2023-09-06 17:26:45 ET
Summary
- Neuronetics is currently facing challenges from increased competition and a difficult macro environment, which is impacting growth and profitability.
- While market conditions appear to have stabilized somewhat, Neuronetics still needs to rein in operating expenses.
- Neuronetics' current valuation is near all-time lows, which may present an opportunity. Competition and reliance on large investments in sales and marketing present risks though.
Neuronetics ( STIM ) has had a difficult multi-year period, with the pandemic, rising competition and difficult macro conditions all negatively impacting the business. While Neuronetics remains firmly focused on driving growth through sales and marketing, the past few years have seen some product innovation, which has improved the company's positioning relative to peers. Growth remains tepid though, and Neuronetics has made little progress towards improving its profitability. While the stock could be considered inexpensive, progress towards profitability and a more stable macro environment may be needed before the stock rerates.
Market
The TMS market has had a turbulent past few years, first being negatively impacted by the pandemic and now by the rapid tightening of monetary policy. This has impacted TMS systems sales, particularly to smaller customers. While customers and market participants appear to be adjusting to current conditions, growth may remain soft while access to capital is limited.
Figure 1: BrainsWay and Neuronetics Unit Shipments (source: Created by author using data from company reports and The Federal Reserve)
Greenbrook ( GBNH ) could be considered emblematic of some of the issues that have plagued the TMS market over the past 12 months. Greenbrook ran into trouble on the back of a high-cost structure and weak balance sheet. In response the company has reduced its headcount by 145 employees , rationalized marketing spend, extinguished lease liabilities and reduced a range of general and administrative expenses.
Greenbrook’s revenue has been relatively resilient in 2023, despite the company closing 50 treatment centers and significantly reducing marketing spend. Marketing spend in Q2 2023 was down over 90% from the fourth quarter of 2022. Greenbrook’s office closures are impacting Neuronetics' treatment session volumes and related revenue though. Greenbrook is currently in the process of relocating TMS systems and expect this to be completed by the end of the third quarter. Neuronetics has stated that as part of this process it is displacing BrainsWay ( BWAY ) at many sites.
At the end of second quarter, Greenbrook had 133 treatment centers and around 340 installed TMS devices. Capacity is expected to decline over time though as existing leases expire. Greenbrook is also moving capacity to more productive centers. While this should be improving system utilization, Greenbrook has suggested that utilization is still relatively low. Greenbrook believes that with its current footprint it can generate roughly 40% more revenue. Low utilization has been attributed to a lack of marketing spend. While increased treatment volumes would obviously be a positive for Neuronetics, treatment volumes may need to pick up substantially before system demand is impacted.
BrainsWay recently shifted its sales focus towards larger customers which could be a threat to Neuronetics. BrainsWay has had some traction in this area, but it is not currently clear whether this is impacting Neuronetics. I have previously covered BrainsWay and its greater focus on R&D here and here .
The TMS market also continues to receive tailwinds from improved insurance coverage , with this generally taking the form of reduced medication / therapy attempts before patients are eligible for TMS. Easier access to covered TMS should increase TMS treatment volumes and demand for TMS systems over time.
Neuronetics
Neuronetics is differentiated by its focus on sales and marketing, with initiatives including customer education, strong customer support and marketing to drive awareness of TMS. Neuronetics believes that its commercial and customer education initiatives are gaining traction.
Neuronetics has 127 employees working in sales and customer support, roughly equal to BrainsWay's total number of employees. In some ways this makes sense given Neuronetics' greater participation in downstream value, although there are questions regarding efficiency. This focus on sales and marketing comes at the expense of investments in R&D though. Until recently Neuronetics had lagged peers in product innovation but has had some success over the past few years as a fast follower.
Figure 2: Neuronetics Sales and Customer Support Resources (source: Neuronetics) Figure 3: Impact of NeuroStar University on System Utilization (source: Neuronetics)
Neuronetics announced the 510(k) clearance of its OCD MT cap technology in June. Determining a patient's motor threshold is an important part of the treatment process and the OCD MT cap helps to simplify this. Nearly 300 patients with OCD have received treatment with NeuroStar TMS, with over 6,000 treatments delivered.
Neuronetics has also filed a 510(k) submission which could expand its patient population. The company has elected not provide details at this stage for competitive reasons but expects to hear back from the FDA by the end of the year. Without insurance coverage this will likely not be material, but it is a positive that Neuronetics is investing in the product side of its business. If cleared, insurance coverage may come in time, but Neuronetics will likely have to demonstrate the cost effectiveness of its treatment first.
International markets also remain another potential growth area for Neuronetics, although progress on this front continues to be slow. The company's current focus is on Japan due to both the size of the potential patient population and the path to reimbursement. It should be noted that BrainsWay has had recent successes in India and Taiwan and also has a strong footprint in Israel.
Figure 4: Neuronetics International Expansion (source: Neuronetics)
Financial Analysis
Total revenue increased 8% YoY in the second quarter, driven by a combination of strong treatment session growth and system expansion. Capital sales have been fairly consistent in recent quarters with NeuroStar systems contributed roughly 25% of total revenue. 54 systems were shipped during the second quarter, with nearly half of these going to customers buying their second system. Accounts purchasing second systems were primarily private offices. Neuronetics has not sold any systems to national accounts in the last couple quarters. This is somewhat surprising given that these types of accounts appear to be a focus area for Neuronetics. The reason for this is not clear but BrainsWay did recently begin targeting larger institutions and enterprise customers.
Treatment session revenues have also continued to increase, despite the headwinds associated with Greenbrook. US treatment session revenue was up 9% YoY in the second quarter, which was attributed to a strong increase in local consumable utilization and improving performance among national accounts.
Neuronetics is currently guiding for 69-73 million USD revenue in 2023, which would represent roughly a 9% increase over 2022. For the third quarter of 2023, the company expects revenue of 17-18 million USD, a 6% increase YoY.
Figure 5: Neuronetics Revenue (source: Created by author using data from Neuronetics) Figure 6: Local Consumable Monthly Utilization and New Patient Starts (source: Neuronetics)
Gross margins declined roughly 3% YoY to 72.5% in the second quarter . This drop was attributed to an increase in amortization expenses associated with a product release and the transition to a new contract manufacturer.
Operating expenses during the second quarter declined 9% YoY, although Neuronetics' operating losses are still relatively large. The company has identified 4.5 million USD of potential cost savings for the balance of 2023, but this will still leave Neuronetics a long way from breakeven. Cost reductions are expected to be offset to some extent by increased co-marketing expenses related to Greenbrook. Provided that this helps Greenbrook ramp treatment volumes, this may actually help Neuronetics' margins though.
Figure 7: Neuronetics Operating Profit Margin (source: Created by author using data from Neuronetics)
While Neuronetics still has relatively large operating losses that are likely to continue for some time, it also has a considerable cash runway. At the end of the quarter Neuronetics had 45.9 million USD of cash and cash equivalents. Neuronetics also secured 60 million USD in new debt financing in the quarter.
Conclusion
Neuronetics' stock has exhibited extreme volatility over the past few years, with its valuation changing far more than justified by fundamentals. The stock currently trades near an all-time low revenue multiple, despite recent product innovations and an apparent improvement in market conditions. While this could be considered an attractive entry point, this must be weighed against the fact that Neuronetics doesn't appear to have a competitive advantage and is facing increased competition. Neuronetics will likely need to demonstrate progression towards profitability for the stock price to move higher and this may be difficult while financial conditions are tight.
Figure 8: Neuronetics P/S Ratio (source: Seeking Alpha)
For further details see:
Neuronetics: Large Losses May Be Repelling Investors