Neuronetics Inc (STIM) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 financial and operating results conference call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Mark Klausner. Thank you. And please go ahead, sir.

Thank you, operator. Good morning and thank you for joining us for Neuronetics' First Quarter 2020 Conference Call. A replay of this call will be available on our website for 30 days. Joining me on today's call are Neuronetics' Chief Financial Officer Steve Furlong; and Andy Macan, Senior Vice President and General Counsel. Steve and Andy are also members of the Company's Office of the President.

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 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 annual report on Form 10-K filed on March 3, 2020 and quarterly report on 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 noncash 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' Chief Financial Officer, Steve Furlong.

Good morning, everyone, and thank you for joining us. On today's call, I'll provide an update on recent events that have occurred within the company along with an overview of how the COVID-19 pandemic and resulting economic turmoil are impacting our business. I'll then provide an overview of our first quarter financial results, provide our thoughts on the remainder of the year and then open the call up for your questions.

Beginning with the management transition, in early March, the company announced the transition and senior management. The Board of Directors established an interim Office of the President, made up of myself and Andy Macan, Senior Vice President and General Counsel, to lead the business while the company recruits a new CEO.

Additionally, Brian Farley, the company's Chairman of the Board was appointed as the Board's liaison to the Office of the President. The Board of Directors has appointed an Executive Search Committee and has engaged a recruiting firm who is performing a formal search for a permanent CEO. In the meantime, we continue to drive the company's tactical and strategic initiatives with the goal of maintaining and expanding our market leading position.

Shifting gears, I would like to provide an update on our response to the impact of COVID-19 as well as an update on our business more generally.

As previously announced, we have experienced a material impact on our business from COVID-19. As a result, we have taken numerous proactive steps aimed at keeping our employees and customers safe, continuing to support our customers and their patients during the crisis and managing our capital resources with a view towards both near- and long-term business continuity.

Depression is a debilitating condition that millions of patients suffer from worldwide and for those undergoing or in need of TMS treatment for depression, we believe that TMS treatment is a medical necessity. The company is not aware of any COVID-19-related government order that prohibits the initiation or continuation of TMS therapy for the treatment of depression. We estimate today that approximately 1/3 of our customers have temporarily suspended treating patients while many others have heavily curtailed TMS patient treatments. We believe adoption of safe and appropriate pandemic operating procedures by our customers is possible, and many customers have already established these operating protocols. To facilitate safe ongoing use of the company's products, the company has provided customers with clear sanitizing and disinfecting procedures for the NeuroStar TMS Therapy system.

Clinical associations such as the Clinical TMS Society are similarly providing guidance to practitioners on delivery of this important therapy in a manner that is protective of both patients and practitioners. At this time, it is not clear when practices that have suspended or curtailed in-person patient treatments will begin to restart patient treatments utilizing the pandemic TMS and patient treatment protocols. In the short term, we expect that our capital equipment sales and treatment session revenues will be materially impacted by this pandemic as customers are deferring capital purchase decisions, and new patient treatment starts and system utilization have declined compared to our pre-COVID-19 projections.

In the first quarter, total revenue was $11.5 million, down 10% versus the prior-year quarter. During the first 2 months of the year we were on track to hit our previously issued revenue guidance for the quarter. Beginning in mid-March, as the spread of COVID-19 and related stay-at-home orders accelerated in the U.S., we started to see a significant decline in both new system sales and treatment session volumes. Despite our belief that TMS treatment is a medical necessity for the treatment of depression, system sales slowed and various levels of shelter-in-place initiatives to turn patients from seeking treatment and cause some customers to temporarily reduce or cease providing TMS Therapy.

As a result of both the recent management transition and the anticipated impact of COVID-19, the company implemented a number of steps to adjust the size of the business with a focus on both near- and long-term business continuity. Even before COVID-19, we were evaluating the company's commercial model with the goal of rightsizing our organization. Prior to the restructuring implemented on April 8th, the company had 213 employees including a 152 in the sales and marketing organization. After the restructuring, which involved layoffs, furloughs and spending decreases, the company has a 117 employees, of which 74 are in the sales and marketing organization. It was a difficult decision to reduce staffing but in doing so, we believe the company is in a far better position to weather a prolonged impact of the pandemic on our business and come out successfully.

