Neuronetics, Inc. (NASDAQ:STIM) Q1 2024 Earnings Call Transcript

Neuronetics, Inc. (NASDAQ:STIM) Q1 2024 Earnings Call Transcript May 7, 2024

Neuronetics, Inc. beats earnings expectations. Reported EPS is $-0.26713, expectations were $-0.33. STIM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. Welcome to the Neuronetics First Quarter 2024 Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference call is being recorded. I would like now to turn the conference over to your speaker today, Mark Klausner. Mark, go ahead.

Mark Klausner: Good morning, and thank you for joining us for the Neuronetics first quarter 2024 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 and other operational issues and metrics. Actual results can differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company’s business.

For a 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 Form 10-Q which will be filed on or before May 7th. 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 provide 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 the 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.

Keith Sullivan: Mark, thanks for the introduction. Good morning, everyone, and thank you for joining us today. I’ll begin by providing an overview of the recent performance, followed by an operational update. Steve will then review the financial results, and I’ll conclude with some thoughts on 2024 before turning to Q&A. Building on the momentum we generated during 2023, we had a solid first quarter. Our efforts to drive increased utilization and broader adoption of NeuroStar are paying dividend. Total revenue was $17.4 million an increase of 12% over the first quarter of 2023. This continued solid performance reflects the outstanding efficacy of NeuroStar Therapy, the demand we are generating and the ongoing execution by our commercial team.

NeuroStar system revenue was $3.3 million reflecting steady demand for new systems. During the quarter, we shipped 41 systems, slightly below our plan of 45 to 50 systems per quarter, partially due to a number of customers having challenges securing credit for capital purchases as well as the negative impact experienced by some customers as a result of the Change Healthcare cybersecurity incident in late February. As a result of this incident, providers have seen an impact on both collections on patient claims submissions as well as determination of patient eligibility due to the benefits investigation portal being shut down. During this time, providers’ ability to collect cash has been significantly impaired and is still being negatively impacted as of today.

As a result of reduced cash collections due to change healthcare situation, many psychiatry practices were forced to reallocate cash they had planned to use to purchase a NeuroStar in order to cover essential costs like rent and payroll, which impacted our ability to collect from customers. To further emphasize the impact on providers, the American Medical Association published an article at the end of April discussing the results of the survey they conducted with healthcare providers. Despite change healthcare’s announcement of restored service, the survey found that 60% of providers are still facing challenges in verifying patient eligibility for treatment, 75% of providers still face barriers with claim submissions, and 85% of providers continue to experience disruption in claims payment.

As the headwinds due to change healthcare subside, we expect that we’ll return to our target of shipping 45 to 50 systems per quarter. Ultimately, we still expect to ship roughly 200 systems in 2024. Our NeuroStar summits have been a key driver of growth and adoption for our systems by educating healthcare professionals about the power of NeuroStar in the battle against depression and other mental health disorders. Since we began hosting these events, we have conducted 12 summits across the United States. Through these summits, we have sold a total of 200 systems, generating over $14 million in capital sales with numbers steadily increasing each quarter. New customer relationships we have formed as a result of the summits have enabled these practices to treat over 2,850 patients, leading to $11.2 million in treatment session revenue.

Our next summit scheduled for mid-May in Phoenix Arizona is already fully booked with 75 attendees. Importantly, 20% of the attendees currently treat adolescents. We are very pleased with the initial interest from the adolescent psychiatrist as we have only just begun to educate them on the benefits of the NeuroStar treatment for their patients. Overall, we are encouraged by the continued demand for our technology and its potential to positively impact those battling depression. Turning to an update on our commercial partnerships. In March, we announced a five-year exclusive partnership with Transformations Care Network, one of the nation’s largest mental health care providers. They operate 47 locations, soon to be 48, across the U.S., primarily in the Northeast and Pacific Northwest and currently have 20 NeuroStar systems across their network.

