NMTC - NeuroOne: A Hidden Contender Against ClearPoint In The Brain Drug Delivery Arena

2023-11-14 08:00:00 ET

Summary

• Both NeuroOne and ClearPoint Neuro are emerging as significant players in the neurological device sector, each carving out their own niche, with ClearPoint focusing on drug delivery and NeuroOne advancing.
• NeuroOne is rapidly positioning itself as a formidable competitor in the brain drug delivery market, a niche where ClearPoint Neuro has established a strong foothold, indicating a potential shift.
• NeuroOne's ongoing strategic initiatives, including partnerships and product development, coupled with its improving financial health, present it as an attractive investment opportunity.

Investment Thesis

In the complex landscape of neurological device technology, ClearPoint Neuro ( CLPT ) stands out with its precision-guided drug delivery for the brain. Despite its unique edge, ClearPoint continues to struggle, evidenced by a modest 12% year-over-year revenue growth in their last quarter and a cash runway of less than eighteen months. The company's biologics and drug delivery segment, its sole area of growth, stands vulnerable in the rapidly evolving neurological device sector.

On the other hand, NeuroOne Medical Technologies Corporation ( NMTC ) is quietly positioning itself as a formidable competitor. NMTC's expertise in thin film electrode technology, combined with a strategic partnership with Zimmer Biomet—a global leader in orthopedics and robotic technology used in minimally invasive neurosurgeries—positions them uniquely to venture into adjacent markets, such as neurosurgical drug delivery. Management commentary suggests this move is already taking place. Such a move could directly challenge ClearPoint’s stronghold in this specialized market. I will go into why I believe this will happen and NMTC's prospects in consideration of the competitive landscape and inherent challenges of the sector.

Company Overview

NeuroOne Medical Technologies Corporation is a medical technology company that specializes in the development and commercialization of thin film electrode technology. NeuroOne’s products are being explored and used for a variety of purposes, including continuous electroencephalogram (cEEG) and stereoelectroencephalography (sEEG) recording, as well as spinal cord stimulation, brain stimulation, and ablation solutions. The company’s next-generation electrode technology has been showcased at major industry events such as the Congress of Neurological Surgeons, Society for Neuroscience, and American Epilepsy Society meetings, demonstrating its growing influence and acceptance in the neurological field. NeuroOne’s electrode has been used in world-renowned neurosurgery center, Cleveland Clinic.

Key Partnerships

Attesting to the excellence of its electrode technology, NeuroOne boasts partnerships with two giants in neurosurgery, Mayo Clinic and Zimmer Biomet.

Mayo Clinic

Mayo Clinic, a world-famous medical center, has been one of NeuroOne’s strongest supporters. Mayo Clinic has been instrumental in NeuroOne’s growth, starting with preclinical models and clinical research in 2015 progressing to the first commercial human use of the Evo® Cortical Electrodes in November 2020. Dr. Greg Worrell, a leading neurologist at Mayo Clinic, chairs NeuroOne’s Scientific Advisory Board. Mayo Clinic is not only a key development partner but also a shareholder in NeuroOne. NeuroOne is one of nine healthcare companies in which Mayo Clinic ’s portfolio has an active position. reflecting Mayo Clinic’s commitment to investing in innovative companies that can transform healthcare globally.

Zimmer Biomet

Zimmer Biomet, a global leader with a market capitalization of $27 billion, is a strategic partner in marketing NeuroOne’s Evo Cortical Electrode. This partnership , formalized in July 2020 with a $2 million upfront payment and additional milestones, has been a significant boost for NeuroOne. In August 2022, an accelerated milestone payment of $3.5 million was made, showing the success of this collaboration. Zimmer Biomet's role is to exclusively commercialize and distribute NeuroOne’s Evo® electrode diagnostic technology, which complements Zimmer’s ROSA ONE® Brain platform, which is used to perform minimally invasive neurosurgeries at renowned neurosurgery institutions such as University of Pittsburgh and Stanford Children’s .

These partnerships with Zimmer Biomet and Mayo Clinic serve to derisk and validate NeuroOne, providing both the clinical validation and marketing presence needed to advance its position in the neurosurgical device market.

Understanding the Drug Delivery Opportunity: Examining ClearPoint Neuro’s History

To better understand the potential opportunity for NeuroOne, let’s examine the history of ClearPoint Neuro, which provides a rather instructive look into what a strategic pivot can do for a company.

ClearPoint Neuro, Inc. originally began as MRI Interventions, Inc., a company focused on MRI-guided therapies, leveraging the power of real-time imaging to enhance the precision and safety of neurosurgical procedures. Focused on developing and marketing a leading neurosurgery platform, the company saw little success during this period. This led to the development of the ClearPoint MRI-Guided Neuro Navigation System, a platform for planning and adjusting the trajectories of electrodes, catheters and needles under real-time MRI-guided visualization.