We also reduced our marketing spend and delayed certain projects to reduce expenses and conserve cash. The full financial effect of these changes will emerge in the third quarter of 2020. We now project operating expenses in the second half of 2020 to range from $25 million to $27 million. This represents a projected reduction of our operating expenses in the second half of 2020 of approximately one-third compared to the first half of the year.

It is our belief that the company can maintain industry leading customer service with fewer people and more efficient processes. Given the restructuring and the ongoing economic disruptions caused by the COVID-19 pandemic, our priorities have shifted accordingly. We had previously calibrated our commercial organization using a traditional sales representative productivity model, where the majority of the growth in the business was driven primarily by adding BDM to drive system placements and adding MPCs and CTCs to improve system utilization.

With the current revenue pressures along with the shift in our customer base to a higher mix of 'TMS-only providers', who have unique buying preferences and system utilization, we now believe that we can support the future growth of the business with this realigned commercial organization.

As it relates to our geographic expansion efforts, we have previously indicated that we will continue to focus exclusively on the opportunity that exists in Japan. That strategy remains unchanged, as we still view Japan as a medium-term growth driver for the business. While our expectations for the revenue contribution from Japan for this year were not initially significant, we have started to see a negative impact from COVID-19, similar to what we are experiencing in the U.S. We will continue to monitor the situation alongside our distribution partner Teijin with our goal of anticipating and appropriately reacting to changing conditions in Japan.

Lastly, as to our indication expansion efforts, we are continuing dialog with the FDA regarding appropriate study designs for demonstrating efficacy in treating bipolar disorder and potentially other indications.

Before shifting to a financial review, I would like to briefly comment on the limited duration stockholder rights plan that we recently announced. The Board believes that the Company's current trading level does not reflect Neuronetics' inherent value or the potential of our products and strategy execution. Given the share price dislocations created by an extremely turbulent market, the Board of Directors adopted the rights plan to protect all shareholders' best interests. The rights plan is designed to guard against opportunistic tactics to exert control over the company during this period of economic uncertainty and market volatility, protect long-term shareholder value, and ensure that all of our shareholders receive fair and equal treatment in the event of any proposed takeover of the company. For further details regarding the rights plan, please review the current report on Form 8-K filed on April 8, 2020.

Now shifting gears to a financial review, total revenue for the first quarter of 2020 was $11.5 million, a 10% decrease compared to first quarter 2019 revenue of $12.7 million. From the beginning of the year until mid-March, we were on track to meet our previously announced guidance of $13.5 million to $14 million. Starting in mid-March, the COVID-19 pandemic, government-mandated social distancing and the resulting economic turmoil caused a significant drop-off in performance across our business. Our system sales were heavily impacted in late March as many customers deferred or delayed purchasing decisions due to the impact of COVID-19. Nevertheless, our sales team was able to successfully sell 38 NeuroStar systems in Q1, 2020, compared to 43 systems in Q1, 2019.

Similarly treatment session volumes, both from ongoing treatment and new patient starts, declined substantially beginning in mid-March as shelter-in-place orders and other similar restrictions were put in place throughout the United States. To provide some context on the magnitude of the decline, we are going to share some operating metrics that we typically do not disclose and do not anticipate providing on an ongoing basis.

In March, we saw 21% year-over-year decline in per-click treatment session volume even though the COVID-19 disruptions did not substantially impact our business until the second half of March. New patient starts across all of our customers fell by an average of over 55% during the final 2 weeks of March as compared to the average weekly run rate during January and February.