In this new agreement, Neuronetics is now Transformations’ exclusive provider of new TMS systems. Also, as part of the agreement, Transformations has converted from a fixed price to a consumable model for all of their systems. We have had a long-standing relationship with Transformations, and we are very excited that the NeuroStar will become an increasingly bigger part of their plans moving forward, as they seek to deliver exceptional care and provide their patients with access to the best possible mental health solutions. U.S. treatment session revenue was $13 million, which represents a 22% increase compared to the first quarter of 2023. This growth was mainly fueled by a more than 32% year-over-year increase in local consumable revenue.

The highest year-over-year increase outside of COVID, validating the effectiveness of our commercial initiatives. While Treatment Session revenue growth remained strong, we did note some impact from the changed health care situation that I just mentioned, as providers sought to conserve capital as a result of slower cash collections. When discussing the issue with customers, we have heard anecdotally that, patient demand for therapy remains strong, but many of those patients have been delayed moving into treatment, as a result of slow prior authorizations from insurers. Now let’s shift our focus to operational updates. Beginning with an update for the Better Me Guarantee Provider Pilot Program or BMGP. The Better Me Guarantee Provider Program aims to establish a nationwide group of accounts, following patient care and responsiveness standards developed in collaboration with expert TMS clinicians aimed at delivering timely and consistent care to those, who need it most.

As discussed during our last earnings call, we officially launched the second phase of the pilot in January. This phase included more than 100 accounts made up of both the Greenbrook sites from the initial launch in late 2023, as well as additional sites that met the qualification standards prior to January 22nd. In early April, we will enroll another cohort of approximately 100 sites and currently have 204 sites who are actively participating in the BMGP program. We continue to be thrilled with the significant positive trends we are seeing coming out of the sites enrolled in the pilot, particularly related to responsiveness and more, timely follow-up with the potential patients. BMGP sites are seeing up to a 6.5x improvement in patient follow-up within 24 hours versus our non BMGP sites, which we know is critical to facilitating the treatment of patients suffering from mental health conditions.

Because these BMGP sites are more rapidly connecting with patients, they can more quickly educate patients and have them begin treatment using NeuroStar. On average, Better Me Guarantee Provider sites are able to move a patient from being interested in NeuroStar to completing a motor threshold test 5x faster than we saw across our customer base last year. Historically, it took an average of 82 days to move a patient from interest to treatment. This process is now being completed in 17 days on average for BMGP sites. As a result, BMGP sites are seeing a 48% improvement in the number of motor threshold tests being completed. These providers are improving patients’ lives by providing them with faster access to potentially lifechanging treatment.

While we continue to closely monitor the positive impact of the pilot program as we expand to a greater number of customers throughout the year, the continued success of the program highlights that the tactics being employed are working in a meaningful way. Moving forward, the pilot phase will be open to all NeuroStar customers who agreed to meet the five-key standards of the program. We will continue to take a measured approach to a broader rollout of the program to ensure we effectively balance demand while upholding standards. We will launch another group of 100 sites in June, bringing the total number of participating sites to over 300. Turning our attention to NeuroStar University. This program continues to enhance our customers’ understanding of the benefits offered by our 5-STARS Solution, which includes educational programs and tools, clinical best practices as well as marketing initiatives.

As a result of the education that customers are receiving at NSU, we are seeing material increases in utilization as compared to sites who have not participated. In fact, NSU attendees on average are seeing a 58% increase in utilization as compared to sites who have not attended, because they’ve learned how to educate patients about NeuroStar and learn the latest clinical techniques for using our system. Because of this, we have seen a trend of sites becoming repeat attendees, with 20% of sites that attended prior classes having sent additional team members to NSU to benefit firsthand from our course. This underscores that the more we are able to educate customers on best practices and the benefits of partnering with Neuronetics, the more utility they’re able to drive.

