Getting back on the front foot
Update | 21 May 2019
Nexstim has successfully secured funding to enable the commercialisation of its proprietary Navigated Brain Therapy (NBT) platform in MDD (major depressive disorder). The near-term challenges now shift to maximising the uptake of NBT in specialist centres in North America and Europe. Initial indications are encouraging, with notable support from major centres and key opinion leaders. Our valuation and financial models have been updated to reflect the capital raise. We value Nexstim at €18.8m or €0.53 per share (€0.40 diluted), against €35.5m, or €1.00/share (€0.73/share diluted) were the remaining financial risks removed.
|Year-end: December 31||2017||2018||2019E||2020E|
|Net Income (€m)||(7.3)||(6.2)||(7.0)||(6.4)|
21 May 2019
|Shares in issue||35.4m|
|12 month range||€0.07-1.23|
Nexstim is a targeted neuro-modulation company that has developed a proprietary navigated rTMS platform for use in diagnostics (NBS) and therapeutics (NBT). NBS is used in planning brain surgery while NBT is focused on depression and chronic pain. FDA approval for depression was given in 2017, and the focus is on commercial roll out in the US, Europe and Asia.
Mick Cooper PhD
+44 (0) 20 3637 5042
+44 (0) 20 3637 5041
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.
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.
A Scientific Advisory Board, composed of key opinion leaders in the field of TMS, has been established. The current members are:
These renowned experts will provide specialist support, advice and guidance to Nexstim as it develops its clinical applications.
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.
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.
Trinity Delta Research Limited (“TDRL”; firm reference number: 725161), which trades as Trinity Delta, is an appointed representative of Equity Development Limited (“ED”). The contents of this report, which has been prepared by and is the sole responsibility of TDRL, have been reviewed, but not independently verified, by ED which is authorised and regulated by the FCA, and whose reference number is 185325.
ED is acting for TDRL and not for any other person and will not be responsible for providing the protections provided to clients of TDRL nor for advising any other person in connection with the contents of this report and, except to the extent required by applicable law, including the rules of the FCA, owes no duty of care to any other such person. No reliance may be placed on ED for advice or recommendations with respect to the contents of this report and, to the extent it may do so under applicable law, ED makes no representation or warranty to the persons reading this report with regards to the information contained in it.
In the preparation of this report TDRL has used publically available sources and taken reasonable efforts to ensure that the facts stated herein are clear, fair and not misleading, but make no guarantee or warranty as to the accuracy or completeness of the information or opinions contained herein, nor to provide updates should fresh information become available or opinions change.
Any person who is not a relevant person under section of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom should not act or rely on this document or any of its contents. Research on its client companies produced by TDRL is normally commissioned and paid for by those companies themselves (‘issuer financed research’) and as such is not deemed to be independent, as defined by the FCA, but is ‘objective’ in that the authors are stating their own opinions. The report should be considered a marketing communication for purposes of the FCA rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. TDRL does not hold any positions in any of the companies mentioned in the report, although directors, employees or consultants of TDRL may hold positions in the companies mentioned. TDRL does impose restrictions on personal dealings. TDRL might also provide services to companies mentioned or solicit business from them.
This report is being provided to relevant persons to provide background information about the subject matter of the note. This document does not constitute, nor form part of, and should not be construed as, any offer for sale or purchase of (or solicitation of, or invitation to make any offer to buy or sell) any Securities (which may rise and fall in value). Nor shall it, or any part of it, form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information that we provide is not intended to be, and should not in any manner whatsoever be, construed as personalised advice. Self-certification by investors can be completed free of charge at www.fisma.org. TDRL, its affiliates, officers, directors and employees, and ED will not be liable for any loss or damage arising from any use of this document, to the maximum extent that the law permits.
Copyright 2019 Trinity Delta Research Limited. All rights reserved.