese markets to 2020 (vs. 2018). We estimate financing needs of 20m (vs. 10m prev.) in order to complete the company s development. Our target price derived from a DCF valuation has therefore been lowered to 7 (vs. 9). BUY maintained ahead of the initial results in breast cancer and the pivot study in the US. in / share e 2018e key points Adjusted EPS -1,05-0,92-0,59 Share price ( ) 5,2 chg. n.s. n.s. n.s. Number of Shares (m) 6,5 estimates chg. n.s. n.s. n.s. Market cap. ( m) 34 Free float ( m) 14 au 31/ e 2018e ISIN FR PE n.s. n.s. n.s. Ticker ALTHE-FR EV/Sales 17,8x 15,0x 5,5x DJ Sector Health Technology EV/EBITDA n.s. n.s. n.s. EV/EBITA n.s. n.s. n.s. 1m 3m Ytd FCF yield* n.s. n.s. n.s. Absolute perf. +0,0% -5,3% -0,6% Div. yield (%) n.d n.d n.d Relative perf. +0,1% -3,7% -14,5% * After tax op. FCF before WCR Source : Factset, Invest Securities estimates 1

2 INVESTMENT CASE Theraclion has developed a high intensity focused ultrasound (HIFU) system called Echopulse (EP) for the treatment of common benign tumors: breast fibroadenomas and thyroid nodules. The company s objective is to establish its noninvasive solution as a credible alternative to existing procedures such as traditional and mini-invasive surgery. This market is substantial and is not being addressed by other players in the HIFU segment. The current installed base is made up of 29 Echopulse systems that have been essentially sold or leased to opinion leaders in the treatment of these benign tumors. The two principal challenges are the expansion of reimbursement and approvals in the United States and China. FINANCIAL DATA 2

3 SOMMAIRE Introduction p.4 1 A new paradigm in the treatment of benign tumors p HIFU technology p Two targeted indications: breast fibroadenoma and thyroid nodules p No HIFU competition in the FA and TN segments p.12 2 Barriers to entry partially overcome p Commercial start below our expectations p The reimbursement challenge has been partially overcome p China and the United States will be the principal sources of new growth p Capitalize on the improvement in scientific visibility p.21 3 Highly attractive potential in oncology over the longer term p Scientific reasoning in oncology p A study piloted by UVA p A positive catalyst but still too soon to be valued p.27 4 Greater caution concerning adoption over the ST but real LT potential p Downward revisions in sales over the short term p Break-even expected in 2021 p.30 5 Valuation of 7 (vs. 9), BUY maintained p Financing needs in order to reach to final development phase p DCF: a central scenario of 7/share p.34 Disclaimer p.35 3

4 Introduction After having successfully completed the first two phases of its strategic development (scientific and clinical phases), the adoption of the HIFU technology has been slower than initially anticipated. We estimate that the expansion of the reimbursement of the technology and the attaining of a critical installed base (estimated at 60 Echopulse systems) would enable the acceleration of installations in countries accepting CE marking and allow optimism regarding approval on major markets such as China and the United States. As such, we believe that the current valuation is attractive, with a revaluation possible by the end of 2018 given the latest achievements and the future dense newsflow. Despite the lag seen due to sluggish shortterm commercial results, Theraclion has established foundations for medium-term growth allowing continued optimism. Despite this lag, the company has laid foundations (expansion of reimbursement in German and Forfait innovation status in France, joint venture in China, start of a clinical trial in the United States) that allow continued optimism regarding its medium-term commercial prospects. The company is actively working on validating the interest of the Echopulse solution and paving the way for the establishment of echotherapy as a credible alternative to invasive treatments in thyroid nodules and breast fibroadenoma. Further efforts needed to complete the business proof phase Source : Theraclion The installed base equals 29 Echopulse systems, with the greatest concentration in Germany (11). The company initially anticipated an installed base of 60 Echopulse systems at the end of This objective will consequently be difficult to attain, illustrating the difficult beginnings for Theraclion. In contrast, the relative success in Germany, where coverage in terms of reimbursement is broader than in the other European countries (13 million Germans covered), suggests that the sluggish start is essentially linked to the reimbursement issue. 4

5 Introduction Echopulse installed base Source : Theraclion After having based its development on the treatment of benign tumors, Theraclion is now seeking to enter the malignant cancer market. A more favorable trend has been seen in the treatment of thyroid nodules with Echopulse (70% of current treatments vs. 30% in 2015) at the same time the development of the breast fibroadenoma indication has been slow despite convincing clinical results. We can explain this positive trend in thyroid nodules by the greater level of acceptance on the German market, Theraclion s largest European market in the TN area. We believe that the obtaining of reimbursement in France and the opening up of the US market will constitute inflection points that could trigger strong growth in the treatment of breast fibroadenoma using HIFU. Additionally, access to the Chinese market will be the principal inflection point in terms of sales dedicated to the treatment of thyroid nodules. In parallel with these benign indications, Theraclion has launched a clinical study of Echopulse in combination with the monoclonal antibody pembrolizumab in breast cancer. The potential use of Echopulse in the treatment of a malignant cancer could enable Theraclion to take a major step forward by targeting a substantial market highly coveted by the pharmaceutical companies. This study represents one of the potential catalysts to watch over the short term. 5

