STIM - BrainsWay: Parabolic Stock Warrants Context And Caution

2023-11-30 20:32:31 ET

Summary

• BrainsWay's stock grew 300%, driven by a 60% year-over-year revenue increase and Deep TMS technology success, achieving positive cash flow.
• Deep TMS faces challenges: clinical variability, practicality issues, market competition, evolving payer coverage, and inconsistent revenues.
• Despite financial improvements, long-term growth may be hindered by high competition, market penetration issues, and regulatory challenges.
• Investment recommendation: Hold. BrainsWay shows solid short-term financial health but faces long-term growth and market challenges.

Introduction

BrainsWay ( BWAY ) is garnering attention in the financial market, ranking 5th, overall, in Seeking Alpha's Quant rankings, slightly behind Meta Platforms ( META ). This position reflects a remarkable growth of nearly 300% in its stock price over the past six months. The surge is well-justified given BrainsWay's impressive performance: a 60% Y/Y increase in quarterly revenues to $8.3 million, propelled by their Deep Transcranial Magnetic Stimulation (Deep TMS) technology. This platform, FDA-approved for conditions like major depressive disorder ((MDD)), obsessive-compulsive disorder (OCD), and smoking addiction, has played a pivotal role in the company's financial health. In Q3, BrainsWay achieved cash flow positivity and reported strong gross profit margins of 73%, alongside a solid balance sheet with no immediate liquidity or debt issues.

Despite these achievements, Deep TMS technology is not without its challenges. Clinical trial results have shown variability ( page 7 ), and the underlying mechanism of action remains largely theoretical . The device's size ( slide 19 ) and the necessity for frequent clinical visits (five times a week over a period of four weeks for MDD) limit its practicality, often relegating it to a last-resort treatment option. Additionally, Deep TMS faces stiff competition from other entities and struggles for recognition and utilization in a crowded market of longstanding therapies for conditions like depression. Moreover, payer coverage is still evolving, and because BrainsWay's revenues have been inconsistent, the $8.3 million achieved in Q3 '23, from my porch, does not particularly stand out when viewed against the backdrop of the past few years.

Lastly, while the company's recent "cost optimization measures" are commendable, they might inadvertently restrict the potential growth and broader application of Deep TMS.

The following article delves into the multifaceted challenges and opportunities facing BrainsWay's Deep TMS technology as it seeks to become a growth compounder. We'll examine its competitive positioning against firms like Neuronetics and Magventure, scrutinize its market penetration strategies, and assess the clinical and regulatory landscapes that shape its trajectory.

BrainsWay's Deep TMS: Balancing Innovation with Market Realities

BrainsWay's journey to establish Deep TMS as a growth compounder is hindered by several distinct challenges, each demanding strategic attention.

Technologically, the TMS field is fiercely competitive. Neuronetics ( STIM ), for one, currently super-focused on expanding sales , serves as a direct competitor with its own TMS treatment, NeuroStar. Magventure's TBS treatment notably trumps traditional methods by reducing treatment time for MDD from 20 to 3 minutes , thus increasing patient turnover. Additionally, Magstim’s 3D navigation system offers precise targeting , a feature potentially superior to BrainsWay's broader stimulation approach.

Market penetration for Deep TMS is another challenge. Its focus on a niche market segment - patients unresponsive to antidepressants - faces encroachment from novel treatments like ketamine , offering rapid relief for treatment-resistant depression. Furthermore, the broader neuromodulation market, including options like electroconvulsive treatment and deep brain stimulation , backed by heavyweights like Medtronic ( MDT ) and Boston Scientific ( BSX ), offers formidable competition.

Clinically and regulatory-wise, BrainsWay's ambition to secure approval for Deep TMS across multiple conditions is fraught with hurdles. The technology, already holding the European CE mark for an array of mental health conditions, including Alzheimer’s Disease and PTSD, is currently under clinical trials for other conditions like chronic pain. While these trials demonstrate BrainsWay's commitment to diversifying Deep TMS's applications, the path to FDA approval demands robust evidence of efficacy and safety.

Patient and practitioner acceptance is crucial yet challenging. Perceptions of safety and effectiveness, particularly with the broader brain area stimulation, could impact its mainstream adoption. Financial aspects also pose barriers. TMS therapy costs, although variably covered by insurance globally, can be significant for patients without insurance, averaging $200-$300 per session and totaling $6,000 to $11,000 for a full course of treatment, per one Florida-based clinic.

In conclusion, BrainsWay's Deep TMS, despite its innovativeness, confronts multifaceted challenges: advanced technological competition, a constrained target market, rigorous clinical and regulatory paths, acceptance issues among users and practitioners, and financial constraints. These factors collectively pose a substantial hurdle to its growth potential.

