Neuronetics, Inc. (STIM) Q3 2021 Earnings Call Transcript

Good day and thank you for standing by. Welcome to the Neuronetics' Third Quarter 2021 Financial and Operating Results Conference Call. Please be advised today's conference may include forward-looking statements. I would now like to hand the conference over to Mike Vallie from Westwicke.

Good morning and thank you for joining us for Neuronetics' third quarter 2021 conference call. Joining me on today's call are Neuronetics' President and Chief Executive Officer, Keith Sullivan, and Chief Financial Officer, Steve Furlong. Before we begin I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our business, strategy, financial and revenue guidance, the impact of COVID-19, and other operational issues and metrics. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. For discussion of risks and uncertainties associated with Neuronetics' business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K and the Form 10-Q, which will be filed later today. The company disclaims any obligation to update any forward-looking statements made during the course of this call, except as required by law. During the call, we'll also discuss certain information on a non-GAAP basis, including EBITDA. Management believes that non-GAAP financial information taken in conjunction with U.S. GAAP financial measures provides useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of trends in our operating results. Management uses non-GAAP financial measures to compare our performance relative to forecast and strategic plans to benchmark our performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables accompanying our press release, which can be viewed on our website. With that, it's my pleasure to turn the call over to Neuronetics' President and Chief Executive Officer, Keith Sullivan.

Good morning and thank you for joining us. I'll begin by providing an overview of the third quarter performance followed by an operational update. Steve will then review our financial results and I'll conclude with our thoughts for the balance of 2021 before turning to Q&A. Total revenue was $13.8 million, up 11% over the third quarter of 2020. While we are continuing to see progress in many of the initiatives we have put into place and believe underlying trends in the business are moving in the right direction. The conversion of our strategic initiatives into top line growth has been slowed primarily due to COVID. On the capital equipment side, US NeuroStar Advanced Therapy System revenue increased by 3% over the third quarter of 2020. Our assumption at the time we launched our commercial organization at the beginning of the year was that the team would begin to be productive in the second quarter and continue to progress through the balance of the year. Although we have shown pipeline growth, the expansion into new accounts was slower than expected as a result of a longer than anticipated sales cycle. We experienced slower than anticipated expansion by national accounts in the quarter as our two largest providers were focused on fundraising this year to support expansion efforts. As a reminder, we define national accounts as large TMS providers like Greenbrook and Success TMS. Our teams continue to work closely with these national accounts, and I believe we are in a good position to support their growth plans in 2022 and beyond. Our US treatment session revenue increased by 13% over the third quarter of 2020. Despite the growth, we believe performance was impacted by COVID headwinds delaying the new patient start. Now turning to operational highlights. In recent months, we have announced multiple exclusive commercial partnerships with leaders in the TMS space in an effort to accelerate the adoption of NeuroStar Advanced Therapy for mental health. In September, we announced a commercial agreement with Zion Healing, a leading franchisor of behavioral services. In this agreement, Neuronetics will be the exclusive supplier of TMS equipment to Zion Healing and its franchisees. In October, we announced a five-year contract extension with Success TMS, one of the nation's leading TMS providers, and one of our longest-standing accounts. As part of this agreement, Success TMS will exclusively utilize our NeuroStar Advanced Therapy System for mental health systems to treat patients suffering from treatment-resistant depression. As part of the extension, we made a $10 million secured term loan to support their expansion plans over the coming year. Also in October, we signed a commercial agreement with River Region Psychiatry, a leading TMS provider in the southeastern United States. We are excited to have been chosen as their exclusive supplier for TMS systems. We have our team prepared to assist River Region in executing their expansion plans in 2022 and beyond. Turning to an update on our marketing initiatives. In September, we hosted our second NeuroStar summit event in Chicago. The event was well attended with over seven physicians and practice managers from over 50 accounts. This was an opportunity to provide an in-depth review of the partnership we offer to our customers, including the various practice support programs we offer. We closed a number of capital sales at the event, and several subsequently; we have another event scheduled for November. And we'll continue to put these events on the calendar and expect them to expand growth opportunities. In addition to the programs we launched earlier in the year, our 5-STARS and Precision Pulse programs, we recently piloted a new program designed to help our customers identify patients within their practices who are candidates for NeuroStar therapy. Utilizing a proprietary screening tool, we were able to identify over 500 patients in several practices who are interested in a non-drug treatment for their depression and meet the criteria to be NeuroStar patients. Over time, as these patients work their way through the pre-authorization process, we believe many will become NeuroStar patients. The success of our new tool points to a significant opportunity within our existing customer base to help practices deliver better outcomes to more patients without any additional investment on their part. Lastly, I want to provide an update on our clinical and regulatory progress. Recently, a peer-reviewed paper was published that showed patients have a significantly lower risk of seizure with NeuroStar Advanced Therapy for mental health than with TMS treatments that claim a deeper stimulation with an H-Coil technology. The paper titled 'Seizure Risk with repetitive TMS survey results from over a half a million treatment sessions' was published in Brain Stimulation, which further supports the important work we are doing to solve patients' mental health struggles with what we believe is the safest and most effective system on the market. We are encouraged with our recent dialogue with the FDA regarding our potential label expansion and clearance for an additional indication. While the exact timing of the FDA decision is out of our control, we continue to have productive discussions with the agency and believe we are moving in the right direction. In summary, while our revenue performance this quarter was below our expectations, we believe that we are continuing to make progress on our strategic initiatives to drive future growth. We continue to optimize and expand our efforts to drive awareness, work with our existing customers to identify and educate patients, and seek out ways to drive the broader adoption of NeuroStar Advanced Therapy for mental health. I'd now like to turn the call over to Steve to provide a financial overview.