6 1 A NEW PARADIGM IN THE TREATMENT OF BENIGN TUMORS HIFU technology p Two targeted indications: breast fibroadenoma and thyroid nodules p No HIFU competition in the FA and TN segments p.12 6

7 1 A new paradigm in the treatment of benign tumors 1.1 HIFU technology Theraclion has developed the Echopulse (EP), a system for the non-invasive treatment of two types of benign tumors: thyroid nodules (TN) and breast fibroadenomas (FA). EP is a high intensity focused ultrasound device that enables the thermal ablation of benign tumors. While this technology already exists, Theraclion has chosen to adapt it to indications where solutions have been limited to invasive and mini-invasive surgery in order to offer patients an effective non-invasive alternative. High intensity focused ultrasound (HIFU) enables the benign tumors to be necrotized and eliminated. The device combines a HIFU transducer and ultrasound imagery in order to directly visualize the target area to be treated. Echopulse Ultrasound has been long used in the medical area. It offers a combination of properties that make it a highly interesting source of energy in order to provide a non-invasive alternative to traditional and microinvasive surgery. Source : Theraclion Ultrasound has been long used in the medical area. It can be used for diagnostic and therapeutic purposes. The most common example is its use in physiotherapy to heat tissue on the level of joints and muscles in pain and anti-inflammatory treatment. HIFU consists of the concentration of ultrasound energy on a focal point. It combines properties that make it a highly attractive source of energy for surgical applications, thereby offering an alternative to traditional and micro-invasive surgical techniques that imply scarring and risks of post-operative infection. Other companies sell HIFU devices. The difference lies in the properties of EP and the targeted indications. In contrast to other devices on the market, EP is mobile and includes an integrated membrane and cooling system and an ultrasound guidance system. Additionally, Theraclion is the only player targeting breast fibroadenomas and thyroid nodules. Finally, Echopulse treats between depths of 0.5 cm and 3 cm, i.e. superficial tumors, something very difficult to do because of the concentration of the ultrasound cone when passing through the skin. 7

8 1 A new paradigm in the treatment of benign tumors 1.2 Two targeted indications: breast fibroadenoma and thyroid nodules Theraclion is attacking a market featuring substantially unmet medical needs: the noninvasive treatment of benign breast tumors (breast fibroadenomas) and thyroid nodules. Theraclion has obtained CE marking on the basis of convincing clinical results on several levels Several interesting clinical demonstrations In breast fibroadenoma (FA) Fibroadenomas are small benign masses of fibrous tissue and glandular tissue that develop in the breast. They are the most common benign breast condition in women under 25 years old. Theraclion is focusing on the treatment of benign breast tumors and thyroid nodules, indications where its effectiveness is recognized. Among the different studies published in scientific journals, we believe that the study evaluating the long-term effectiveness of Echopulse in the treatment of FA is the best illustration of the clinical effectiveness of the device. This study involving 20 patients and 26 breast fibroadenomas evaluated two distinct groups with two different treatment regimes. The 19 FA included in the first group presented a median volume of 1.82 ml ( ) and received only one HIFU treatment with the Echopulse. The second group (seven FA) showed a significantly greater median fibroadenoma volume (8.14mL) and was treated with two HIFU sessions. In the first group, the median volume of the FA fell significantly starting the first month (-1.44mL, -0.21/-5.18mL, p <0.001) and continue to fall up through the 24th month visit (-0.35 ml, -0,06/-1.21mL; p <0.001). In the second group, a significant reduction in the volume of the FA was seen three months after the first HIFU session (median -4.70mL, /-8.02mL, p = 0.005). After the second HIFU session, the significant reduction in volume continued through the 24th month (median of -0.2mL, -0.09/-1.66mL, p = 0.003). Significant reduction in the volume of the FA (group 1 - left, group 2 - right) Source : Focus Ultrasound Foundation 8