Moving forward, we will continue to leverage NSU’s success to drive increased adoption and utilization. During the first quarter, we saw continued strength with our co-op marketing program. The co-op program remains a critical component of our commercial strategy for two key reasons. First, by matching our customers’ marketing spend, we are effectively getting double the return on dollars invested to help to drive awareness and educate prospective patients. And second, by having a customer participate, it reinforces their commitment to NeuroStar and developing a successful TMS program within their practice. At the beginning of 2024, we introduced significant improvements to the program based on feedback from our customers, making it even easier for our practices to use our streamlined and turnkey marketing approach, which should ultimately lead to a greater patient awareness of NeuroStar.

As of the end of first quarter, we have approximately 300 sites participating. As the participation grows, we are continuing to see uplift across a number of key metrics. Those accounts who participated in co-op marketing, both during Q4 of 2023 and Q1 of 2024 saw a year-over-year increase in both motor threshold tests and utilization during the first quarter. Turning to a regulatory and clinical update. As of the end of March, we have received our eighth FDA 510(k) clearance in the past three years. Our new indication for NeuroStar is as a first line adjunct treatment for adolescent patients aged 15 to 21, who are suffering from major depressive disorder. For this patient population, NeuroStar can be used in combination with other therapies without requiring failed prior courses of medication.

This is a significant milestone for the Company and more importantly, adolescent patients as the NeuroStar is the first and only TMS treatment to be cleared for this age group. Adolescent depression is a complex mental health condition that impacts an estimated 4.3 million patients in the United States and its prevalence has been accelerating since COVID-19 pandemic. Currently, treatment options available for adolescents are extremely limited and this advancement has the potential to set a new treatment paradigm for how clinicians address depression within this large and growing patient population. With the size and scale of the adolescent patient population, our total addressable market within MDD has increased by approximately 35%. This clearance was two years in the making and is a testament to our clinical team and highlights the increasing value of the data we are accumulating within TrakStar.

Leveraging over 1,100 real world adolescent patients who were treated using NeuroStar, our TrakStar data analysis showed that 78% of adolescent patients achieved clinical meaningful improvement in their depression following a full course of treatment. Relying on the FDA’s commitment to consider and utilize real world evidence in evaluating new indications, we combined our TrakStar data with clinical data from published literature to demonstrate that NeuroStar TMS was safe and effective when used in a first line add-on therapy. This clearance highlights the immense power of our proprietary TrakStar platform in particular, for the advancement of our regulatory strategy. We will continue to leverage the growing repository of real world data from our customers’ daily use of TrakStar in administering NeuroStar therapy to evaluate opportunities to make NeuroStar more widely applicable to treat additional mental health conditions.

Moving forward, we will work to educate clinicians as well as adolescent MDD sufferers and their parents on the benefits that NeuroStar can deliver. Beyond the adolescent patient population that may exist within our current customer practices, there are approximately 8,000 adolescent psychiatrists and an additional 6,000 adolescent nurse practitioners in the United States, who we now have the opportunity to educate. Prior to recent clearance, the providers had no TMS option available to them. The interest we have already received from the physician community has been extremely encouraging. To date, we have received interest from dozens of providers, both current customers and prospects. Some have expressed appreciation for expanding treatment options for this underserved adolescent population, while others have sought to clarify specifics around the approved indication for use in this age group.

To further educate providers, we held a seminar last week to review the clinical data supporting our adolescent clearance. This allowed us to address common questions as practices look to incorporate NeuroStar TMS for their adolescent patients. The webinar had over a 140 physician attendees with roughly two-thirds being current customers and one-third being prospective NeuroStar users, highlighting strong interest from clinicians for this new indication. We have a comprehensive launch strategy for expanding our indication to treat adolescents 15 and up that includes increasing awareness and education among practices and parents. Our goal is to ensure that everyone suffering from MDD knows about NeuroStar and has an understanding about the benefits of the treatment.