The trends that we experienced in late March continued into April. Total revenue for the month was down approximately 45% versus April of last year. Total U.S. capital revenue was most significantly impacted from a year-over-year perspective, down approximately 80% as customers continued to defer or delay purchasing decisions. Within the treatment session portion of the business, we saw continued year-over-year slowdown in April with total treatment session revenue down approximately 33%. The decline was primarily driven by a significant increase in per-click treatment session volumes.

The U.S. NeuroStar Advanced Therapy system revenue for the first quarter of 2020 was $2.6 million, a decrease of 23% versus first quarter 2019 revenue of $3.3 million. The decrease was primarily driven by fewer NeuroStar system sales as well as lower other revenues related to HP coil revenue in the first quarter of 2020. We expect that average selling prices will fluctuate based on the mix of capital sales and sales-type leases as well as underlying pricing trends.

In the first quarter, NeuroStar capital revenue was $2.4 million, a decrease of 18% compared to first quarter 2019 revenue of $2.9 million. During the quarter, we saw our active installed base increase by 20% to 1,119 units, a net increase of 188 units from the first quarter of 2019 and a net increase of 34 units sequentially. As a reminder, the active installed base includes capital units sold, sales-type leases and operating lease units.

In the first quarter, US operating lease revenue was $155,000, a decrease of 15% compared to the prior-year quarter. Due to the accounting change that went into effect in 2019, we don't currently expect to install any new systems under operating lease agreements and thus this revenue number will eventually go to 0 as the terms of these operating leases expire.

In the first quarter of 2020 other U.S. NeuroStar Advanced Therapy system revenue was $29,000, a decrease of approximately 80% over the prior-year quarter as we saw a significant decline in the number of treatment coil upgrades purchased during the quarter.

Turning to U.S. treatment session revenue, U.S. treatment session revenue was $8.2 million for the first quarter of 2020, a decrease of 7% over the prior year quarter. The decrease in treatment session revenue was driven by a decline in average revenue per active system, largely caused by a material reduction and per click treatment session volume during March, caused by COVID-19. During the quarter, average revenue per active system was approximately $7,600, a decrease of 22% from the prior year quarter primarily driven by a 16% year-over-year decrease in U.S. treatment session revenues during March, being spread over a much larger active installed base during the first quarter of 2020.

Gross margin for the first quarter of 2020 was 75.5% compared to first quarter 2019 gross margin of 77.9%. The decrease was the result of lower blended NeuroStar capital system ASPs as well as lower per-click treatment session volumes during the quarter. Operating expenses during the first quarter of 2020 were $19.1 million, an increase of $2.1 million compared to $17 million in the first quarter of 2019. The increase was primarily driven by sales force, higher product and clinical development expenses, as well as management transition costs.

Net loss for the quarter -- for the first quarter of 2020 was $12.6 million or negative $0.68 per share as compared to first quarter 2019 loss of $7.5 million or negative $0.42 per share. EBITDA for the first quarter of 2020 was negative $10.5 million as compared to the first quarter of 2019 EBITDA of negative $6.4 million.

Moving to the balance sheet, as noted earlier we have put in a significant amount of effort aimed at ensuring that we have adequate capital resources and liquidity to support the business over both the near and long term. As of March 31, cash and cash equivalents were $63.6 million. On April 27, we disclosed that we had applied for and received a $6.4 million loan from the Paycheck Protection Program. The intent of the PPP is to help small businesses, like Neuronetics, and their employees weather the COVID-19 pandemic and the business-closure mandates enacted through the US. Neuronetics intended to use the PPP loan proceeds for exactly these purposes.

Due to questions concerning the eligibility of public companies similarly situated to the Company, the Company will repay its PPP loan on or before May 7, 2020. Frankly, it's a shame. The PPP could have provided an important bridge to companies like ours that have been severely [impact] by COVID-19 and lacked access to other forms of liquidity. The PPP loan would have benefited our employees and partially mitigated the significant disruption that COVID-19 has had on our business.