9 1 A new paradigm in the treatment of benign tumors The treatment by HIFU was tolerated well by all the patients and no serious undesirable reaction was observed. The VAS score (pain score) during the first HIFU session (average of 40.7 ± 24.6) was not significantly different than during the second session (average of 34.9 ± 17.9). There was no significant correlation between the VAS score and age, the body mass index, the depth of the FA, the total energy applied as well as the energy applied by volume, the initial volume of the FA or the duration of the treatment. 9/20 patients (45.0%) reported pain or slight to moderation sensitivity up until one week after the initial treatment and similar sensations were reported by 4/7 patients (57.1%) after the second session. Additionally, none of the patients needed additional pain killers after the therapy. During the first HIFU treatment, four patients developed a slight subcutaneous edema that disappeared after one week. All the side effects were temporary and completely absorbed. All the patients filled out a questionnaire. The level of satisfaction concerning the disappearance of symptoms was high (grade 3) in 50% and 45% were completely satisfied (4th year), while the level of satisfaction was low (2nd year) for one patient (5%). Concerning the cosmetic results, 19 out of the 20 patients (95%) were completely satisfied (4th year) while one patient (5%) reported a high level of satisfaction. HIFU treatment is a promising noninvasive method that is tolerated well by patients. The results of the HIFU ablation consequently suggest that the method is promising, effective and safe. Even if one treatment session leads to a significant reduction in the volume of the FA, the second session considerably increases the degree of volume reduction. Due to its non-invasive nature, the method is well tolerated and is associated with a high level of patient satisfaction. Consequently, HIFU treatment with the Echopulse could become an alternative to other well established treatment methods (surgery, cryotherapy). Additionally, other published studies support the effectiveness of EP in the non-invasive treatment of breast fibroadenomas. The University of Virginia has presented the initial results of a feasibility study in the United States (single arm, still underway) involving 20 patients with one of several fibroadenomas. In the 16 patients treated, the reduction in the palpable mass was observed by both the patients and the doctor in all cases. These results show that treatment with Echopulse is tolerated well by patients, with minimal discomfort. There were no grade 3 side effects, no burns, no permanent change in the appearance of the skin and no other significant toxicity/morbidity. Echopulse in thyroid nodules (TN) Thyroid nodules are lumps that develop on the thyroid gland. They are usually asymptomatic and without consequence. Study results have shown that Echopulse is a safe and effective therapeutic option that enables improvement in the quality of life of patients who do not wish to undergo surgical ablation. Effectiveness in thyroid nodules has equally been demonstrated on numerous occasions. The University of Hong Kong has presented the results of a prospective, single arm study underway involving 22 patients with benign symptomatic thyroid nodules. These results showed that treatment using Echopulse echo-guided HIFU is a safe and effective therapeutic option for patients with benign symptomatic thyroid nodules and offers the possibility of improving the quality of life of patients who do not wish to undergo surgical ablation. Out of the 22 patients treated with Echopulse, the average reduction in volume of the treated nodules was -71.6% ± 11.8% six months after treatment by echotherapy. The study also showed a significant improvement in the quality of life in all areas, including the quality of sleep, daytime sleepiness, mood, anxiety, depression and the physical condition as described by the SF-12 quality of life questionnaire. 9

10 1 A new paradigm in the treatment of benign tumors Additionally, the University Hospital of Endocrinology of Sofia, Bulgaria has presented highly promising results of a study (single arm, still underway) involving patients with thyroid nodules. These results showed that the percentage reduction in volume at three and 12 months after echotherapy was -47.4% ± 20.8% and -55.5% ± 28.4% respectively in group 1 (one session only) and -24.2% ± 15.8% and -46.0% ± 22.0% in group 2 (two sessions). The available scientific literature is generally confirming the effectiveness of HIFU treatment in the thermal ablation of thyroid nodules. A study in Basedow s disease has demonstrated the effectiveness of Echopulse. Note that the company is continuing to seek new indications for which HIFU treatment by Echopulse could be considered in partnership with its KOLs. Dr. Brian Hung-Hin LANG, the KOL in Hong Kong, has conducted a study involving 30 patients to evaluate the effectiveness of a HIFU session with Echopulse for patients suffering from Basedow s (Graves ) disease (one patient receiving two treatments). Basedow s disease is an autoimmune disease of the thyroid characterized by hyperthyroidism. The conclusions of the study published in Radiology were a hyperthyroidism remission rate of 73.3% at 12 months, a significant reduction in anti-tshr antibodies, stability for the other anti-thyroid antibodies and feasibility of the treatment, along with a favorable cost/benefit ratio compared to surgery. Theraclion estimates that his indication would enable a +40% increase in the number of echotherapies compared to the thyroid nodule indication alone Superiority over current treatments on different levels Theraclion offers a credible alternative to other methods of treatment of breast fibroadenomas and thyroid nodules. At present, the accepted definitive treatment for breast fibroadenomas is breastconserving surgery that entirely eliminates the FA, with risks of complications such as bleeding, serum formation and chronic pain linked to the incision. Vacuum-assisted percutaneous excision, a mini-invasive procedure, shows better cosmetic results but involves incomplete elimination, with a residual tumor rate of 3.4% to 30%. HIFU as an ablation treatment method competes with other ablation methods such as radiofrequency, laser and cryoablation. Note that HIFU is entirely non-invasive and does not require the insertion of a probe or antenna in the FA. It is only associated with minor side effects without complications such as bruises, infection or scar formation. It can be performed in cases of multiple lesions in one or both breasts. Additionally, the residual lesions do not appear to lead to reappearance of the fibroadenoma. Concerning thyroid nodules, operative removal has traditionally been the recommended treatment for benign thyroid nodules. The American Thyroid Association (ATA) has recommended that a operative removal be considered when a solid or predominantly solid nodule is either large (diameter > 4 cm) or the cause of local symptoms or clinical concerns. However, surgery is associated with the risk of hypothyroidism, bleeding, infection and hoarseness caused by a recurring lesion of the laryngeal nerve that could be permanent. Additionally, surgery requires general anesthesia and can be impossible for certain individuals due to associated medical morbidities. This has led to the introduction of mini-invasive non-surgical techniques such as percutaneous ethanol injection therapy (PEIT) and image-guided thermal ablation techniques such as laser ablation therapy (LAT) and radiofrequency ablation (RFA). PEIT is effective on thyroid cysts and is recommended for recurring benign thyroid cysts. However, thermal ablation techniques such as LAT and RFA are generally more effective on solid nodules. 10