Thank you, Keith. Unless otherwise noted, all results discussed will be related to the third quarter of 2021 compared to the third quarter of 2020. Total revenue was $13.8 million, an increase of 11% over prior year revenue of $12.4 million. Total US revenue increased by 10% and international revenue increased by 24%. The US revenue growth was driven by an increase in US treatment session revenue. US NeuroStar Advanced Therapy System revenue was $2.6 million, up 3% compared to the prior year. In the quarter, the company sold 40 systems, up from 39 in the prior year. Several of these systems were part of a new operating lease program. US treatment session revenue was $10.3 million, an increase of 13% over prior year revenue of $9.1 million. Revenue per active site was approximately $11,100 compared to approximately $10,200 in the prior year quarter. Gross margin was 77.2% compared to 78.7% in the prior year, the decrease was primarily a result of increased supply chain costs. Operating expenses were $17.8 million, an increase of $5.6 million compared to the prior year. The increase was primarily driven by costs associated with the rebuild of our commercial organization and the implementation of marketing initiatives. During the quarter, we incurred approximately $1.9 million of non-cash stock-based compensation expenses. Net loss was $8.2 million or $0.31 per share, as compared to a net loss of $3.4 million, or $0.18 per share in 2020. EBITDA was negative $6.9 million as compared to negative $2.2 million in 2020. Moving to the balance sheet, as of September 30, 2021, cash and cash equivalents were $99.4 million, which includes the investment in Success TMS. Now turning to guidance; for the full year 2021, we now expect revenue in the range of $53.3 million to $54.3 million, down from our previous guidance of $59 million to $63 million, implying a fourth quarter range of $13 million to $14 million. Assumed in our guidance is a continued COVID overhang as well as seasonality related headwinds impacting new patient starts during the holidays. The company now projects total operating expenses for the full year 2021 to be in the range of $69 million to $71 million.

Thank you, Steve. Before opening the line for questions, I wanted to outline our key areas of focus during the fourth quarter as we work to set ourselves up for long-term growth. As noted earlier, we have recently expanded our relationship with three leading national accounts. We have partnered with Success TMS for a number of years, and are looking forward to continuing that partnership to help support their growth plans, which include significant site expansion across the US. The other partnerships we noted, Zion and River Region Psychiatry, are in early stages, and we will work very closely with both organizations as they look to expand their respective footprints and treat more patients. Beyond these agreements, we continue to have a close relationship with our largest customer and the country's largest national account Greenbrook TMS. We have a significant footprint within their 150 locations, and we will continue to support their expansion plans with new systems and work hand in hand with their individual sites to facilitate the increased utilization of NeuroStar on a greater number of patients. In addition to an emphasis on national accounts, we remain highly focused on the ongoing maturation of the salesforce; the pipeline of new prospects continues to grow. And as we work through recent COVID spikes, and the holiday season, we expect an acceleration of conversions as we move into 2022. In support of this, we will be hosting a NeuroStar Summit later this month. The demand has already exceeded our capacity. In addition to focusing on new system sales, we will continue to work alongside existing customers to drive increased utilization. To accelerate this, we plan to grow the NPC sales team in the fourth quarter to focus on implementing practice support programs and help expand the utilization of NeuroStar. As many of you are aware, October was National Depression Awareness Month. As part of our efforts to drive awareness among patients and psychiatrists, we announced a partnership with Dr. Melissa Shepherd. Dr. Shepherd is a Board Certified Psychiatrist and Psychotherapist who is an active mental health advocate. In addition to being a key opinion leader in the industry, she is a well-known social media influencer with over 1 million followers. In this partnership, Dr. Shepherd will be highlighting NeuroStar Advanced Therapy from her own social channels which will be the cornerstone in awareness and education initiatives going forward. As it relates to our regulatory strategy, we continue to be encouraged by the recent interactions with the FDA and are leveraging our real-world data from TrakStar to support label expansion and new indications. In summary, we are very optimistic about the future here for Neuronetics. The long-term opportunity is significant as the number of patients needing non-drug alternatives to treat their depression continues to rise. While the inflection point in top line growth has come later than expected, we have no doubt that we have the right strategy in place to deliver that growth in future quarters. With that, I'd like to open the line for questions.

