Nexstim: now focussed on commercialisation

Nexstim’s management has successfully raised €3.1m (net) through a discounted rights issue. These funds allow the commercial strategy to be progressed to the stage where clear market traction can be demonstrated, at which point we would expect additional funds or a strategic partner to be sought. Despite the funding difficulties, significant progress has been made over the past six months in establishing the necessary infrastructure to exploit the market potential of its highly accurate TMS (Transcranial Magnetic Stimulation) system as a treatment for major depressive disease (MDD).

We have detailed Nexstim’s proprietary rTMS technology and its clinical applications in previous notes (notably Initiation July 2018), with further notes examining its use in depression and its commercial prospects (Update October 2018, Update March 2019). In summary, Nexstim’s platform is differentiated by its ability to navigate precisely, reliably, and reproducibly. Its value in pre-surgical brain mapping (NBS) is acknowledged, but it is its potential in therapeutic applications (NBT) that has most commercial appeal. It has CE Marks for clinical use in stroke, depression, and chronic pain; as well as FDA approval in pre-surgery brain mapping and major depression. The applications are shown in Exhibit 1.

Exhibit 1: Unique navigated TMS system for diagnostic and therapeutic applications

Source: Nexstim, Trinity Delta

MDD indication gaining traction in key US market

Following approval by the FDA, the NBT depression therapy system was launched in the US in May 2018. Since then six systems have been ordered and installed, with utilisations rising as treatment protocols become embedded. The US market is receptive to leasing of capital equipment and all the current NBT systems there have been placed on a pay-per-use model, which means that the majority of these revenues will be recognised as net sales through the rest of 2019 and beyond. The targeted revenue for each system, when fully employed, is $100k per annum.

In Europe the market is less developed and more varied, with a mix of private and public operators (with regional differences in the preference of leasing or capital acquisition). Currently seven systems have been installed, with the expected annual revenues lower than the US model as utilisations tend not be as well optimised. The seven includes two systems that were recently sold in Sweden, a region that has not previously employed TMS for the treatment of MDD.

The US is being addressed through a focussed direct sales team, with ten people currently addressing four key geographic areas (North East states, South East states, Texas, and California) where TMS is already established and high-volume psychiatric practices appear primed. In Europe and Asia, a mixed direct and distributor model is being deployed, with the recent Ampere Medical distribution deal for Hong Kong demonstrating progress in developing new markets.

Impressive Scientific Advisory Board in place

A Scientific Advisory Board, composed of key opinion leaders in the field of TMS, has been established. The current members are:

• Professor Turo Nurmikko MD, PhD, is Professor of Pain Relief at the Walton Centre NHS Foundation Trust. He is known for his extensive research on pain relief, especially in the field of chronic neuropathic pain. He has authored over 100 scientific publications and served on editorial boards of several pain journals.
• Professor Paul Fitzgerald MD, PhD, is Professor of Psychiatry and Director of the Epworth Centre for Innovation in Mental Health in Melbourne, Australia. He is also Director of Therapeutic Brain Stimulation at the Monash Alfred Psychiatry Research Centre (MAPrc).
• Professor Pascual-Leone MD, PhD, is Professor of Neurology and an Associate Dean for clinical and translational research at Harvard Medical School. A world leader in TMS in cognitive neuroscience and for therapeutic applications. He uses TMS therapy to treat patients with MDD at the Berenson-Allen Center for Noninvasive Brain Stimulation, a Harvard-affiliated center within Beth Israel Deaconess Medical Center, Boston, MA.
• Professor Linda Carpenter MD, is a professor of Psychiatry and Human Behavior at the Alpert Medical School of Brown University, United States. She has extensive experience in the field of TMS and is the founding Director of the Butler Hospital TMS Clinic and Neuromodulation Research Facility and has been a Director of the Clinical TMS Society since 2016.

These renowned experts will provide specialist support, advice and guidance to Nexstim as it develops its clinical applications.

Valuation and Financials

We employ a risk-adjusted DCF model to value Nexstim, forecasting cash flows for the three known likely revenue streams and then applying a development risk probability as appropriate (detailed in Exhibit 2). However, realistically, the single major consideration lies in ensuring sufficient financing is in place to properly execute the commercial plans for the MDD indication. To reflect this, we have applied a further adjustment as a financial risk (see table), which we will continue to update as the funding visibility improves. To take into account the recent capital raise, our risk-adjustment is now 50%, versus 35% previously (NB. 100% is equivalent to no significant financial risk). Obviously, assuming the appropriate funding is available, the second valuation figure should converge with the first valuation over time. Despite our conservative stance, our valuation suggests that Nexstim is undervalued at current levels.

NBT MDD is the largest element, with the “commercial” valuation being €21.8m, but reducing to €10.9m when we overlay our “financial risk” adjustment. The NBS diagnostic unit is valued at €6.2m and reduces to €3.1m after risk adjustment. Similarly, the NBT Pain indication is valued at €5.4m and €2.7m respectively. Obviously, the net cash position remains at €2.0m under both scenarios. This results in our valuation for the company being €18.8m, which is equivalent to €0.53/share, or €0.40/share diluted (based on in-the-money options and warrants). This compares to €35.5m or €1.00/share and €0.73/share diluted were the financial risk removed.

Exhibit 2: Updated DCF-based valuation of Nexstim

Source: Trinity Delta; Note: Peak sales achieved after nine years in the US and 10 years in Europe. We assume the subscription prices for the 2018 options is the weighted average of existing options, which is €5.337.

The rights issue has strengthened the balance sheet, raising €3.1m (net) with the cash position at May 2019 estimated at c. €7.2m, including the €3.756m loan from Kreos Capital. We believe this will be sufficient to maintain the marketing and selling efforts at the current levels through to Q120, and into Q220 if all the warrants from the rights issue are exercised at €0.115 in Q419. Assuming the uptake of NBT in depression does happen as planned, we would expect the improving commercial visibility would be used to support a further fund raise (at better rates) to progress to the next milestone before break-even is achieved (forecast within our model as FY22).

The next 12 months will define Nexstim’s future, with the degree of success in executing the commercial plans being the critical determinant. We believe that it will be the level of sales performance over the coming quarters will dictate the attractiveness of Nexstim’s investment case. The value of accurate navigation is well documented; however, the key question is whether clinicians are sufficiently aware of the NBT system and, if so, are they ready to adopt it. Yet, importantly, even a modest clinical adoption should result in increasing interest from other industry participants, potentially raising the prospect of material value accretion.

Exhibit 3: Summary of changes to estimates

Source: Trinity Delta

Exhibit 4: Summary of financials

Source: Nexstim, Trinity Delta  Note: The accounts are produced according to Finnish GAAP. In FY19, we assume that all the warrants associated with the May 2019 capital raise are exercised in November at a strike price of €0.115 and the short-term debt in FY20 is indicative of our view of the company’s funding requirement. Our sales forecasts do not include any contribution from indications that are yet to be approved. Historic EPS, DPS and Average no. of shares have been adjusted to reflect the 30:1 share consolidation in December 2018.