11 1 A new paradigm in the treatment of benign tumors Studies have shown that these techniques can not only lead to a >50% reduction in the size of the nodule, but also relieve symptoms in numerous patients. HIFU treatment therefore offers multiple advantages in the treatment of TN given that it is a noninvasive solution. The principal limitation of HIFU involves the shallow depth of treatment, making this solution less effective for the deepest nodules. Source : Theraclion, Ultrasound In order to bolster the sales pitch for Echopulse, Theraclion has published the results of a study comparing Echopulse and subtotal thyroidectomy in the treatment of thyroid nodules. The patients treated ith Echopulse showed significantly lower incidence of hypothyroidism, a significantly better symptom improvement score, a significantly shorter hospital stay and significantly better voice quality after a follow-up of one month. The company has developed two solutions in order to reduce the constraints (such as the slowness of the treatment) linked to the use of HIFU : (i) a contour treatment method and (ii) the BeaMotion procedure. King s College of London has presented intermediate results of a study involving 50 patients diagnosed with fibroadenomas showing that the circumferential treatment by HIFU of breast fibroadenomas with Echopulse is feasible, offers a significant reduction in volume compared to the control group of patients and thereby represents a simple, non-invasive and ambulatory alternative treatment solution in this area. For the 20 patients treated in this study with Echopulse, the results showed a significant average reduction in the volume of the FA of -43.5%, compared to a -4.6% reduction in volume in the control group after six months. Circumferential treatment significantly reduces the average treatment time by % compared to the time needed to treatment the entire lesion. Additionally, six out the eight patients having felt pain prior to the treatment saw their symptoms disappear completely after treatment. Results of a study evaluating the new technology called BEAMOTION in the treatment of thyroid nodules were announced last year. The reduction in treatment time exceeded the company s initial expectations. This procedure is up to 5x more rapid compared to Theraclion s estimate for a tripling in treatment speed. While the average duration of treatment with the previous technology was 83 minutes, the duration of treatments with the new procedure was reduced to 17 minutes. 11

12 1 A new paradigm in the treatment of benign tumors 1.3 No HIFU competition in the FA and TN segments There is no HIFU competition in the indications targeted by Theraclion. Capitalize on the absence of competition and solid patent protection. Source : Theraclion Devices are currently commercialized in connection with other indications and no competing clinical study is being conducted in the ablation of breast fibroadenomas and thyroid nodules using HIFU. Additionally, the company holds patents that guarantee protection for all the technological solutions that it has developed. 12

13 2 BARRIERS TO ENTRY PARTIALLY OVERCOME 2.1 Commercial start below our expectations p The reimbursement challenge has been partially overcome p China and the United States will be the principal sources of new growth p Capitalize on the improvement in scientific visibility p.21 13