Our first question comes from Margaret Kaczor with William Blair.

Hi, good morning, everyone. Thanks for taking the questions. I wanted to start maybe first from an underlying market perspective that and you referenced earlier on in the comments that some of the larger national accounts focused on fundraising. I think some of those maybe behind us. So maybe clarify that. But how quickly can that translate to new clinic openings, new patient starts? Is it several quarter endeavor or longer than that?

Hi, Margaret. It's Keith. We have a strong relationship with our major account success in specific areas. I think our team has met with them to discuss how we can help, and with their assistance on the opportunities available in the field, I believe we are well-positioned to help them open those sites quickly.

Okay, yes. And so if I push you a little bit more on that, if we think about kind of the operational requirements associated with that, if you want to open a clinic start opening a clinic today, is that kind of a three months prospect, six months process, and then you've obviously got to build the referral network. So is that another quarter or two behind? Or can you do both of those in tandem?

We believe that it's about three months to get a clinic up and running. But Greenbrook has their earnings call later today, I think Bill can probably lay out a more precise plan. But in our experience, when we open a new physician to a NeuroStar clinic, it takes about three months to get them up and running.

Okay, perfect. And then if we think about the guidance for the fourth quarter I wanted to maybe walk through some of the implied key metrics. I know there's seasonality associated with it, which adds an extra element. But Steve, can you talk a little bit about what gets you to that higher or lower end of the range and what you're assuming for rep productivity and utilization, ultimately, really thinking about what is key for guidance mean is a leading indicator for '22 that at least in the first quarter? Thanks guys.

Thank you, Margaret. As we mentioned in the press release, we have launched a new financing program. With our increased focus on treatment sessions, we are confident in the operating lease program we've outlined since these systems will be generating treatment sessions moving forward. However, this will have a minor effect on our overall revenues, and this mix will be reflected in Q4. Regarding treatment sessions, we observed a solid recovery in October, as people returned to school and work after their vacations. Unlike 2020, when there was no seasonal change due to lockdowns, we expect to see a return to the normal seasonality patterns similar to those of 2019 and 2018. We are managing the lingering effects of COVID alongside this expected seasonality. Historically, Q4 has been a strong quarter for capital equipment, which informs our estimate in the $13 million to $14 million range.

Okay, and just thoughts on what that could mean for Q1? Does that mean that we kind of get some more traditional seasonality ranges for '22, excuse me, as a more traditional seasonality range off of those Q4 numbers? Or could it be better given some of the programs you're running?

Yes, we're still in the final stages of really nailing down 2022. Again, there's so much depends on COVID and the vaccine, the new Pfizer pill could be a game changer. And so we'd rather not comment on '22 at this point.

Our next question comes from Matthew O'Brien with Piper Sandler.

Good morning, thanks for taking the question. So just a little bit finer point on the national account impact. How meaningful could that be as we transition into '22 and '23? I mean what type of revenue contribution can we expect from these three newer partnerships that you have outside of Greenbrook?

Yes, thanks, Matt. This is Steve; part of our strategy is to get long-term contracts with these large national providers. And so we're very excited with the recent announcements. I would say it will vary by partner. But looking at success in Greenbrook, the largest, and again, Bill will be speaking tonight on his call. I think their expansion plans are very robust. And so the group makes up about 25% of our overall revenue right now. And we expect that to continue to grow into '22 and beyond. And so being exclusive providers to these partners is we think it's a big deal for both of us.

So just, again, a little bit finer point on top of the finer point, Steve. So if that 25% is call it $10 million or $15 million of sales for three new providers, maybe somewhere in the $2 million to $4 million range per provider eventually.

So, again, Matt, I think it does vary. They have different models, they're in different geographies. I would say it's tough to say two to four, five partners, because I think some will be a lot higher than that. And some may take a little bit longer. It wouldn't surprise me if we did 75 systems next year between the partners.

Okay. That's really helpful. Two more quick ones for me, hopefully, the site growth commentary, I thought was interesting. I think you said just over 11,000, here in Q3 versus maybe 10,000 in Q3 of last year. That includes a period where you've got the COVID headwind and Greenbrook out raising capital. So I'm just curious, as far as maybe some of the less affected areas, what kind of growth were you seeing in the productivity per site, does that help give us visibility into the business as we come out of some of these headwinds?