The ClearPoint System turned out to be well-suited for the precise insertion of needles and infusion of pharmaceuticals into the brain. Recognizing the burgeoning potential in the targeted brain drug delivery market, MRI Interventions pivoted towards servicing this niche. This strategic move was bolstered by key collaborations with pharmaceutical and biotech companies, focusing on CNS therapies. These partnerships, coupled with alliances for research and development, expanded ClearPoint Neuro's reach and capabilities significantly.

In February 2020, to fully embody this new direction, MRI Interventions rebranded to ClearPoint Neuro, Inc. This name change was a clear signal of its transition from MRI-guided interventions to a major player in targeted brain drug delivery. This strategic shift paid off remarkably, with the company's valuation skyrocketing from under $20 million in 2018 to an impressive $503 million in February 2021.

Since pivoting in 2018, ClearPoint Neuro’s drug delivery segment continues to be the primary driver of its growth. This segment has consistently outperformed other areas of the business, emerging as the sole contributor to significant revenue growth over the past five years.

Source: ClearPoint Neuro August 2023 Investor Presentation

NeuroOne’s Quiet Move into Drug Delivery

NeuroOne is quietly positioning itself as a formidable competitor in the targeted brain drug delivery market. Leveraging its advanced electrode technology, known for high-resolution data and facilitating minimally invasive neurosurgery, the company appears uniquely suited for drug delivery applications.

NeuroOne has developed the OneRF system, a combination diagnostic and ablation electrode system nearing FDA 510(k) approval. This system uses sEEG electrodes to record brain activity before ablating problematic nervous tissue with an RF probe through the same apparatus. It's conceivable that NMTC could adapt this system for diagnostic and infusion purposes. Such innovation would not only enhance the precision of drug delivery but also enable real-time monitoring of the brain and local tissue responses to medication, a critical advancement aligning with the shift towards personalized medicine.

Recent developments indicate that NeuroOne is actively pursuing this new direction. The company's Q3 filing revealed plans to use proceeds from their July 2023 financing to “complete the design of a novel drug delivery electrode.” Furthermore, CEO Dave Rosa's comments in the latest earnings call highlight successful feasibility testing at the Mayo Clinic and ongoing discussions with biotech companies for research studies and product development. These steps show significant progress in integrating its electrode technology with drug delivery systems.

The potential integration of NeuroOne's electrode technology with drug delivery systems could be transformative. Upcoming regulatory milestones, clinical trial results, and partnership announcements will be critical in assessing NeuroOne’s progress and its ability to capture market share in this specialized field. If NMTC continues to advance in drug delivery, it could mirror the growth in valuation experienced by ClearPoint Neuro, while also challenging their position in the market.

Recent Highlights

Before we jump into valuation, let's examine some key highlights from the most recent quarter and subsequent events for both NeuroOne and ClearPoint Neuro.

NeuroOne

NeuroOne experienced a remarkable third quarter . Product revenue surged nearly 20-fold, from $32,000 in Q3-2022 to $630,000 in Q3-2023. Additionally, collaboration (Zimmer) revenue in the first nine months of the fiscal year jumped from $6,000 in 2022 to $1.46 million in 2023. This substantial growth far outpaced the expected increase in burn, which led to net loss growing only 25.69% from $2.75 million to $3.47 million YoY over the same period.

Since the end of their third quarter, NeuroOne has successfully raised $6 million through a public offering and an additional $2.5 million via an ATM (At-the-Market) facility.

ClearPoint Neuro

ClearPoint, in contrast, posted a less impressive quarter . Total revenue grew by only 12%, from $5.1 million in Q3-2022 to $5.8 million in Q3-2023. This modest growth came despite a nearly 30% increase in net loss, which climbed to $4.8 million over the same period.

Notably, year-over-year comparisons for the same period reveal:

• Biologics and drug delivery revenue increased by 55%, from $2.2 million to $3.5 million.
• Functional neurosurgery navigation and therapy revenue decreased by 21%, from $2.4 million to $1.9 million.
• Capital equipment and software revenue fell by 26%, from $0.5 million to $0.4 million.

Given ClearPoint’s continued decline in non-drug delivery revenue, the company faces the challenge of generating sufficient drug delivery revenue growth to offset its cash burn. This is crucial for maintaining operations against their current cash position of $24 million, which is estimated to be sufficient for the next five quarters.

ClearPoint Update: Key Takeaways from its Q3 2023 Earnings Call

The recent Q3 earnings call for ClearPoint Neuro last week provided great insight into the company’s path forward.

Biologics and Drug Delivery Segment: CEO Joe Burnett makes it clear that they are doubling down on their only growing segment. Over the last two years, they have continued to expand their portfolio of offerings with development, regulatory and other preclinical CRO services. While this has served to increase their total revenue, it has come at the cost of margins, and is implied to be the primary reason why gross margin in the same third quarter dropped from 71% to 57%.

Functional Neurosurgery Navigation and Therapy Segment: Historically serving as ClearPoint’s ‘razor and razor blades’ model, it’s clear that this segment is under strategic reevaluation. The company is trying to breathe life into this segment with new products such as the SmartFrame product and the PRISM Laser Therapy.

