Neuronetics, Inc. (NASDAQ: STIM) is a commercial-stage medical technology company at the forefront of transforming the lives of patients who suffer from neurohealth disorders. The company’s flagship product, the NeuroStar Advanced Therapy System, is a non-invasive and non-systemic office-based treatment that utilizes transcranial magnetic stimulation (TMS) to deliver pulsed, MRI-strength magnetic fields designed to stimulate specific areas of the brain associated with mood.
Business Overview and History:
Neuronetics was founded in 2003 with the vision of developing innovative solutions to improve the quality of life for individuals struggling with mental health challenges. The company’s journey began with the development of the NeuroStar Advanced Therapy System, which received clearance from the U.S. Food and Drug Administration (FDA) in 2008 to treat adult patients with major depressive disorder (MDD) who have failed to achieve satisfactory improvement from prior antidepressant medication.
In the early years, Neuronetics faced challenges in generating market adoption for the NeuroStar system, as TMS therapy was a relatively new and unfamiliar treatment option. The company invested significant efforts in educating healthcare providers and patients on the benefits of TMS, gradually building a substantial customer base of psychiatrists and other medical professionals offering the NeuroStar treatment.
Over time, Neuronetics expanded its reach and clinical applications. In 2017, the company received regulatory approval for its system in Japan, opening up an important new international market. The NeuroStar Advanced Therapy System is now available in other parts of the world, including Japan, where it is listed under Japan’s national health insurance.
Neuronetics has continued to invest in research and development to explore additional clinical applications for the NeuroStar system. These efforts have led to expanded FDA clearances, including its use as an adjunct for adults with obsessive-compulsive disorder (OCD) and to decrease anxiety symptoms in adult patients with MDD that may exhibit comorbid anxiety symptoms. Most recently, the company received FDA clearance for the NeuroStar system as an adjunct for the treatment of MDD in adolescent patients aged 15-21.
Despite these significant milestones and advancements, it’s worth noting that Neuronetics has yet to achieve profitability, having incurred operating losses since its inception as it has invested in building its commercial infrastructure and expanding the clinical footprint of the NeuroStar system.
Financial Performance and Ratios:
Neuronetics’ financial performance has shown both challenges and progress in recent years. For the fiscal year ended December 31, 2023, the company reported total revenue of $71.35 million, a decrease of 9.3% compared to the prior year. However, the company’s gross profit margin remained relatively stable at 72.5% in 2023, compared to 76.2% in 2022.
The company’s net loss for the fiscal year 2023 was $30.19 million, or $1.05 per diluted share, compared to a net loss of $37.16 million, or $1.38 per diluted share, in the previous year. Neuronetics’ operating cash flow for 2023 was -$32.04 million, and its free cash flow was -$34.41 million.
Liquidity:
As of September 30, 2024, Neuronetics had cash and cash equivalents of $20.9 million and total debt of $50.0 million. The company’s current ratio, a measure of liquidity, stood at 3.16, indicating a strong ability to meet its short-term obligations. The quick ratio was 2.87, further demonstrating the company’s solid short-term liquidity position.
Neuronetics has a $90 million credit facility with Perceptive Credit Holdings IV, LP, of which $50 million was drawn as of September 30, 2024. The facility has a final maturity in July 2029, providing the company with additional financial flexibility.
Key Financial Ratios (as of September 30, 2024): – Gross Profit Margin: 75.6% – Operating Profit Margin: -37.85% – Net Profit Margin: -50.09% – Return on Assets: -49.14% – Return on Equity: -160.79% – Debt-to-Equity Ratio: 1.83
Quarterly Performance:
In the third quarter of 2024, Neuronetics reported total revenue of $18.5 million, a 4% increase compared to the same period in 2023. U.S. NeuroStar Advanced Therapy System revenue was $4.1 million, with 49 systems shipped during the quarter. U.S. treatment session revenue increased by 2% year-over-year to $13.3 million.
