Nexstim: preparing the pathway for the future

Nexstim’s management is seeking to secure a solid financial foundation for its commercial future. Following last year’s disappointing result in the pivotal E-FIT Phase III stroke trial, the strategy was re-focussed on maximising the market potential of its highly accurate TMS (Transcranial Magnetic Stimulation) system as a treatment for major depressive disease (MDD).

The recent publication of FY18 results showed that revenues were €2.672m, vs €2.645m in FY17 and our forecast of €2.934m. Good cost control saw the net loss fall to €6.154m, from €7.328m the prior year and beat our expected €6.487m. The loss per share was €1.93 from €2.77, and similarly better than our forecast €2.03. The operating cash flows showed an outflow of €6.193m as a result of the residual R&D spend of the stroke programme, coupled with continuing investment in expanding the sales and marketing infrastructure. The outflow in FY17 was €5.403m, and our FY18 forecast was €7.122m.

The cash position at December 2018 was €7.175m, against €8.474m the previous year; this includes the €4.0m loan from Kreos Capital. Management estimates it will require a minimum of €3m to maintain its going concern basis (sufficient through to December 2019) if the terms of the Kreos loan agreement are maintained. The amount required would rise to around €6m, including outstanding interest and fees, if Kreos were enabled to call the loan in prematurely.

Management’s priority is to strengthen its financial position and is evaluating options that include equity funding and the divestment of non-core assets.

Focussing on commercialising the MDD indication

We detailed Nexstim’s proprietary TMS technology and its clinical applications in previous notes (notably our comprehensive Initiation July 2018), with an extensive note examining its use in depression and its commercial prospects (Update October 2018). To recap briefly, the platform is currently employed in two related albeit commercially separate divisions: Diagnostics and Therapeutics (Exhibit 1). The diagnostics division comprises the Navigated Brain Stimulation (NBS) system which is used, and extensively validated, in pre-surgical brain mapping, while the Navigated Brain Therapy (NBT) system has been optimised for therapeutic use.

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

Source: Nexstim, Trinity Delta

NBS is principally used as a diagnostic tool in pre-surgical mapping (PSM), where it provides greater mapping precision, allowing surgeons to be more aggressive in tumour resection, thus improving treatment outcomes. The NBS system was launched in 2003 and has subsequently developed an impressive, and supportive, client list. The global installed base is around 160 NBS systems, including numerous world-renowned cancer centres (for instance: Mayo Clinic, Karolinska, MD Anderson, Charité, Great Ormond Street Hospital, and UCSF).

Management’s stated strategy is to focus on the NBT clinical applications and is considering viable options for the NBS unit, including its divestment through a partnership or trade sale, although the details have yet to be made public. The suggestion is that the available options will be discussed at the AGM, scheduled for March 25.

As yet, management has not indicated what the likely divestment value will be. We value the NBS unit, using a risk-adjusted DCF model, at €6.2m. This figure does not include the specific direct and indirect costs, particularly regulatory and field support and R&D efforts, as these were allocated across the whole company. Allowing for these, and to reflect the reduced negotiating room management has, we estimate the realisable value to be around €3m to €4m.

MDD is clinically, and commercially, attractive

The Navigated Brain Therapy (NBT) platform was FDA approved for MDD in December 2017 and launched in the US in May 2018. It is the only FDA approved device with built-in navigation, ensuring accurate and reproducible treatment. This is achieved through precise mapping of the motor cortex, and via proprietary e-field modelling to account for distortion caused by bone and brain tissue, accurately visualising the exact location, orientation, and magnitude of the stimulation. This means NBT can target the DLPFC (dorsolateral prefrontal cortex) 100% of the time vs 30% with other TMS approaches. Early indications are that the benefits of accurate navigation are readily understood by clinicians.

The opportunity in MDD is material and timely. Treatment resistant depression (ie unresponsive to pharmacological anti-depressant medication) has a current addressable market of c 6m patients but is growing rapidly. The use of repetitive TMS (rTMS) is accepted as a second-line therapy, with the first FDA approval occurring in 2008 (Neuronetics’ Neurostar focal iron core coil TMS platform). It is also reimbursed in the US and various European countries.

In the US, the commercial strategy is direct sales, with ten people currently in the sales team 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.