To amplify our outreach on digital and social media platforms, we are hosting a press event in New York City on May 15th, with editors and writers from top consumer trade and health media outlets. This event will feature the transformative experience and perspectives about NeuroStar from a top psychiatrist, a patient advocate accompanied by their parent and a key representative from NeuroStar. This new indication is the most newsworthy event at NeuroStar since our initial clearance in 2008. We anticipate a significant increase in media coverage will help reach MDD sufferers and their families, leading to a higher level of awareness and education, which will help more people in need get treatment. We expect to see some contribution from this new indication in the second half of the year, and we believe the positive impact on our business will be even more material in 2025.

After the end of the first quarter, we announced the publication of some significant findings in brain stimulation. The premier journal in the field of neuromodulation, highlighting the criticality of patients completing a full course of treatment when using NeuroStar therapy. The analysis confirmed that, if patients in treatment show early improvement in their MDD symptoms, it was a strong predictor of a successful clinical outcome. Importantly, it also confirmed that a substantial number of patients who had low levels of improvement early in their treatment course, ultimately experienced a meaningful reduction in symptoms once they completed a full course of therapy. This data reinforces one of the pillars of the BMGP program, which is that, clinicians are required to educate patients on the benefits of completing a full course of 36 treatments, which the data shows, provides the best clinical outcomes.

With this data, we will continue to work to educate clinicians and patients on the benefits of finishing a full course of treatment. We are excited about what we were able to accomplish during the first quarter. We continue to deliver solid financial performance, as a result of the successful execution of our educational and awareness initiatives. Beyond that, we achieved significant milestones by being the first and only TMS manufacturer with an adolescent indication approval. This not only validates the safety and efficacy of NeuroStar, but also allows us to help clinicians provide better care to the growing population of 15 to 21 year olds suffering from MDD. We also made progress in expanding commercial partnerships agreements and increasing access to care with NeuroStar.

We are incredibly excited about the future at Neuronetics. With that, I’d like to turn the call over to Steve.

Steve Furlong: Thank you, Keith. Unless otherwise noted, all performance comparisons are being made for the first quarter of 2024 versus the first quarter of 2023. Total revenue was $17.4 million an increase of 12% over prior year revenue of $15.5 million, primarily driven by increased treatment session sales in the quarter. U.S. NeuroStar Advanced Therapy System revenue was $3.3 million and we shipped 41 systems in the quarter. U.S. Treatment Session revenue was a record for the Company at $13 million, an increase of 22% year-over-year. The revenue growth was primarily driven by continued strong performance within our local consumable customer segment. Revenue per active site was approximately $11,300 in the quarter compared to approximately $9,700 in the prior year quarter.

This double-digit increase in revenue per active site is due to the ongoing success of our commercial, education and awareness initiatives, as well as the fact that, we are continuing to see an increasing percentage of system shipped per quarter going into existing customer sites, where there are now operating multiple NeuroStars. Gross margin was 75.1% compared to 73.3% in the prior year quarter, up 180 basis points from the prior year, driven by a higher mix of treatment session revenue. We plan to continue this consistent improvement in gross margin, as we work towards our longer-term target of being above 80%. Operating expenses during the quarter were $20 million, a decrease of $1.4 million or 7% compared to $21.3 million in the first quarter of 2023.

This year-over-year and sequential reduction in operating expenses comes directly as a result of our ongoing prudent cost management efforts. During the quarter, we incurred approximately $1.3 million of non-cash stock based compensation expense. Net loss for the first quarter was $7.9 million or $0.27 per share, as compared to a net loss of $10.5 million or $0.38 per share in the prior year quarter. EBITDA was negative $6.3 million as compared to negative $9.4 million in the prior year quarter. This significant reduction in EBITDA loss reflects our continued success in creating operational leverage through strong top-line growth and prudent expense management. As of March 31, 2024, cash and cash equivalents were $47.7 million. Cash collections in the quarter would have been higher absent the cybersecurity issues experienced by changed healthcare, which in addition to delaying some customer purchases, also delayed some customer payments.