Beyond conserving cash, we are significantly reducing operating expenses. The Company now estimates operating expenses for the full year 2020 to be in the range of $58 million to $60 million, compared to the previously issued guidance of $76 million to $78 million. Based on the restructuring of the business and the realignment of our strategy, we expect operating expenses to be in the range of $12 million to $14 million per quarter. [At] these levels, we now believe that we are likely to achieve operating-income breakeven at revenue of $18 million to $20 million per quarter.

Looking into the balance of 2020, given the ongoing disruption caused by COVID-19, we withdrew our full-year 2020 revenue guidance in early April. With substantially all of our revenues generated in the US, our revenue performance during the remainder of the year will be driven in large part by the cadence of reductions and eventual elimination of COVID-19-related stay-at-home orders and social-distancing restrictions throughout the Country.

Q2 capital-equipment placements will be highly correlated with new and existing customers' willingness to expand their TMS service capabilities during the COVID-19 pandemic and their abilities to secure financing through third-party lenders. We will continue to drive revenue from treatment sessions where practices are actively treating patients, but we acknowledge that the volume of treatment sessions being purchased is materially lower than we would typically see. Based on these expectations and our April results, we expect our second-quarter revenue to be down materially, both sequentially and year over year.

Once restrictions have been eased, we believe there is the potential for a return in demand for NeuroStar Advanced Therapy in the back half of the year. There will not only be a backlog of patients who have not been able to access treatment during the quarantine who will seek it, but we believe it is entirely possible to see a spike in new patient starts in response to the intense strain put upon many Americans during this period. Any such increased demand for mental health services should help to keep psychiatric practices and providers in good economic health. Like these customers, we are in a good position to help a potentially growing number of MDD patients as they become suitable for TMS, making our therapy more important than ever.

With that, I would like to open up the line for questions.

(Operator Instructions) Your first question comes from the line of Margaret Kaczor from William Blair.

Maybe, first, to start out, we can dive into the sales and marketing spend and the changes you guys are making there. So first, can you give us details in terms of how many BDMs do you have as well as on NPC CTCs and whether you're keeping that structure or not?

We are maintaining that structure. I would say the most significant change we have made to the sales organization was integrating those 3 functions vertically. Prior to early March, we had a different management structure. Now we feel going more vertical with BDMs, NPCs and CTCs under the same manager was the more efficient approach and extremely timely, given the environment we're operating in. The specific numbers, I don't think of that relevant at this point, but we do -- we will be maintaining that same type of structure and support to our customers.

Okay. Yes. So part of it is the impact of what that means for kind of 2 types of accounts that you guys have, so you referenced focusing primarily on those TMS-only accounts. But on the same token, we've seen a little bit of pressure on the legacy accounts over the last few quarters. So maybe you can give us a sense of how you're strategically changing the focus on that as well as the percentage of sales that those accounts could represent, will be represented?

Sure. Yes, in 2019, we did see a significant shift in sales to the TMS-only service partners and we are forecasting that to continue into 2020 and 2021. These entities are very self-sufficient and don't need the level of support that stand-alone practices or psychiatrists require. So we are able to redirect some of our BDM time to our traditional customer base. From an MPC and CTC perspective, it's pretty much the same type of model. Again, those service providers are again self-sufficient and have great business models and are able to conduct their business without a lot of our support. Obviously, we do offer training and other types of support to those partners. But they are less reliant on the Neuronetics' offerings.

Okay. I think the question for me is more focused on the legacy accounts. So those would be the accounts that I assume maybe were closed a little bit more or maybe aren't giving as much TMS treatment during this environment. So between that and maybe less support potentially coming to them, does that mean that that segment can grow or is it going to decline for a bit while you guys refocus back on those TMS-only accounts?

Yes. During our last conference call, Malgorzata, we did indicate that we had a program in place to address those legacy accounts. We highlighted the top 150 and our MPCs have been working with each of those legacy accounts. Again, a lot of these operational issues that led to some of those volume declines were, I would say, easily addressed by our MPC team and hopefully they can get those legacy accounts back to the volumes where they were prior to that drop-off that we saw in Q3 and Q4 of '19.

