BrainsWay (BWAY)

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BrainsWay: Still Undervalued (Still)
Jun. 02, 2021 6:45 PM ETBrainsWay Ltd. (BWAY)

https://seekingalpha.com/article/4432728-brainsway-stock-still-undervalued

Summary

In the past 12 months BrainsWay has received FDA clearance for the Theta Burst protocol and assisting smoking cessation as well as positive coverage policies for OCD.

Insurance coverage for OCD strengthens BrainsWay’s position as the TMS market leader and confirms the potential of TMS outside of treating MDD.

BrainsWay’s revenue growth could accelerate significantly as they begin to commercialize their installed base of OCD coils through revenue sharing arrangements.

BrainsWay could also become the TMS supplier of choice, accelerating capital sales.

These positive developments have still not been reflected in the share price, providing investors with an opportunity.

Brain Stroke

BrainsWay (BWAY) has had a difficult 12 months due the impact of COVID-19 lockdowns on their business. Despite this they have made significant progress towards developing a technology platform for treating mental health conditions. FDA clearance for assisting smoking cessation supports the use of Transcranial Magnetic Stimulation (NYSE:TMS) as an effective treatment for a range of conditions and positive coverage policies for Obsessive Compulsive Disorder (OCD) supports the use of TMS as an economic treatment for a range of conditions. BrainsWay’s stock has reacted little to these positive developments though, providing investors with an opportunity to invest in a business with a long growth runway at a modest valuation.

OCD Coverage
In the U.S. medical devices must receive clearance from the FDA before they can be marketed as a treatment. The FDA’s assessment is primarily based on safety, with consideration also given to efficacy. In the absence of insurance coverage many FDA cleared devices have no market due to a lack of demand when the patient has to cover the entire cost of treatment. This has been the case for BrainsWay over the past 20 months as they have struggled to attract patients without insurance coverage. BrainsWay is monetizing their OCD business with a revenue sharing model, meaning that despite having built an installed base of 225 OCD coils it has so far not been a significant contributor to revenue.

This is set to change though with Centene (CNC) publishing the first positive coverage policy for the treatment of OCD using Deep TMS in May 2021. Centene provides coverage to about 25 million members in all 50 states, including Medicaid and Medicare members, as well as to individuals and families served by the Health Insurance Marketplace, the TRICARE program, and commercial insurance. Insurance coverage is a recognition that TMS is not only an effective treatment for OCD in a clinical trial setting but is also an effective and economic treatment in a real-world setting.

Centene’s positive coverage policy was quickly followed by the first draft Local Coverage Determination (LCD) proposing coverage of TMS for the treatment of OCD issued by the Medicare Administrative Contractor (NYSE:MAC) Palmetto GBA. Palmetto’s jurisdiction covers Medicare patients in Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia, representing over 9 million covered lives. A review period will now ensue with a final policy expected later this year. This initial draft LCD is by one of the seven MACs in the U.S. and BrainsWay anticipate that other MACs, over time, will also issue their draft policies for Deep TMS coverage of OCD. The restrictions on coverage in the LCD are fairly modest relative to restrictions on coverage for Major Depressive Disorder (NYSEARCA:MDD). To receive OCD coverage a patient must have been diagnosed with OCD as per DSM-5 criteria, have failed to respond to trials of 2 distinct drugs over a minimum of 8 weeks and failed to respond to psychotherapy. This coverage guidance appears to have been based on the recommendations of the Clinical TMS Society. The Clinical TMS Society was established in 2013 to optimize clinical practice, awareness and accessibility of TMS therapy.

The market reaction to these first positive policy coverage announcements was muted, particularly given their potential impact. When BrainsWay has previously made an FDA clearance announcement their stock has appreciated by approximately 10%, despite this having no direct impact on the company’s finances. Insurance coverage for OCD will have a significant impact on BrainsWay’s revenue in the future and yet the stock only appreciated 0-10% after the first two announcements.

Table 1: BrainsWay Stock Price Reaction to Recent Events

(source: Created by author using data from Yahoo Finance)

Theta Burst Protocol Clearance
BrainsWay received FDA clearance for the treatment of MDD using the three-minute Theta Burst protocol in April 2021. The clearance was supported by safety and efficacy data from 146 subjects who had received either the standard Deep TMS protocol or Theta Burst Deep TMS. Subjects in both groups demonstrated a statistically and clinically meaningful reduction in depression scores, and the results met the equivalence criteria needed for clearance of the shorter treatment.

The inability to provide the Theta Burst protocol was a weakness for BrainsWay as the shorter treatment protocol potentially allows providers to treat more patients and increase their returns on investments in TMS units. Magventure and more recently Neuronetics (STIM) already had clearance for the Theta Burst protocol which may have provided a sales advantage. I had previously noted that BrainsWay was capable of providing the Theta Burst protocol but had chosen not to pursue FDA clearance for unknown reasons. BrainsWay has stated that approximately 30% of their customers have already started using the Theta Burst protocol, indicating significant interest.