The commercial priority is to raise market awareness of its NBT system. Growth in patient registry data in MDD (including a comparative element with non-navigated systems) will supplement the body of clinical outcomes evidence and should support a shift from existing treatment practices and increase adoption of NBT. Growing understanding of the value proposition (ie improved patient outcomes and economic benefit to clinicians) should be a key driver of uptake.

We value NBT’s use in treating MDD, again using our risk-adjusted DCF model, at €21.5m. This is based on peak sales of €22.4m being achieved in 2028, which should be attainable through the use of a targeted sales team in the direct markets and well-motivated distributors in the other territories. Arguably this figure should be reduced to reflect the larger cost contribution this business area would carry to reflect the possible divestment of the NBS unit, but we are assuming overheads will be trimmed. In fairness, we are already employing conservative assumptions throughout (notably regarding clinical adoption), so the effect is, in any case, relatively minor.

Neuropathic pain is an earlier stage programme

The treatment of chronic neuropathic pain is currently the largest application in the neuromodulation market. While Nexstim’s NBT is CE Marked for chronic neuropathic pain, the FDA has yet to approve any rTMS device for this indication. This largely reflects the fact that no large, multi-centre, randomised clinical trials have yet been undertaken by any manufacturer.

Following encouraging results from an exploratory 39-patient Phase II study at The Walton Centre, Neuroscience Research Centre, Liverpool (detailed in our Initiation note), Nexstim was evaluating potential clinical trials for neuropathic and related chronic pain. The pressing need to finance adequately the depression opportunity suggests that, despite the clinical potential, pursuing the neuropathic pain indication will be a lesser priority.

We value the pain indication at €5.4m, with peak sales of around €25.8m by 2033 and a success probability of only 25% (reflecting the early nature of the clinical studies). We should note that this indication is the one most sensitive to Nexstim’s financial position, where limited funds would, rightly in our view, be channelled towards commercialising MDD.

Valuation

We believe a risk-adjusted DCF model is the most appropriate method to value Nexstim, and this shows that the company is undervalued at current levels. However, realistically, the single major consideration lies in ensuring sufficient financing is in place to execute the commercial plans for the MDD indication.

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 financial uncertainty surrounding the company is understandable, weighs heavily on the share price, and does cloud our investment case. To reflect this, we have maintained our previous assumptions based on sufficient funding being in place to support the commercial operations adequately. However, to this clean operational scenario we have added a further risk probability to present the possibility that the necessary funds will not be available in a timely manner.

In order to maintain the desired transparency in our modelling we show two valuation figures for each business unit: the first is based on the commercial outcomes we would expect if funding were not an issue; and the second introduces a risk adjustment for the current funding uncertainties. Obviously, assuming the funding picture becomes clearer, the second valuation figure should converge with the first valuation over time.

NBT MDD is the largest element, with the “commercial” valuation being $21.5m, but reducing to €7.5m when we overlay our “financial risk” adjustment. The NBS diagnostic unit is valued at €6.2m and reduces to €2.2m after risk adjustment. Similarly, the NBT Pain indication is valued at €5.4m and €1.9m respectively. Obviously, the net cash/debt position remains at -€1.1m under both scenarios. This results in our valuation for the company being €10.5m, which is equivalent to €3.23/share and also €3.23/share diluted (based on in-the-money options and warrants). This compares to €32.0m or €10.5/share were the financial risk removed. For context, our previously published valuation was €35.9m or €11.04/share and €10.30/share diluted.

It is worth highlighting that we always seek to apply conservative assumptions regarding patient populations, market sizes and growth rates, net pricing, adoption curves, and peak market penetration. Also, we only value the existing clinical assets with potential supplementary clinical indications and off-label usage excluded. Additionally, as before, we have also sought to account for the known dilution from the outstanding warrants and options.

Nexstim had net cash of around €1.1m at December 2018 which, despite the cessation of clinical work on stroke and other cost cutting, means the need for funding is pressing in our view. Although still unclear, our forecasts (based on the Kreos loan facility being in place) suggest that Nexstim needs around €6m over the next 12 months to properly execute its commercialisation plans for NBT in MDD. Depending on the level of subsequent investment needed in the commercial infrastructure and the level of sales performance, further funds may be required: we model €15m in FY20. However, the actual amount and timings will depend on the rate of clinical acceptance and institutional adoption on the one hand, and the investments in clinical data and marketing effort on the other.

Exhibit 3: Summary of financials

Source: Nexstim, Trinity Delta  Note: The accounts are produced according to Finnish GAAP. The short-term debt in FY19 and 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.