Your next question comes from the line of Marie Thibault from BTIG.

Just a follow-up on Margaret's question, I'm curious what you saw in the first 2 months of the quarter when things were a little bit normal in terms of the success of efforts to increase utilization of the legacy accounts. Any color you can give us there?

Not specifically, but again as we communicated on the call, the expectations as late as March 13, where we were going to achieve the guidance that we had previously offered at $13.5 million to $14 million, a lot of the inputs from the field, both from BDMs and MPCs were that at least until that point the impact on from COVID-19 wasn't really material, and then all of a sudden, that last 2.5 weeks of March volume declines were extremely material. I will say that the program that we put in place was still relatively early in Q1. So it would be difficult to forecast those results but we did have a well-formalized program to again get those volumes back to where we saw them in the early part of 2019.

Okay, sure. And then with a couple of states or some states opening last week, are you seeing any customers in those geographies? I guess any early color you can tell us about centers reopening or treatment session volumes? And interested by the idea of an uptick and more patients coming out of this quarantine and needing the mental health help, are you positioning for any new marketing efforts around that with your customers? Anything you can tell us about that would be helpful.

So regarding the states that are starting to ease the restrictions, yes, our customers that are seeing those easings are starting to restart the business. Speaking with our TMS-only providers, they really haven't skipped a beat, they've really been pushing to maintain their treatment session volumes. I think the one area being hardest hit still is the Chicago area that's slowing a little bit of progress there. But all in all, I think you're seeing a general slow reopening of those centers, the 33% that had ceased treatment. One of the key indicators that we look at -- so we track sales, utilization, but also the MT or motor-threshold starts; and we did see a nice uptick towards the end of April that would indicate to us that it's not a 100% correlated, but it is correlated to the new patient starts, which you would think would lead to a bit of a recovery as we head into May and June. So we are seeing some signs that we are gradually starting that uptick.

And then anything on marketing for new patients?

Yes. So we have started some, I would say more strategic focused marketing efforts. Again, we don't want to get too far ahead of ourselves, again trying to preserve cash and being unsure of the length and the magnitude of COVID-19, but we did see in April the incidence of depression scripts spiked up significantly and 75% of those scripts were for new patients. So following the treatment protocol of TMS being indicated for one failed drug, you can envision a potential increase in TMS treatments towards the latter half of 2020.

Your next question comes from Matthew O'Brien from Piper Sandler.

I guess just to start with your various customers out there, you've got the TMS-only providers, the chains, you've got the independent providers as well. Can you just talk about their ability to ramp back up from a capital perspective to get back going? I know in the past you've had some--one of your chain providers actually gave your systems back, is that a potential headwind we could see if some people decide that they just can't make a go of it in this environment that we could see over the next several quarters? So just how the things go out here from a patient treatment perspective as been to Q3 and then capital perspective, is it more expecting very little capital sales Q2, Q3, maybe a little bit more in Q4? Just that general ecosystem, how do we think about things progressing there?

Yes, I think our existing customers will be in the best position to restart since they already have the capital in place. Again, depending upon the duration of some of the social distancing and stay-at-home orders some of the lower-volume customers could be impacted more than others. I think one of the fallouts of this pandemic could be some consolidation depending upon the customers' both economic and just overall willingness to continue with TMS. I just think it's too early to tell.

We do have a number of third-party financing partners that are still willing to lend to our customers. And so at least from that financing perspective, that hasn't dried up at this point and I know our sales team is still out there, pushing for transactions and selling as many NeuroStars as they can. So I do think the environment will likely change. Again, it really depends on how long this last and what the economic impact is to our customers. But I was going to say the TMS-only partners, they probably are and the larger facilities are in the best shape to come out of this even stronger.

Okay. So I know you're in cash preservation mode, but you're much better capitalized than many of your other competitors in this space. And so I'm curious, you've got flexible financing plans available for customers. So is there an opportunity with some maybe wounded competitors to get some of that share away from them in this environment, maybe near term and maybe that being a little bit of a backstop for our system placements goal?