Smoking Cessation
BrainsWay received FDA clearance for assisting patients with quitting smoking in August 2020. BrainsWay began introducing their smoking addiction coils to the market in early 2021 and now have 10 systems installed, with plans to install another 4. Similar to OCD, smoking addiction will be monetized through a revenue sharing arrangement which will likely mean limited revenue until insurance coverage is received. BrainsWay has a robust tracking system in place to gain post-marketing data in support of insurance coverage but this is likely to be a multi-year process, similar to OCD. I believe it will be difficult for BrainsWay to receive insurance coverage for treating smoking addiction given the relatively high expense of TMS treatments. This will come down to a decision by insurers regarding the cost and efficacy of TMS in a real world setting versus the reduction in health care costs from helping people to quit smoking.

Other Growth Drivers
In addition to monetizing their OCD and smoking cessation businesses, BrainsWay are looking to initiate at least one clinical trial this year, most likely reducing fatigue in Multiple Sclerosis (NYSE:MS) patients. Other potential indications include opioid addiction and post-stroke rehabilitation.

BrainsWay is also seeking to expand their business outside of the U.S. and Israel, which is largely dependent on gaining insurance coverage in various countries. Their focus is primarily on Japan where they are currently awaiting reimbursement. Neuronetics generated 2 million USD in revenue internationally in 2019, primarily from Japan and Korea, meaning insurance coverage in Japan could also be a significant contributor to revenue growth for BrainsWay in 2022.

Financial Analysis
BrainsWay is likely to achieve robust revenue growth over the next few years through a combination of a larger sales force, pandemic recovery and monetization of their OCD business. BrainsWay plan to increase their number of sales reps from 13 to 18 by the end of the year and given that Neuronetics is guiding for over 1 million USD in capital sales per sales rep annually, it would not be unreasonable to expect capital sales of approximately 18 million USD in 2022 (up from 7.5 million USD in 2020).

BrainsWay is monetizing their OCD and smoking addiction coils through a revenue sharing model. The revenue generated by this will be determined by the number of installed units, utilization and the revenue sharing agreement. While the details of revenue sharing agreements are unknown, BrainsWay had 225 OCD coils in place at the end of March 2021. Neuronetics average annual revenue per site from revenue sharing is approximately 55,000 USD and Nexstim averaged 87,000 USD in therapy revenue per installed unit in 2020. Assuming BrainsWay has 250 OCD units in place in 2022 and 50% utilization relative to Neuronetics, BrainsWay could potentially generate another 6.9 million USD in revenue from OCD. OCD revenue at this stage is still highly uncertain given it is unknown how widespread insurance coverage will be or how much demand for treatment will exist even with coverage.

Figure 1: BrainsWay Sales Models

(source: BrainsWay)

While Neuronetics generates a large amount of revenue from treatments and will benefit significantly from a return to normal in the second half of 2021, they may find it increasingly difficult to generate capital sales with only FDA clearance for MDD. BrainsWay’s expanding portfolio of indications put them in a strong position to close the revenue gap between the company’s over the next few years.

Figure 2: BrainsWay Revenue

(source: Created by author using data from company reports)

BrainsWay made significant progress toward achieving operating profitability in 2020, although some of this was due to temporary gains from factors like reduced travel. Operating profit margins were lower in Q1 2021 due to a one-time non-cash charge of approximately 2 million USD for stock compensation expense, due to the repricing of options. Operating profit margins are likely to deteriorate in 2021 as BrainsWay invests in growth but the company should be profitable on an on-going basis by 2022-2023. This will be assisted significantly by revenue sharing from OCD coils, which is likely to be a very high margin source of revenue.

Figure 3: BrainsWay Profit Margins

(source: Created by author using data from BrainsWay)

Valuation
TMS has had a long path from research to practice with it taking 13 years and hundreds of clinical trials to achieve FDA clearance in the United States. Neuronetics was the pioneer in the market giving them recognition amongst both patients and practitioners and many practices have likely standardized on Neuronetics’ units due to familiarity and the simplicity of using one type of unit. With Deep TMS expanding indications and now beginning to receive insurance coverage for OCD there is a compelling commercial reason for customers to standardize on BrainsWay units. Any TMS provider which doesn’t have a BrainsWay unit is now leaving money on the table by limiting themselves to treating MDD.

Despite this BrainsWay continues to trade at a discount to comparable companies across a range of metrics. Even ignoring potential growth from OCD and smoking cessation, BrainsWay is undervalued relative to peers. This undervaluation could be due to an expectation that there will be no demand for OCD and smoking addiction, even with reimbursement, or an expectation that competitors will rapidly achieve FDA clearance and insurance coverage for additional indications, limiting BrainsWay’s growth. Magventure already has FDA clearance for treating OCD and appears to be progressing towards gaining reimbursement.

Table 2: BrainsWay Relative Valuation

(source: Created by author using data from company reports)

*Includes Navigated Brain Stimulation units used for pre-surgical mapping of the motor cortex in brain cancer

It is currently difficult to find reasonably priced companies that have a strong business model and growth prospects. BrainsWay has been one of those companies over the past 12 months and remains so today despite the stock appreciating over 80% in the last 6 months. This is a stock that has been continually overlooked by the market and may remain so until it achieves profitability.

Figure 4: BrainsWay Relative Valuation

(source: Created by author using data from Yahoo Finance)

This article was written by Richard Durant

Disclosure: I am/we are long BWAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.