14 2 Barriers to entry partially overcome We can identify three principal obstacles behind Theraclion s mixed beginning: (i) the still limited reimbursement of treatments, (ii) international expansion still in its early stage and (iii) still too low awareness by patients. Nevertheless, it is worth noting that despite the commercial disappointments, Theraclion has made progress in these different areas, with numerous achievements suggesting a brighter future. 2.1 Commercial start below our expectations 280 A low frequency of treatments The difficulties are clearly identified but numerous achievements suggest a brighter future. Traitements/EP Objectif 10 ans - traitements/ep IS Source : Invest Securities The above chart shows the company s lag compared to our forecasts for treatment per system (250 treatments per year on average). This objective (covering a period of ten years) integrated the obtaining of reimbursements and the entry onto the US and Chinese markets, where the target population of patients suffering from breast fibroadenomas or thyroid nodules is larger. We continue to believe that the number of treatments per system will be sensitive to the expansion of reimbursement and the penetration of more important markets (China and the United States). The treatment trend by indication (FA or TN) depends on the market on which the Echopulse system is installed. At this phase of development, it is still difficult to identify a preference of surgeons / endocrinologists for a particular indication. In Germany, the bulk of Echopulse systems are installed in nuclear medicine centers for the treatment of thyroid nodules. We remain confident in the momentum in treatments that, once the obstacles are overcome, should trend up to our estimates. 2.2 The reimbursement challenge has been partially overcome On a market of benign indications, the price and reimbursement determine the choice of the surgeon and patient. Even if the EP price is on the order of $250k, the high cost of the technology compared to other traditional methods currently makes a broader adoption of this non-invasive alternative impossible if the center hopes to rapidly amortize the cost of the machine. For example, operations for breast fibroadenoma are rare in France, except if the patient s impairment (physical and esthetic) is clear. As such, in the absence of reimbursement, a center will prefer to avoid the innovation for financial reasons and the installed base will be developed through leasing or the making available of the Echopulse, leading to lower revenue generation. 14

15 2 Barriers to entry partially overcome Additionally, the supply of the machine accompanied by payment per use (seven such agreements signed by Theraclion) is another option in order to enable to company to propose its alternative solution and reinforce its visibility on the market. The Echopulse is the least expensive HIFU device on the market. Additionally, its use in the treatment of thyroid nodules would allow savings of 36% to 46% compared to the price of a traditional treatment. Source : Journal of Therapeutic Ultrasound, 2017 Consequently, reimbursement is the key variable in order to hope for greater adoption of the technology despite clinical effectiveness that is being continuously demonstrated. The clinical results as well as the cost savings generated by the use of Echopulse reinforce the company s case with the insurance companies. In order to obtain reimbursements, the company is continuing to expand its sales pitch in order to demonstrate that the use of EP is a cost effective solution despite its high initial price. The Echopulse is the least expensive HIFU device on the market ($250k vs. $400k for competing devices). Breast fibroadenoma and thyroid nodule surgery require average hospitalization of 3.3 nights. The rapid recovery after an ablation with the Echopulse enables the hospital to reduce its operation costs and patients to return to work more rapidly. The hospital costs are estimated at between $8-12k for a breast operation and $20k for a thyroid operation. The hospitals lose money on breast operations. With EP, there is no general anesthesia, infections or post-operatory bleeding implying substantial additional costs. Treatment of thyroid nodules using HIFU allows savings equal to 36% to 49% of the price of traditional treatments. These solid arguments nevertheless require a full-scale medico-economic study in order to accelerate the obtaining of reimbursements. This study is currently being conducted in the framework of the innovation flat rate pricing system in France A favorable trend in Germany The company is moving ahead rapidly in Germany and could soon reach the inflection point needed to expand its solution more broadly. It is not surprising to see that Germany is Theraclion s leading market, as the company has substantially reinforced its reimbursement coverage here through multiple agreements with regional insurance companies. The beginnings of success are gradually emerging in the country, highlighting the importance of reimbursement in Theraclion s business model. 15

16 2 Barriers to entry partially overcome The company has signed numerous agreements with insurance groups covering a total of 14 million persons allowing the reimbursement of Echopulse treatments. Population covered for Echopulse treatment in Germany Source : Theraclion Germany is the leading market of Theraclion, which is seeing encouraging success here. We can see that reimbursement principally involves thyroid nodules, thereby explaining the success of this indication in Germany. Note that Germany is particularly concerned by thyroid problems. The average reimbursement by the insurance companies equals 2,200. This amount should allow a rapid return on investment and a substantial reduction in healthcare costs compared to traditional treatment of thyroid nodules. Source : Theraclion The company has now set an objective to expand coverage by targeting the major public insurance companies (along the lines of TK last January), enabling it to further enhance the credibility of its solution. The major insurance groups have an influence over the market. 16