As a reminder, Q1 is typically our highest cash burn quarter of the year. We continue to remain confident in our path to profitability, and we continue to expect to be cash flow positive in the fourth quarter of 2024. Now turning to guidance. For the second quarter, we expect revenues of $18 million to $19 million. In the quarter, we anticipate that we will continue to see revenues modestly impacted by the changed healthcare issue. When this issue is resolved, we expect that revenues in cash collections will rebound. As a result, we continue to expect full year revenue in the range of $78 million to $80 million. We expect total operating expenses for the full year range to be in the range of $80 million to $84 million. I would now like to turn the call back over to Keith.

Keith Sullivan: Thank you, Steve. In conclusion, the momentum we built in the first quarter positions us very well for the remainder of 2024. Our commercial initiatives are clearly working, driving increased adoption and utilization of NeuroStar Therapy across our installed base. We expect these programs and the Better Me Guarantee Provider Program, in particular, to continue yielding strong results as we systematically roll them out more broadly. Looking ahead, we have several key growth catalysts. Most notably, our recent adolescent indication approval represents a significant market expansion opportunity that we are just beginning to unlock. With our focused education and awareness efforts ramping up, we anticipate interest and demand from the adolescent psychiatric community to ramp up over the course of the year, with even more material impact in 2025.

Additionally, our robust clinical data pipeline and collaborative partnerships should further increase NeuroStar’s applicability across mental health conditions. Our financial outlook remains strong, and we are on clear trajectory towards profitability and cash flow positivity. With our comprehensive commercialization strategy and expanding treatment indications, Neuronetics is uniquely positioned to drive long-term sustainable growth. Before we open up the line for questions, I’d like to thank everyone throughout the Neuronetics organization for their dedication and tireless work towards our mission of helping those suffering from mental health disorders. I’d also like to take a moment to thank three members of our Board of Directors, Joe Capper, John Bakewell and Will Jaeger for their dedication and contribution to Neuronetics, and me personally, as they will not be standing for reelection.

We wish them the best as they move on to their next ventures. With that, I’d like to open the line for questions.

Operator: [Operator Instructions]. Our first question comes from William Plovanic of Canaccord. Please go ahead, Bill.

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Q&A Session

Unidentified Analyst: Hi, Keith and Steve. It’s John on for Bill this morning. Thanks for taking our questions and congrats on the quarter. I just want to first touch on guidance. Why keep guidance, flat if you’re still expecting the full 200 system sales? You saw the strength in treatment revenues in Q1 despite all the headwinds that you highlighted on the call. And also, you still have the tailwinds now from the adolescence contribution in the second half that you highlighted. I just want to understand the methodology keeping guidance flat there.

Steve Furlong: Yes. I mean, John, thanks for that question. It really comes down to the uncertainty due to the cyber breach. As we indicated, it did impact system sales in the quarter. Although we do think, it will rebound in Q2 and Q3, it just felt like we’d be getting ahead of ourselves if we increase guidance at this point. The impact on adolescents this year is still unknown. It’s still very early. As a reminder, many of the private payers were already reimbursing for adolescent TMS down to either 17 or 18 years of age. It is a nice tailwind, but we think the most significant impact of that is going to be in ’25 and ’26.

Unidentified Analyst: Okay. Thanks. And then just as for the Q2 guidance, a little bit below the street. Assuming most of it probably some of these capital sales have been pushed out. But I saw the motor threshold test chart, it looked really strong towards the end of this quarter. Maybe just some puts and takes for what you expect for Q2 revenue? Thanks again.

Steve Furlong: Yes. Again, the capital equipment market is impacting all of med devices. It’s not that, lenders are denying credit, but they’re doing a lot more diligence. It’s taking longer to get our transactions funded. That’s one of the reasons, why we continue to schedule our summits earlier in the quarter. Our first summit was scheduled four weeks before quarter end, and now we’re scheduling them between seven and eight weeks before quarter end. We do forecast a rebound from first quarter for the NeuroStar sales. But again, 60% of our customers or even slightly higher are really single office doctors, and they are impacted by cash flow. And so not only other claims being held up, but prior authorization for new patients are also being held up.