A Huge Shift in Monetization Strategy: ClearPoint revealed a massive shift in their growth strategy, note the following excerpt:

Now we're talking about those same sort of economics, but in some cases, it's spread over two or three years. So we would maybe only for this year, for example, recognize three months of one year or $15,000, $20,000 compared to the entire $200,000 in the sales. So it's not to say that there's not going to be a mix, but I would say historically, 90% to 95% of our deals had been on the capital side of things of an outright capital purchase."

While their new strategy might yield dividends in the future, ClearPoint seems ill-positioned for execution. The impact of this shift is already evident, as they have lowered their 2023 revenue forecast and anticipate significantly lower operational cash flow in the second half of 2023 compared to the first. The shift to a 'rental and services' model, which spreads payments over time, will reduce the revenue collected per client each quarter. This approach increases their burn rate and further shortens their already limited cash runway.

The commitment to launch a new product, the PRISM Laser Therapy, alongside the ongoing expansion of the biologics and drug delivery services portfolio, makes me wonder if they are trying to do too much, too quickly. Given their cash position of $24 million, it's questionable whether they can even sustain these efforts. If they continue down this path, a financing will almost certainly be required.

However, an increase in deferred revenue in the upcoming quarters would be a strong indicator of the success of ClearPoint's new growth strategy. I believe this will be the most important figure to keep track of going forward.

NeuroOne Valuation: Progress Without the Appreciation

NeuroOne Medical Technologies Corporation reached a peak valuation of $130 million in February 2021. However, despite this high, the company's valuation has since declined, currently standing at around $30 million. This downward trend in share price contrasts with the significant milestones NeuroOne has achieved.

Since 2021, despite losing over three-quarters of its market capitalization, NeuroOne has accomplished several key objectives:

• Successfully uplisted to the NASDAQ.
• Received a $3.5 million milestone payment from Zimmer Biomet for the Evo sEEG electrode.
• Obtained FDA 510(k) clearance to market the Evo sEEG System for use up to 30 days.
• Launched the Evo sEEG electrodes in the U.S. market.
• Submitted a 510(k) application for the OneRF Diagnostic/Ablation System.
• Increased product revenue by nearly 20 times.

Upcoming Catalysts

The company also has several significant milestones over the next 12 months.

• FDA clearance for the OneRF ablation system, feedback from the FDA is expected within 30 days with commercialization on track for 1H2024 pending FDA clearance.
• Full market launch of the Evo sEEG system with Zimmer Biomet, expected by the end of the fiscal fourth quarter. The first order for calendar 2024 has already been placed by Zimmer Biomet.
• Completion of a large animal feasibility study for a brain drug delivery system. Proof of concept for brain drug delivery has already been successfully tested in a small animal model at the Mayo Clinic.

Given these developments, NeuroOne is significantly ahead of where they were at the height of their valuation. With Evo expected to go into full launch with Zimmer by end of the fiscal year, and NeuroOne potentially receiving FDA approval for its OneRF ablation device by year end, the company is poised to massively ramp up their incoming revenue. Considering its rapid revenue increase, upcoming catalysts, clinical validation, and recent cash position enhancement, a valuation of at least $100 million, or $4.16/share , seems conservative. If NeuroOne continues to progress in drug delivery, its valuation could increase substantially, akin to ClearPoint's experience.

Risks

Investing in NMTC entails inherent risks, common in the medical device sector and neurotechnology industry:

1. Regulatory Risks:
   • Medical devices require regulatory approval. Delays, denials, or recalls could significantly impact NeuroOne’s revenue generation.
2. Clinical and Development Risks:
   • There's a possibility that NeuroOne's products may underperform in clinical trials, potentially hindering development or regulatory approval.
3. Competition:
   • The medical device industry is highly competitive. Larger companies could develop similar or superior technologies, diminishing the appeal of NeuroOne's products.
4. Market Adoption:
   • Regulatory approval doesn't guarantee market acceptance, which can be influenced by factors like physician preference, compatibility, and reimbursement policies.
5. Financing Risk:
   • As a smaller company, NeuroOne faces financial challenges, including limited capital resources and potential share dilution from equity offerings.

However, NeuroOne has mitigated several of these risks. The FDA approval of its Evo electrode and the impending full launch with Zimmer Biomet address the first four risks. Additionally, the recent $8.5 million fundraising provides sufficient capital for over a year, supporting NeuroOne through its commercialization phase. Even modest success with its Evo electrodes could sustain the company's OneRF ablation system and drug delivery program without needing additional financing.

Conclusion and final thoughts

NeuroOne Medical Technologies Corporation offers a nuanced investment opportunity within the neurological device sector. The company's specialized electrode technology has potential applications that extend beyond diagnostics into therapeutic realms, including drug delivery—a market where companies like ClearPoint Neuro have established a presence.

The company's ability to leverage its technology for both diagnostic and therapeutic purposes, particularly in the burgeoning field of neurosurgical drug delivery, sets it apart in a competitive landscape.

While NMTC's path forward includes significant regulatory and market penetration hurdles, its strategic focus on a niche market, and the potential for technological synergies, present a case for asymmetric upside despite the risks involved.

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