17 2 Barriers to entry partially overcome Source : Theraclion More recently, Theraclion expanded the reimbursement coverage in Germany through the signing of an agreement with BKK Landesverband Nordwest (LV NW). The grouping includes 21 insurance companies that together count nearly three million insured persons principally in northwest Germany. LV NW is responsible for the drafting of insurance contracts and the organization of regional healthcare. The special healthcare program set up by LV NW now covers echotherapy through a integrated healthcare contract. The treatment will be available for all patients covered by LV NW member insurance companies, regardless of whether they live in northwest Germany or elsewhere in Germany. This milestone is therefore of major importance for the centers in Leipzig, Hamburg, Paderborn, Bottrop, Coburg and Frankfurt. These different successes in terms of reimbursement of treatments using the Echopulse is a positive signal for the German market Global reimbursement in France thanks to innovation fixed rate status? Obtaining global reimbursement for Echopulse treatments on Theraclion s domestic market would be a very strong signal for the markets. The trend is clearly positive since the obtaining of special reimbursement in the framework of the innovation pricing program. Obtaining reimbursement is a major barrier to entry for the company. Theraclion has announced the publication in the French Official Journal of the decree authorizing the flat rate reimbursement of treatments of breast fibroadenoma using the Echopulse. This reimbursement, obtained in the framework of the innovation pricing program, has been set at 1,300 and will be effective for a period of four years. This reimbursement over four years (one year of inclusion, 1.5 years of follow-up, six months of analysis and one year of evaluation by the national health authority HAS) will allow the collection from 150 patients of all the data needed for the setting of a definitive reimbursement rate for breast fibroadenoma treatment using the Echopulse. 12 French centers are concerned by this reimbursement corresponding to a total of around 600 patients eligible for reimbursement. Note that Theraclion had obtained a favorable Forfait Innovation opinion in December This reimbursement constitutes an important milestone for the company in terms of penetrating the French market. Obtaining flat-rate reimbursement in France demonstrates that the company is actively working to overcome the reimbursement barrier in order to expand the development of HIFU treatment of breast fibroadenoma. The company still has a long way to go here, with a decision expected in four years. However, the trend is clearly positive. 17

18 2 Barriers to entry partially overcome An initial reimbursement code in effect since 1 July opens the door to a possible expansion of reimbursement in the United States. Source : Theraclion Additionally, the company will conduct a medico-economic study at these 12 centers in the framework of the innovation flat-rate pricing program comparing the use of Echopulse with surgery based on a protocol validated by the French national healthcare authority, which will use these results to set the definitive reimbursement of treatments. If positive, the results of this medico-economic study could also serve as an additional arguments in the company s negotiations to expand reimbursement in other countries. The positive clinical results as well as the impact of HIFU treatment in terms of a hospital s personnel and material requirements make us confident regarding the outcome of this study Outlook for reimbursement in the United States Even if there is currently no specific reimbursement code for HIFU treatment of breast fibroadenoma and thyroid nodule treatment in the United States, certain factors make us optimistic here. First, surgical operations are reimbursed at $4-5k. Second, costs linked to surgery are very high in the United States (between $8-12k for breast surgery and around $20k for thyroid surgery). Finally, the CMS (Center of Medicare Services) a recently assigned a reimbursement code (C-code 9747) for the ablation of prostate tissue by HIFU effective since 1 July This code applies to all the procedures conducted by the company s HIFU devices, including whole primary whole gland prostate ablation or partial prostate ablation. This represent of the first formal recognition of HIFU technology in the United States, particularly given the CMS very rapid processing of the application filed by the French company EDAP. This code opens the door the expansion of the reimbursement of HIFU technology by the different payers in the United States, public or private. 2.3 China and the United States will be the principal sources of new growth Entry onto the US and Chinese markets would give the company access to the most important markets worldwide. China ranks no. 1 in terms of the number of breast and thyroid operations. Approvals on these two markets would be an important milestone for the company. 18

19 2 Barriers to entry partially overcome A pivot study is currently being conducted on the US market, suggesting potential commercialization in Commercialization in the United States expected in 2020 Theraclion has launched a pivot study in order to obtain approval for commercialization in the United States, the no. 2 market in terms of breast surgeries with around 400k operations performed each year. We estimate that Theraclion should initially above approve in breast fibroadenoma in 2020 before seeking approval in thyroid nodules. The launch of the pivot study took place following positive results from a feasibility study conducted by the University of Virginia (UVA) that were published last May. These results showed that echotherapy was well tolerated and presented few undesirable side effects. 20 patients with palpable FA measuring over 1 cm were included in the study in order to evaluate the feasibility and safety of treatment with Echopulse. The fibroadenoma was causing pain in half of the patients prior to treatment. The study showed that echotherapy was tolerated well and that only one pain and minimal discomfort were seen during the duration of the treatment. Patient satisfaction after three months was 4.4 (on a scale running from 1 to 5, with 5 representing the score corresponding to maximum satisfaction) and the probability of recommending the treatment to a friend or family member was 4.7. The cosmetic results, the reduction in volume of fibroadenomas and long-term patient satisfaction are currently being evaluated. The pivot study required for the approval application is slated to included 100 patients at three sites in the United States (UVA, Columbia, Bellevue/NYU) and two sites in Europe (Sofia and Tubingen). The treatment program is limited to a single HIFU treatment, with the principal endpoints being the reduction in volume, pain and anxiety. The company has already recruited the first two patients in this pivot study. The definitive results of this study should be published in mid-2019, with commercialization anticipated in 2020 in breast fibroadenoma, the principal indication in the United States. Commercialization should be made through a direct sales force, a most costly approach but required in connection with the US clientele, who feel the need to develop a personal relationship with the salesperson. The recruitment of this sales force, including the creation of a Theraclion subsidiary in the United States, should take place in We anticipate authorization in thyroid nodules in 2021, with the regulatory process necessarily being more rapid (one year) if Echopulse has just been approved for the non-invasive treatment of à FA. We estimate that the Echopulse installed base on the US market could reach 190 EP by 2026, with peak sales of 28m, 60% from sales of consumables Sales estimates in the US revenues from EP services (k ) revenues from EP equipment (k ) revenues from Epack disposables (k ) Source : Invest Securities 19

