Nexstim H2 2022: Slight miss – but long term profitability in sight

Research Update

2023-02-28

13:20

Redeye provides a research update after Nexstim's H2 report, which came in slightly below our projections. As a result, we have made minor adjustments to our base case and provided our perspective on 2023.

FT

Fredrik Thor

Contents

Review of the financials

Per Segment FY22:

Events in 2023

Changes to our estimates

Valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Report below our expectations

Total revenue in H2 came in at EUR2.7m (3.4m), -20.5% compared to H2 2021. This was lower than our expectations of EUR3.4m. Per segment, this is mainly explained by the lower-than-expected sales in the diagnostics segment at EUR1.3m compared to our expectation at EUR2.1m. For FY22, net sales came in at EUR9.5m compared to our estimate at EUR10.2m the operating result came in at EUR0.84m compared to our estimates of EUR1.2m

Outlook focused on profitability

The company declared its transformation into a global process organization in 2023, resulting in potential cost savings of up to EUR0.6m for FY2023. In addition, the company revealed its plan to delist its parallel listing on First North Stockholm. Overall, we observe that the company is emphasizing profitable growth and implementing measures to reduce costs. However, to achieve its objectives in the upcoming years, it is crucial for the company to increase comparable sales growth.

Slightly tweak our valuation

We have updated our Redeye Rating model, resulting in a minor adjustment to the WACC to 12.5% (from 13%). Additionally, we have updated our FX assumptions and conducted some housekeeping of our model. We have also revised our estimates downwards, and subsequently, we have lowered our base case for the share price to SEK60 (62.5) per share.

Key financials

EURm2020202120222023e2024e
Revenues4.16.49.57.89.4
Revenue Growth23.0%55.3%48.4%-18.3%20.6%
EBITDA-3.0-1.21.30.380.91
EBIT-3.4-1.70.80-0.40-0.02
EBIT Margin-81.3%-25.9%8.5%-5.1%-0.3%
Net Income-4.2-0.941.5-0.40-0.02

Review of the financials

Total revenue in H2 came in at EUR2.7m (3.4m), -20.5% compared to H2 2021. This was lower than our expectations of EUR3.4m. Per segment, this is mainly explained by the lower-than-expected sales in the diagnostics segment at EUR1.3m compared to our expectation at EUR2.1m. However, sales in the therapy segment at EUR1.4m slightly exceeded our expectations of EUR1.3m. Nexstim has historically been stronger in H2, but we also note that the diagnostics segment is quite volatile, given the high value per order. Still, given the solid growth in recent years, our expectations were higher, as we have started to see this segment as a significant driver for growth. When comparing to H1 21, investors should be aware of the one-off sales of a prototype system worth EUR0.9m in 21.

For FY22, net sales came in at EUR9.5m compared to our estimate at 10.2m and operating expenses at -EUR8.2m compared to our expectation of EUR 8.1m. For the full year, Nexstim capitalized development costs of EUR1.2m compared to our expectation at EUR1m, which affected the reported operating profit positively but does not impact our valuation. In FY22, the operating result came in at EUR0.84m compared to our estimates of EUR1.2m. When adjusting for the capitalized development costs, adjusted operating result came in at EUR-0.4m compared to our estimates at EUR0.2m. Nexstim’s cash position amounted to EU4.4m compared to our estimation at EUR6.6m.

Per Segment FY22:

NBS

Nexstim’s TMS diagnostics segment, used for pre-surgical mapping of brain tumors, decreased roughly 8% YoY in 22. Nexstim sold and delivered 14 NBS systems during the period. When adjusting for the one-off prototype sales, growth in the segment was instead 20%.

NBT

The TMS therapy segment, mainly focused on treating treatment-resistant depression, grew 127% YoY with 62 installed systems worldwide, including eight new installs during 2022. This includes both the NBT system and NBS system with therapy capabilities. Sales growth was driven by the EUR3.5m licensing fee from Magnus Medical, and the segment would otherwise have a small decline during the period.

About the Magnus Medical Deal

In February 2022, it was announced that Nexstim will out-license technology used in its NBT-system to Magnus Medical, a new US-based company built on commercializing a new TMS therapy protocol called “SAINT,” developed at Stanford University. The deal consists of an upfront payment of EUR 3.5 million and a technology royalty for a maximum of five years, projected by Magnus Medical to be approximately EUR 13 million. During the royalty period, i.e., the first five years of commercialization of the technology, Nexstim will not directly sell new NBT therapy systems in the US. However, it will keep its recurring revenues from installed systems, continue sales of its NBS diagnostics system (including combined NBS/NBT system), and invest in partner clinics.

Our impression is that Magnus Medical will start sales in H2 2023, which then would start the exclusivity period.

Events in 2023

In 2023, it was announced that the company would transform into a global process organization, hoping to become more efficient, and the company hopes to save up to EUR0.6m for FY2023. It was also announced that the company would remove the parallel listing on First North Stockholm, due to low liquidity and relatively few shareholders. We will start to present our valuation in Euro once the delisting is completed. Overall, the cost control during 2022 and measures to cut costs further in 2023 are positive and a good start to turn the company profitable.