Yes, that's a good question too, Matt. And we have seen high standard deviations between different customers in different geographies. We do have the ability to track specific sites, and some of those growth rates are very impressive with north of 25%, whereas others that were more impacted by COVID are flat to slightly down. And so on average, the increase was nice. But there really are subsets of our customer base that are doing much better than others. Again with some of the vaccine progress that we've made and hopefully moving past the pandemic, we do envision getting the ones that were most impacted back to the growth levels that we're seeing with the other customers.

Okay, and then last one probably for you as well, Steve, as we think about '22 you've got some headwinds, some substantial tailwinds here on the provider side, do you think sales for next year can get back up to 2019 levels?

I'm going to take that one. I believe, look, on our treatment session revenue, we are at 2019 levels. So we're really focusing on expansion with the capital team and getting more systems placed out into the field. So I do believe that on both capital and treatment sessions, we should be able to get there.

Our next question comes from Bill Plovanic with Canaccord.

Great, thanks. Good morning. Thanks for taking my question. Just go back to the guidance what are you contemplating in Q4 relative to capital and disposables or treatment utilization? How do we think about this? I mean you've been tracking if I look at capital; you had 2.4 in Q2, 2.3 in Q3 on the capital sales? And yes, I mean, by your commentary, are you saying just Q4 will be a little up, and then it's really 2022 when we see that rebound?

Yes, Bill, in summary, that's exactly it. Q4 has always been a high capital sales quarter, like most med device companies, so we are anticipating an increase in capital revenue. But it's really the COVID overhang and the seasonality that's tough to predict for the treatment sessions. And so that's kind of a mix of, we still think it's going to be in that 80:20 treatment session revenue versus capital revenue.

Okay. And then just as you look at the US capital salesforce, I was just wondering, what has been the turnover of that capital salesforce since the meeting? Back in January, February.

Bill, this is Keith, good morning. What I'll tell you, and I'm going to give you estimates, because I'm not really 100% sure; our turnover in our field has not been out of the ordinary. I think on the capital side, at 22 reps that were at our national sales meeting, we may have turned over four. And what I would say was out of those four, one was a loss. On the NPC side, I think any of the turnovers that we had was mutually agreed upon. So I think when we are shifting this company from a system company to a treatment session, we really changed the job of our NPCs. And I think the majority of them have responded extraordinarily well. But we have now asked them to really balance their time, from really being strictly trainers on how to get great clinical results with the NeuroStar system, to doing that, but also helping the accounts generate patient awareness. And you're familiar with our five stars to success. And in that program a lot of it is associated with patient awareness and patient generation. Quite honestly, some of our NPCs were very comfortable doing clinical work and getting it really well. But we're not interested in doing the, I'll call it the sales or marketing side of the job, which is completely understandable. So, again, I think it's a long answer to your short question, but we have not had an extraordinary amount of turnover in the sales organization.

Thank you for that caller. And then I know it's been asked already, but trying to get a handle on, you're signing all these partnerships with these customers. And as I think about the economics, I think one of the things that surprised us earlier in the year is a component of your treatment session revenue was fixed, regardless of the number of treatment sessions. And as you move forward with these agreements, are these similar types of agreements that are more fixed in nature? Or do they go up as treatments increase? And that's it for me today. Thank you.

We have signed two new contracts with Zion and River Region Psychiatry, both based on a per-click model. Our focus is on supporting their rapid growth because as they expand, we benefit as well. Therefore, we are no longer offering a fixed price model, which we haven't used all year.

Our next question comes from Marie Thibault with BTIG.

Hi, good morning, Keith and Steve. This is Sam on behalf of Marie. I appreciate your time for the questions. I have one regarding the new opportunity that helped identify around 500 patients within existing customer practices who qualify. That seems like a substantial opportunity, doesn’t it? Are these patients currently with your customers? What will it take for these customers to get these patients to the chair? How much resistance is there? Thank you.

Sam, that's a great question. I think what really surprised us in the third quarter was the length of time it takes to get a patient from them raising their hand saying they're interested to going through the benefits investigation, and then the prior authorization. So as we said in the comments, we believe that those patients are going to work their way through the system over the next few months. But what I will tell you, my reason for optimism is that we only were able to deploy this in a handful of our accounts, and a handful is under 100. So this is a good tool for us. And I think it's demonstrated to many of our providers that their patients that they think are under medical management and doing fine are really not. And so we've been surprised and so have they with the effectiveness of this tool. That concludes our question-and-answer session for today. I'd now like to turn the call back to Keith Sullivan for closing remarks. Thank you, operator, and thank you all for joining us on the call today. We look forward to updating you on the progress next quarter. I hope you have a good holiday season. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.