20 2 Barriers to entry partially overcome Commercialization in China hopefully in 2020 China is Theraclion s most important target market, with an average of 750 thyroid operations and 650 breast fibroadenoma operations per hospital. The Chinese market consequently represents nearly 50% of worldwide procedures (1.7 million operations) involving thyroid nodules and breast fibroadenomas. The advantages of Echopulse on this market are numerous on the level of the 1,300 category III hospitals. Entry into the Chinese market should take place starting in 2020 through a joint venture set up with Mongolia Furui Medical Science. Theraclion has already published convincing clinical results involving an Asian population. This report (published last March 2) including 73 patients and evaluated Echopulse as unique treatment in three arms divided based on the nodule volume (arm 1: volume < 10 ml, arm 2: volume between ml and arm 3: volume > 30 ml). The analysis of the effectiveness was made six months after treatment, with the principal endpoint being an over 50% reduction in the volume of the nodule. The published results confirmed the effectiveness of Echopulse, with an overall median reduction after six months of -68.3% of volumes without serious side effects. In greater detail, it would appear that the effectiveness of EP was essentially validated in the small volumes (arm 1) with an overall median reduction of -77.6% vs % for arms 2 and 3. The thickness of nodules limits the effectiveness of HIFU echotherapy, as the energy delivered is smaller. Repeating the treatment three to six months after the first session should therefore by recommended in cases where volumes are greater than 10 ml. Even if the results for arms 2 and 3 were not conclusive, Echopulse still showed notable effectiveness, with a reduction in volume close to -50%. Asia (notably China and Korea) represents a major challenge for Theraclion. This study represented the first demonstration of Theraclion s potential in Asia. The company anticipates commercialization in China through a joint venture set up with Inner Mongolia Furui Medical Science. Theraclion will own 56% of this new entity, entitled Theraclion China. We believe that commercialization in China through a joint venture is a particularly appropriate strategy on a market that is difficult to penetrate. This strategy will enable the company to retain control and benefit from a local presence in collaboration with a well known Chinese player. Additionally, this joint venture with Furui Medical Science is logical given that this Chinese group had already invested in Theraclion through different capital increases ( 1.8m in May 2016 and 5m in August 2016). Theraclion s five-year plan on the Chinese market calls for the generation of $20m in revenues on an investment of $10m in two indications. We are significantly more cautious, with an estimate of 7m in revenues in Over the short term, the company plans to place ten EP systems during the regulatory approval period in order to validate a series of tests. We anticipate commercialization in China in Peak sales are estimated at 29m in 2026 on an installed base of 242 EP Sales estimates in China revenues from EP services (k ) revenues from EP equipment (k ) revenues from Epack disposables (k ) Source : Invest Securities 20

21 2 Barriers to entry partially overcome 2.4 Capitalize on the improvement in scientific visibility The final element that should enable Theraclion to reach a major milestone in its development is the visibility of HIFU treatments in the two targeted indications. Theraclion has a coherent strategy that above all focuses on convincing opinion leaders in order to reinforce the company s scientific visibility with treatment centers that could install an Echopulse. The company has made substantial progress in this regard, particularly in Germany, as shown by the numerous scientific articles published in the country (22 articles in six months) promoting the non-invasive treatment with HIFU of breast fibroadenomas and thyroid nodules. In parallel with the expansion of reimbursement, this better visibility has contributed to Theraclion s emergence in Germany. Echopulse s scientific visibility has been considerably enhanced in the scientific reviews. However, efforts must still be made to democratize and target patients suffering from these two benign conditions. Source : Theraclion In contrast, we believe that communication efforts targeting opinion leaders in all the scientific reviews or at meetings are not yet enough to sufficiently sensitize patients. Combined with insufficient reimbursement, this could explain the still very low frequency of treatment per system. In parallel with communication efforts targeting the scientific community, we believe that more active communication efforts targeting patients would be valuable in order to reinforce the adoption of Echopulse in the non-invasive treatment of FA and TN. Raising patient awareness will be accomplished gradually as the installed base and reimbursement rises in all countries. However, we believe that larger investments are still necessary in order to communicate directly with patients. La Echopulse s low visibility with patients in the treatment of FA and TN can be seen in the low traffic figures for the website ( which is nevertheless described by Theraclion as patient pull. According to SimularWeb data, only 7,600 monthly visits are seen on average, a very low figure compared to the size of the potential market. 21

