2023-05-25 04:45:40 ET
Summary
- Neuronetics is the leading TMS vendor and, as such, stands to benefit from the broader adoption of TMS.
- The company's growth rate has been weak in recent years, and margins have not been improving with scale, which could reflect increasing competition.
- Neuronetics' stock price has a tendency to be extremely volatile, and its current valuation is near the lower end of the historical range.
- A transition to profitability could create significant value for shareholders, but this will likely require a step change in sales and marketing efficiency.
Neuronetics ( STIM ) is the leading TMS vendor globally, and is slowly expanding its business, with a focus on close customer relationships and a business model that benefits from treatment volumes. The company is yet to show that this approach is profitable though, and the business is demonstrating limited operating leverage. The stock is inexpensive, but competition has increased in recent years and a weak macro environment could postpone a transition to profitability.
Neuronetics is differentiated from its main competitor (BrainsWay) primarily by its focus on sales and marketing. In terms of product, Neuronetics has generally made little effort to innovate and until recently offered a fairly standard product. This has changed somewhat recently, with Neuronetics introducing new features and gaining clearance for new indications. One of these features is contact sensing, which ensures that the TMS coils are positioned so that the treatment is effective. Its honestly difficult to know how buyers view each of the TMS vendors. BrainsWay has by far the most differentiated product, which by design obviates the need for contact sensing, and in general appears to be more effective. There are also vendors that offer features like mapping, to ensure the correct part of the brain is targeted. Neuronetics is probably as well positioned as anyone by the simple fact that they are a legacy vendor with the largest footprint. Customers are familiar with the NeuroStar system and many larger organizations appear to have standardized on it.
Figure 1: Neuronetics' Contact Sensing Technology (source: Neuronetics)
Neuronetics' footprint also gives the company access to more data than anyone else, although the value of this has not really been demonstrated. Neuronetics believes that its TrakStar system can contribute to new and future indications, although this would presumably require working closely with clinics on trial design and execution. Neuronetics' has recently gained clearance to treat a number of conditions beyond MDD, but this has primarily been following in the footsteps of peers rather than expanding TMS into new areas.
Figure 2: Neuronetics' TrakStar Data Collection System (source: Neuronetics)
The merger of Greenbrook ( GBNH ) and Success TMS is currently a headwind for Neuronetics but could improve the company's competitive position in the long-run. Neuronetics has a close relationship with Greenbrook and the companies are working together to drive awareness, help patients access TMS and improve productivity. Greenbrook is currently consolidating its footprint, recently going from 162 to 133 centers . Neuronetics' management team has stated that they are seeing systems move from closed to active stores, where they are replacing competitive systems (possibly BrainsWay ( BWAY )). Greenbrook also has a fairly unhealthy balance sheet, which the company is in the process of addressing. As part of this Neuronetics has converted around 5.9 million USD of outstanding accounts payable and transaction expenses into a senior secured promissory note.
Neuronetics' revenue was 15.5 million USD in the first quarter of 2023, a 10% increase YoY. Treatment session performance was strong and NeuroStar expansion was in line with management's expectations. Neuronetics is differentiated by the fact that the majority of its revenue comes from treatments rather than system sales or leasing. While this potentially allows Neuronetics to capture more value and creates a stable stream of revenue, it was a significant headwind through the pandemic. Interestingly, Neuronetics has stated that it is only targeting the shipment of 45-50 systems per quarter, as this supposedly allows it to devote the appropriate resources to customers to ensure success.
Neuronetics expects 68-73 million USD revenue in 2023, which would represent roughly 8% growth at the midpoint. Neuronetics has achieved limited growth in recent years, despite growing adoption of TMS, which could be the result of rising competition.
Figure 3: Neuronetics Revenue (source: Created by author using data from Neuronetics)
Neuronetics' base of installed units is growing over time, although quarterly shipments have been volatile. The gap between BrainsWay and Neuronetics is also somewhat concerning given that Neuronetics commits far more resources to sales and marketing.
Figure 4: Neuronetics Quarterly Unit Shipments (source: Created by author using data from company reports)
Underlying trends in treatments look fairly positive though, with volumes generally increasing post-pandemic along with some seasonality.
Figure 5: New Patient Starts and Utilization (source: Neuronetics)
Neuronetics' management team expects total operating expenses in 2023 to be 84-88 million USD . Given expected revenue, this would result in an operating profit margin of around -22%. Neuronetics' hasn't really demonstrated an ability to improve its margins as the business scales, and its losses are quite large given the amount of revenue the company is bringing in.
Figure 6: Neuronetics Operating Profit Margins (source: Created by author using data from Neuronetics)
This is largely due to high sales and marketing and general and administrative expenses. Neuronetics' has a high touch sales approach, which is likely necessary given the company's focus on larger customers and dependence on treatment volumes. Neuronetics not only needs to place systems with customers, but also ensure that they are being used. While there is nothing inherently wrong with this, and it may allow Neuronetics to capture more value, the burden of supporting customers would be expected to decline as the customer base matures. There hasn't really been any evidence of this occurring so far though.
Table 1: Neuronetics 2022 Operating Expenses (source: Created by author using data from company reports) Table 2: Neuronetics' Sales and Customer Support Team (source: Neuronetics)
Neuronetics' stock is relatively inexpensive, but the company still must demonstrate an ability to generate positive free cash flow. Cash flow breakeven is planned for 2024 , although this seems somewhat ambitious given the company's current growth rate and margins.
Figure 8: Neuronetics Price to Sales Multiple (source: Seeking Alpha)
There is substantial risk associated with Neuronetics, as evidenced by the stocks' volatility. The rapid tightening of monetary policy over the past 12 months appears to have impacted customers, which could impact unit shipments going forward. Competition has also increased, and Neuronetics' lack of innovation means that it has lost its first mover advantage. While Neuronetics currently has a relatively large cash position, the company also has a substantial amount of debt and leases. If the company cannot begin reducing losses, it will need to access outside capital again in the next few years. Neuronetics secured an amended credit facility in April, which provides access to up to 60 million USD , which reduces this risk. Given this credit facility and Neuronetics' current 55 million USD cash balance, the company has access to sufficient cash to continue operating for the next 3-4 years.
For further details see:
Neuronetics Q1 Earnings: Profit Potential Remains Uncertain