I mean that possibility exists. And so Matt, making these difficult decisions and reducing our workforce, it certainly wasn't easy. But Andy and I, as soon as we saw some of the indicators in mid-March really start to decline, knowing that 2 of our more valuable assets were our commercial team and our strong balance sheet, we really wanted to make sure that we were in a great position to come out of this whenever the end of the pandemic comes. And so yes, part of that strategy, could be maybe being a bit more aggressive on the sales side, using that strong balance sheet to our advantage when it comes to sales and understanding that customers are making their purchasing decisions, not only on our best-in-class technology but also on the longevity of the company, and who is likely to survive and thrive once this is all behind us. So yes, that is certainly a possibility.

Okay. And then just one more from me if you don't mind, just the reductions across the organization, we're a little bit steeper than I was expecting, again I know you guys are trying to preserve cash, the smart move but again, a little steeper than I expected. So as we come out of this, what kind of grower is Neuronetics? And how do you support your customers? Because a big part of the store really is your customer support and everything else like that; so what happens to the organization from here and what kind of grower do you look like?

I really think part of that will be dictated by the level of economic recovery. Similar to a lot of industries, there's just a lot of unknown as to what the fallout will be. But the one thing we did do was in -- and share our financial ability to weather this storm and I agree we were, I would say, extremely aggressive with what we did in late March and early April. And it really was to preserve the company. You know, assuming things got back to normal or close to what normal was pre COVID, I think the company again with would be growing along the lines of what we previously communicated. And again with the increase in depression prescriptions during March and April, it is reasonable to think that some of that increase will eventually head towards TMS Therapy.

Your next question comes from Cecilia Furlong from Canaccord Genuity.

I just wanted to ask again just about your sales force specifically from a territory perspective and from a BDM perspective, kind of what you're seeing now after the reductions, but then more so longer term, what you see as kind of coverage-at-scale level, especially given your new kind of focus within just HVT?

So the territory realignment is still a work in process at this point. We still view the territory alignment based on opportunities, density, the amount of coverage that BDM can appropriately cover as well as a bit of productivity in the back of our minds. We do think that once those territories are fully aligned that the BDMs will have the opportunity to both make money and also service the accounts that they're assigned.

So at this time and again -- with the increase in TMS-only providers, some of that opportunity within those territories really is deflected to those partners. And so again, we think with the vertical management integration and that support structure our BDMs will be able to be more efficient and also more productive, and we do reserve the right or ability to add back resources as the economic environment unfolds.

This really was, I would say, a very aggressive action to secure our balance sheet, but we will not jeopardize the service offerings that we have in place for our customers. And so if we see strains or pressures within the commercial organizations, we do reserve the right to add those resources to assist our customers.

Great. And if I could also ask just within the reduced spending this year, just how you're thinking about R&D, specifically the NextGen system and your pipeline initiatives -- bipolar being the primary one -- but just how kind of these reductions may play out on timelines in that perspective.

Yes. From an R&D perspective, the projects that we had in place at the beginning of the year are still in place. I will say we did slow some of the spending in R&D. Again and late March in April, it's the duration and the severity of COVID that we didn't fully understand. So we didn't think it was prudent to go out and kind of execute on our original plan that was in place what we had our original 2020 plan in place. But that's still exists and is an ongoing project.

Regarding the other indications, again, we've communicated in the past and we continue with discussions with the FDA. Obviously the pandemic has redirected some of the FDA resources. Honestly, they have a lot more on their plate with COVID-19 than worrying about how we're going to structure our clinical trial with bipolar, but those discussions do continue, and we are hopeful and optimistic that we can come up with a collaborative resolution and see where that heads in the future.

This concludes today's question-and-answer session. I will now turn the call back to Mr. Furlong for any closing remarks.

Thank you all for joining the call today. We look forward to updating you on our progress on our next quarterly earnings call. Please stay healthy and have a great day. Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, you may now disconnect. Speakers please hold.