Gross margin for the third quarter of 2024 was 75.6%, up from 65.8% in the prior-year period, primarily due to a favorable product mix, the absence of a one-time manufacturing cost, and lower inventory impairment charges.
However, the company’s operating expenses increased by 5% to $21.7 million in the third quarter of 2024, driven by higher transaction-related expenses. As a result, Neuronetics reported a net loss of $13.3 million, or $0.44 per share, compared to a net loss of $9.4 million, or $0.33 per share, in the same quarter of 2023.
The company’s operating cash flow for Q3 2024 was -$5.42 million, with free cash flow at -$5.80 million.
Geographic Performance:
Neuronetics generates the majority of its revenue in the United States, which accounted for 97% of total revenue in Q3 2024 and 97% in the first 9 months of 2024. International revenue, primarily from Japan and Korea, represented 3% of total revenue in both periods.
Guidance and Outlook:
For the fourth quarter of 2024, Neuronetics expects standalone revenue to be in the range of $19 million to $20 million. For the full year 2024, the company anticipates standalone revenue to be between $71 million and $72 million, and total standalone operating expenses to be in the range of $81 million to $82 million, excluding approximately $2 million in pre-close transaction expenses.
Neuronetics’ management has also shared its intention to achieve cash flow breakeven by the third quarter of 2025, reflecting the company’s focus on driving profitability and value creation through its integration with Greenbrook TMS, a leading provider of TMS and other neurohealth services.
It’s worth noting that the guidance reduction for Q4 2024 is primarily due to changes in purchasing patterns from customers due to reimbursement and cash flow issues experienced earlier in the year. Additionally, Neuronetics has implemented a strategic reorganization and commercial team changes, which are expected to impact Q4 2024 revenues.
Market and Industry Trends:
The transcranial magnetic stimulation (TMS) market is expected to grow at a compound annual growth rate (CAGR) of approximately 12% from 2023 to 2028. This growth is primarily driven by increasing adoption of TMS therapy, rising prevalence of mental health disorders, and expanding insurance coverage for TMS treatments.
Product Segment and Business Operations:
Neuronetics operates in a single business segment, focusing on the design, development, and marketing of products that improve the quality of life for patients with neurohealth disorders. The company’s primary product, the NeuroStar Advanced Therapy System, generates revenue through initial capital sales, recurring treatment sessions, service and repair, and extended warranty contracts.
For the three months ended September 30, 2024, revenues from sales of treatment sessions and NeuroStar Advanced Therapy Systems represented 74% and 23% of the company’s U.S. revenues, respectively. Similarly, for the nine months ended September 30, 2024, these segments accounted for 75% and 22% of U.S. revenues, respectively.
Neuronetics outsources the manufacture of components for its NeuroStar Advanced Therapy Systems to third-party contract manufacturers, with final installation of the systems occurring at the customer site. The company’s research and development efforts are focused on hardware and software product developments, enhancements to the NeuroStar Advanced Therapy System, and clinical development related to additional indications.
Risks and Challenges:
Neuronetics faces several risks and challenges that investors should consider. The company operates in a highly competitive medical device market, with competition from other TMS therapy providers and alternative treatment options for mental health disorders. Regulatory changes, reimbursement policies, and the company’s ability to maintain and expand insurance coverage for its products could also impact its financial performance.
Additionally, Neuronetics’ reliance on a limited number of large customers and any disruptions to its supply chain or manufacturing processes could adversely affect its operations. The successful integration of Greenbrook TMS and the realization of anticipated synergies will be crucial for the company’s future growth and profitability.
Conclusion:
Neuronetics is at the forefront of revolutionizing the treatment of neurohealth disorders with its innovative NeuroStar Advanced Therapy System. The company’s commitment to clinical evidence, expanding indications, and strategic integration with Greenbrook TMS position it for potential long-term success, despite the challenges it faces in the highly competitive medical device market. As Neuronetics continues to drive advancements in TMS therapy, investors will closely monitor the company’s ability to achieve sustainable profitability and capitalize on the growing demand for effective mental health solutions.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.