Changes to our estimates

In the report, Nexstim sets a strategic objective to achieve a positive EBITDA result for FY2023. This was quite aligned with our expectations (we assumed EBIT around EUR0m). We slightly tweak our estimate for 23, where we expect slightly lower sales (EUR7.8m) but also implement the cost savings, leading to an EBIT at EUR-0.4m and EBITDA around EUR0.4m. This as we are somewhat more confident in managements focus on cutting costs ahead. We also lowered our diagnostics sales due to the missed expectations in H2 but reiterated our stance on the therapy segment. We still expect Magnus Medical to pay Nexstim royalties during 2023, and given that we expect gross margins of almost 100%, exceeding initial sales of Magnus Medical’s system could push Nexstim over the edge back to profitability again.

New estimates divided by segment

Changes to our estimates.

Valuation

We do some model housekeeping, including a minor change in the WACC to 12.5% (13%) due to changes in our Redeye Rating model. We also adjust our FX assumptions. Given the slightly amended estimates, we lower our base case to SEK60 (62.5) per share.

Investment thesis

Case

TMS Diagnostics market leader with KOL support

We see a significant upside (50%+) in Nexstim following a strong year for the company – further strengthened by this year’s therapy licensing agreement with the US based startup Magnus Medical, which we think will let Nexstim focus on its diagnostic segment where it has a stronger comparative advantage and less competition, while it can retain its high margin recurring revenues and add technology royalties with gross margins of, we assume, 90%+. Overall, argue that Nexstim is maturing as a company and thus on a solid path towards long-term profitability.

Evidence

Precision positions ‘navigated’ TMS well

Nexstim’s NBS diagnostics system benefits from the support of key opinion leaders and leading university hospitals for the use of navigated TMS (transcranial magnetic stimulation) in pre-surgical mapping of brain tumors. More than 100 academic publications regarding the system have been published. As Nexstim will focus its in-house resources towards the NBS system, we think it can further leverage the strong momentum to add profitable top-line growth.. We also expect increased use in other areas following Nexstim’s launch of an NBS system with a therapy software update option.

Supportive Analysis

Nexstim's system is the only TMS method that delivers precision on a par with invasive techniques, thus allowing for precise documentation before surgery. The benefit of the NBS system's pre-surgical planning has been shown by researchers in a vast array of clinical trials spanning more than 100 academic articles. Nexstim has a strong standing amongst key opinion leaders within neurosurgery and neurology. Its system is used at leading university hospitals such as the Mayo Clinic in the US, Karolinska University Hospital in Sweden, and Charité Hospital in Germany Nexstim's software constructs a multi-spherical 3D model of the patient's brain based on an MRI and Nexstim's proprietary software. This brain model accounts for the composition and shape of the individual's brain, such as the gray and white matter and cerebrospinal fluid. Nexstim's e-field navigation differs from line-based navigation in that it visualizes the coil location and the electrical field induced. It re-calculates the e-field location when the operator moves or tilts the coil so that the operator can directly see that the correct hotspot is stimulated. Coil navigation based on rule-of-thumb or a simpler spherical model can mainly observe if the right spot was stimulated by observing the outcome.Today, Nexstim has the only FDA-approved product on the market with the ability to locate and visualize the TMS e-field and hotspot using information about the inside of the patient's brain.

Challenge

Dependent on Success of Magnus Medical

Nexstim trades away some upside potential with the technology licensing agreement and becomes reliant on the success of Magnus Medical, still an unproven company. We also have little insight into the launch of Magnus Medical’s TMS therapy. As Nexstim will stop new sales in the US when Magnus Medical’s therapy launches, it will be important to both companies that the sales ramp-up is fast and successful, as Nexstim otherwise could face a period of slow growth in the segment.

Challenge

Unprofitable TMS Market

Despite sales that are 10-20x Nexstim’s in TMS therapy, market leaders Neuronetics and Brainsway remain unprofitable, with their strong focus on market expansion and R&D and the overall new and immature market for TMS therapy contributing to these difficulties. While we believe that Nexstim has laid an increasingly credible path towards profitability following its technology licensing deal with Magnus medical and in-house focus on its diagnostics system, the TMS market conditions add some uncertainty to the case.

Valuation

Transformation after Magnus Medical Deal Pivotal

Our Base Case for Nexstim is SEK 60 per share. Overall, we are pleased with Nexstim’s recent progress that indicates that Nexstim is going in the right direction. We are also positive to Nexstim’s new focus on technology licensing and see further deals, such for the NBS system or other geographies, as an option for further upside. To close the valuation gap, we think that additional news on the launch of Magnus Medicals therapy and continued profitable growth is needed.

Quality Rating

People: 3

Business: 3

Financials: 1

Financials

Income statement
EURm202120222023e2024e
Revenues6.49.57.89.4
Cost of Revenue1.10.011.11.9
Operating Expenses6.58.26.36.5
EBITDA-1.21.30.380.91
Depreciation0.440.480.780.94
Amortizations0.000.000.000.00
EBIT-1.70.80-0.40-0.02
Shares in Associates0.000.460.460.46
Interest Expenses0.000.000.000.00
Net Financial Items0.720.470.000.00
EBT-0.941.3-0.40-0.02
Income Tax Expenses0.00-0.270.00-0.01
Net Income-0.941.5-0.40-0.02

Rating definitions

The team

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Contents

Review of the financials

Per Segment FY22:

Events in 2023

Changes to our estimates

Valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

Download article