And so again, we do think it’s going to recover, but some of the statistics that Keith mentioned previously, there’s still some wood to chop before they fully recover. And then regarding MTs, you’re right. That’s a significant metric for us to watch. It was up nicely in the quarter. And quite frankly, it was very strong in April as well. So again, I think it’s just more of a timing thing, which is why we’re comfortable maintaining the full year guidance at this point.

Operator: Our next question comes from Adam Maeder of Piper & Sandler.

Adam Maeder: Solid start to the year and very nice U.S. treatment sessions number. I wanted to follow up on John’s questions. And I guess just kind of wanted to see if we could get a little bit more granular with the temporal headwinds that arose in Q1 from change, the cybersecurity issue, customers securing credit. Maybe just talk about kind of the impact in Q1 that you saw both from a system revenue and treatment session revenue standpoint? And then, are you able to give us any numbers around kind of anticipated headwind in Q2? I think I heard modest impact. And then what’s kind of baked into the full year guide for those transient headwinds?

Steve Furlong: Yes. We do estimate that the Q1 impact was about 500,000 and it was primarily capital equipment sales. And again, with the reaffirmation of doing approximately 200 systems in the year, we do think there’s going to be a recovery in Q2 through Q4. Not a big impact in treatment sessions. I would say the most significant impact that we saw was on collections. And so, we had $20 million in U.S. revenue in Q4 of ’23. You would like to think you’d be able to collect the lion’s share of that in your first quarter, and we didn’t. And so, we estimate that we were probably short paid about $3 million Again, we do forecast that to recover as the security issue is fixed, but it did have an impact on our balance sheet.

Keith Sullivan: I’ll just add one piece to it. On the capital equipment side, as Steve said earlier, it’s really getting the financing through. And it used to be that we could get financing done in 10 business days. And now we’re looking at several weeks. So, we do have a summit coming up. It’s in Arizona. We have 75 providers coming to that summit. So, it’s the interest is certainly there. It’s just now with seven weeks before the end of the quarter, are we able to get those systems through the financing process?

Adam Maeder: And a follow-up on the Q2 guide and sorry for the near-term focused question. The sequential quarter-over-quarter step up is smaller than in past years and certainly, it sounds like you guys anticipate, again, some kind of carryover impact from the temporal headwinds. But I guess, I’m still kind of trying to square the $18 million to $19 million guidance range for Q2. Just any color that you can give us thus far on the trends in the business in Q2 and kind of how that may or may not be informing the Q2 outlook? And then I have one follow-up. Thanks.

Steve Furlong: Yes. Again, the weekly metrics that we review as a team continue to be strong. But again, as I said to John, the majority of our patients are single site offices, and they are very dependent upon reimbursement. If they can’t get cash in, it’s difficult for them to spend money. And so again, we believe, we took a responsible approach to setting guidance where it was. But it’s by no means an indication that we’re sensing weakness out there. It’s this issue is out of our control. Until it’s fixed, regretfully, it will have some impact near-term on our business. Again, I think our reaffirmation of full year, at this point, we’re still only into early May, tells you that, it’s going to be a good year.

Keith Sullivan: Adam, it’s Keith again. You also said that our motor thresholds look strong and they continue to be strong. We just in speaking with several of our accounts and some of the big ones, their prior authorizations are taking longer to come through as a result of change healthcare. We are seeing the activity out there, but we have to be sensitive to the situation with change healthcare.

Adam Maeder: Sure. That makes sense. If I can squeeze in one more, just on the adolescent’s approval. Congratulations. I think I heard Keith, you mentioned that, this is the most newsworthy event since original FDA clearance. Maybe just talk about the strategy to kind of, I guess, pursue this new patient population, pursue a new clinician base, which practices will you target, how do you grow the customer base, but at the same time not lose focus on the existing customers, which have seen some pretty good utilization trends? Just talk about kind of the strategy and approach there. Thanks for taking the questions.