22 2 Barriers to entry partially overcome Source : SimularWeb Now that Echopulse s scientific visibility has been considerably reinforced, we believe that the company should invest more specifically in direct communication efforts targeting patients suffering from these two benign conditions. The company has the tools needed to justify our optimism regarding the increase in the frequency of treatments. Our only question involves the pace at which patients awareness will rise in order to reach an inflection point making EP a genuine therapeutic alternative to surgery. 22

23 3 HIGHLY ATTRACTIVE POTENTIAL IN ONCOLOGY OVER THE LONGER TERM 3.1 Scientific reasoning in oncology p A study piloted by UVA p A positive catalyst but still too soon to be valued p.27 23

24 3 Highly attractive potential in oncology over the longer term Theraclion received FDA approval last June for the launch of a study in the treatment of breast cancer combining immunotherapy and echotherapy (Echopulse). Theraclion s idea is the expand the range of application of HIFU treatments to malignant cancers. This study constitutes a major milestone for the company in oncology, a $35bn market. If positive results are obtained, this study could lead to a significant revaluation of the company. Nevertheless, research here is still in its early stages and the outcome of this study remains highly uncertain. Consequently, we view the use of HIFU in combination with immunotherapy as a free option in our valuation. Nevertheless, we would highlight (i) the scientific reasoning behind the combination and (ii) the progress of research in this area. 3.1 Scientific reasoning in oncology Breast cancer is one of the most common female malignant diseases, with 411,000 annual deaths corresponding to 14% of deaths from cancer in women. Breast cancer is the no. 5 cause of death from cancer. Over one million new cases are reported each year, principally in the developed nations (361,000 in Europe and 230,000 in North America), with average survival rates of 73% and 57%. The breast cancer market is forecast to reach $17bn in Theraclion launched a study in June in order to expand the range of application of HIFU treatments to malignant cancers (breast cancer), a major $35bn market. Immunotherapy as treatment for cancer is showing rapid progress, with several new drugs approve by the FDA this year alone. The best known drugs are the checkpoint inhibitors, which enable a more effective immune response against cancer tumors. Cancer cells can develop defense mechanism against immune cells. This most common defense is the positive regulation of the checkpoint, thereby protecting the cancer cell by deactivating the attacking immune cells. Several immunotherapies have been developed to assist in overcoming this defense. The most developed immunotherapies are those targeting and blocking the programmed death receptor pathway (programmed cell death protein 1 (PD-1) and the PD-L1 inhibitors). These drugs have shown success in several types of cancer, with tumor regression and increased overall survival. However, only 20% to 40% of patients respond to the treatment. Additionally, the effectiveness of checkpoint inhibitors is improved in patients presenting a base anti-tumor immune response prior to treatment. This base response could be triggered by HIFU treatment. The ablation therapies (radiotherapy, radiofrequency, cryotherapy, laser and HIFU) have demonstrated their ability to stimulate an immune response in pre-clinical and clinical studies. 24

25 3 Highly attractive potential in oncology over the longer term In some cases, the entire tumor mass can not be treated and certain cancerous tissue remains. This could lead to greater risk of relapse in certain patients. In certain patients suffering from metastatic pancreatic cancer, HIFU treatment of the primary tumor provoked an immune response against the distant metastatic tumors outside the zone treated with HIFU. HIFU treatment could improve the basic immune response against tumor cells. Other pre-clinical and clinical studies have shown that treatment by HIFU can improve the immune response thanks to an increase in the activity of cytotoxic T lymphocytes, dendritic cells and heat shock proteins. Given the non-invasive nature of focused echography, the use of non-ionizing radiation and the precise ablation capacity without dose limitations, HIFU could be more attractive in this combined therapy than other ablation methods such as cryoablation. In a study comparing HIFU treatment before radical mastectomy with surgery alone, those patients who received the targeting echography treatment prior to surgery showed significantly higher tumor filtration of T lymphocytes T, B cells and NK2 cells. In pancreatic tumors, HIFU treatment increased the number of anti-tumor T and NK cells in the tumor. Numerous other pre-clinical and clinical studies have shown that HIFU treatment stimulates various components of the immune response by increasing the activity of cytotoxic T lymphocytes, dendritic cells and heat shock proteins. Source : FUS 25

26 3 Highly attractive potential in oncology over the longer term Even if the initial results appear promising, it is still a question of early stage research, particularly in the evaluation of the impact of HIFU on tumor growth, metastases and long-term survival. Evaluating HIFU treatments in cancer is not a new idea, but Theraclion is standing out by evaluating Echopulse in combination with an immunotherapy. Source : FUS fondation 26