Q3 Earnings

Looking at BrainsWay's most recent earnings report , there's a notable improvement in financial performance for the three months ending September 30, 2023, compared to the same period in 2022. Revenue saw a significant increase to $8.3M from $5.2M Y/Y, indicating a robust growth in sales. The company also managed to reduce its total operating expenses from $8.7M to $6.3M, reflecting effective cost management. Despite these improvements, the company still reported a net loss of $0.23M, a substantial improvement from the previous year's $5.04M loss. This reduction in net loss can be attributed to both increased revenue and decreased expenses, showcasing a more efficient operation.

Financial Health

Turning to BrainsWay's balance sheet , the combined value of 'cash and cash equivalents' and 'short-term deposits' totals approximately $44.2M. The current ratio, calculated as current assets divided by current liabilities, is approximately 6.4, indicating a strong ability to cover short-term obligations. When comparing total assets ($59.8M) to total liabilities ($18.6M), the company shows a healthy balance sheet with assets significantly outweighing liabilities.

Analyzing the consolidated statements of cash flows, BrainsWay experienced a net cash used in operating activities of approximately $1.2M over the nine months ending September 30, 2023. This translates to a monthly cash burn of about $133K. Consequently, the historical cash burn rate suggests a prolonged cash runway.

Based on these figures, the odds of BrainsWay requiring additional financing within the next twelve months appear low, given the substantial cash runway. However, this analysis is based on past data and may not fully predict future performance.

In summary, BrainsWay's short-term financial health is robust, given its strong current ratio and substantial cash runway. Its long-term financial health also appears robust, considering its asset-to-liability ratio and low monthly cash burn relative to its liquid assets.

Market Sentiment

According to Seeking Alpha data, BrainsWay with a market capitalization of $101.25M, indicates a modest level of market confidence, reflective of its recent growth but tempered by the challenges it faces. Growth prospects are promising, considering the 60% Y/Y increase in revenues and analysts’ positive revenue projections, yet they are cautious due to the competition and limitations in technology adoption. The stock’s momentum, with a 305.92% increase over 6 months, significantly outperforms SPY, highlighting exuberant investor enthusiasm.

Short interest at 0.68% of float is relatively low, suggesting limited bearish sentiment, but in the context of the company being relatively unknown until recently.

Institutional ownership , notably small at 24%, shows a dynamic, with new positions (7,103 shares) being less than sold-out positions (102,570 shares), indicating a pessimistic institutional perspective. Key institutions include AIGH Capital Management and Masters Capital Management, signaling credible backing.

The lack of recent insider activity suggests stability but warrants monitoring for future sentiment shifts.

Overall, considering these factors, BrainsWay’s market sentiment can be qualified as "Adequate," reflecting potential tempered by competitive and technological challenges.

My Analysis & Recommendation

In conclusion, BrainsWay's recent financial performance, highlighted by a surge in revenue and achievement of cash flow positivity, is commendable. However, the company's strategy to lower operating expenses, while beneficial in the short term, raises concerns about the long-term market penetration and growth potential of its Deep TMS technology. The competitive landscape in TMS is rapidly evolving, with competitors offering advanced technological features and alternative treatments gaining traction. This environment, coupled with clinical and regulatory challenges, places BrainsWay in a precarious position regarding its growth trajectory and market dominance.

Given the mixed outlook – a robust short-term financial position but potential long-term challenges in market penetration and technology adoption – a "Hold" recommendation seems prudent. Investors are advised to exercise caution, closely monitoring BrainsWay's strategic moves in market expansion, technological advancements, and responses to competitive pressures. Considering BrainsWay's yet-to-be-established "flywheel" effect with Deep TMS, the journey ahead is marked by competitive challenges, uncertainties, and significant capital demands. While the recent surge in the stock's value may seem warranted, it's essential for investors to temper their expectations and not anticipate a sustained pattern of parabolic price increases.

To mitigate risk, investors could diversify their portfolio across the healthcare sector, including companies with different technological focuses and market positions. Additionally, staying abreast of industry trends and regulatory changes, particularly in the mental health and neuromodulation space, is crucial. Investors may also consider setting stop-loss orders to protect against significant downside while maintaining the flexibility to benefit from any positive developments in BrainsWay's journey.

Ultimately, while BrainsWay's most recent achievements are notable, the company's path forward appears challenging, necessitating a balanced and cautious investment approach.

Microcap-Specific Risks

Investing in microcap stocks like BrainsWay carries distinct risks, primarily due to their low market capitalizations which can lead to higher volatility and significant price swings. These stocks often suffer from lower liquidity, making trading more challenging and susceptible to larger price impacts from smaller trades. Microcap companies typically offer limited public information, thereby hindering thorough due diligence and potentially obscuring financial or operational issues. They are also more vulnerable to market manipulation and fraud, such as pump-and-dump schemes, where stock prices are artificially inflated and then rapidly sold off. Additionally, microcap stocks can be disproportionately affected by market sentiments and broader market downturns. Investors should exercise heightened caution and consider their risk tolerance thoroughly before investing in this market segment.

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