Brainsway: Lockdowns Are Hiding Progress In The Business (NASDAQ:BWAY)

Brainsway (NASDAQ:BWAY) appears deeply undervalued, given its strong unit sales, clear path to profitability, and large addressable market. Although Brainsway is not currently the market leader, they have arguably superior technology to competitors and are focused on obtaining clearance to treat a wider range of conditions. As revenue recovers from the impact of COVID-19 lockdowns, the company’s share price could appreciate significantly, particularly with potential catalysts like insurance reimbursement approval for the treatment of Obsessive Compulsive Disorder (OCD) and Food and Drug Administration (FDA) clearance for smoking cessation.

Transcranial magnetic stimulation (TMS) is primarily used as a second line treatment for patients with Major Depressive Disorder (MDD) who repeatedly fail to respond or incur intolerable side effects during other treatments. MDD has a massive societal burden with an estimated economic impact in the U.S. of $210 billion per year. The current first line treatment for MDD is pharmacotherapy/psychotherapy and is typically only followed by neurostimulation if there is continued poor response or side effects. Approximately 51% of patients treated for MDD do not respond to the first round of treatment and hence are potential candidates for TMS.

Table 1: MDD Population in the U.S.

(Source: Created by author using data from Greenbrook)

Despite TMS’ efficacy and safety, it is still a relatively narrowly adopted treatment in comparison to Electroconvulsive Therapy (ECT). This appears to be changing slowly though with the number of TMS service providers expanding and insurers becoming increasingly willing to provide reimbursement.

Table 2: Comparison of MDD Treatments

(Source: Created by author using data from Greenbrook)

TMS’ future is largely dependent on whether it can gain widespread acceptance as an alternative to the more widely used ECT. Interest in ECT has been in decline for decades due to negative perception amongst patients and increasing availability of relatively effective pharmacological treatments.

Figure 1: Search Interest for TMS and ECT

(Source: Created by author using data from Google Trends)

Less than 8% of American psychiatrists use ECT and worldwide, it has been estimated that about one million patients receive ECT annually. Treatment prevalence varies significantly across countries though, with ECT most common in places like the U.S. and parts of Europe.

Figure 2: Prevalence of ECT Across Countries

(Source: NCBI)

In comparison to ECT, TMS still has very low market penetration with an estimated 30,000 patients treated annually. There appears to be a patient preference for TMS over ECT though, with most patients who receive ECT reporting that they would have preferred TMS if it was financially available, even knowing that the therapeutic success rate is lower. This is likely a result of the relatively small side-effects of TMS in comparison to ECT.

Figure 3: Brainsway Safety Data

(Source: FDA)

More widespread adoption of TMS is not just dependent on patient demand though, it must demonstrate efficacy and cost effectiveness to gain support from regulators and insurers. Studies indicate that the benefit to cost of TMS is comparable to ECT, although significantly lower than pharmacological treatments like Selective Serotonin Reuptake Inhibitors (SSRIs). The Incremental Cost Effectiveness Ratio (ICER) per Quality Adjusted Life Year (QALY) for TMS is well within the 50,000 to 100,000 USD range used by the Institute for Clinical and Economic Review in the U.S. to assess drug cost-effectiveness.

Table 3: ICER per QALY for Different MDD Treatments

(Source: Created by author using data from medpagetoday, medscape, NCBI)

TMS can also be used to treat other conditions like OCD, which Brainsway has received FDA clearance for in the United States. Similar to MDD, TMS is likely to be used as a second line treatment for OCD patients who do not respond to therapy or drugs. The estimated health care costs of OCD are even higher than MDD, so TMS may be a cost-effective treatment, although no data currently exists for this.

Table 4: ICER per QALY for Different OCD Treatments

(Source: Created by author using data from NCBI)

Brainsway

Brainsway is an Israeli company founded in 2003, which is focused on the development and sale of neuromodulation devices for the treatment of psychiatric, neurological and addictive disorders using their proprietary Deep TMS. Deep TMS works by stimulating neurons using magnetic pulses and consequently modulating the physiological activity of the brain.

Brainsway is still in the early stages of commercializing their technology having only received FDA clearance to treat MDD in 2013 and FDA clearance to treat OCD in 2018, although they have CE mark for additional indications including Alzheimer’s disease, post-traumatic stress disorder, Parkinson’s disease, multiple sclerosis, autism and bipolar disorder. They currently have an installed base of 567 Deep TMS units and 185 OCD coils and primarily target sales to psychiatrist offices, offering fixed fee, risk share and outright sale business models. It appears that Brainsway will utilize the risk sharing model for additional indications with the likely goal of capturing more of the revenue from treatments. This creates the potential for significant revenue growth as treatments for additional indications are adopted across the existing installed base.

Figure 4: Brainsway Sales Models

(Source: Brainsway)

Brainsway’s future avenues for growth include expanding geographically, gaining regulatory clearance to treat more conditions and further developments to the technology. Geographical expansion efforts include India (57 million depression patients), Europe (25 million depression patients), China (55 million depression patients), Asia-Pacific and Japan (5 million depression patients).

Planned improvements to the technology include a multi-channel stimulator and Deep TMS with electroencephalogram (EEG). A multi-channel stimulator would allow different parts of the brain to be targeted with different stimulation parameters, potentially improving the efficacy of the treatment or allowing multiple conditions to be treated simultaneously. EEG is a test used to find problems related to electrical activity in the brain and would help in targeting TMS treatments in real-time.

Figure 5: Brainsway Closed-Loop TMS

(Source: Brainsway)

COVID-19

COVID-19 lockdowns had a large impact on Brainsway’s business with April and May being particularly quiet months for treatment centers. Brainsway estimated that only approximately 60-75% of centers remained opened through lockdowns and patient visits at open centers were also down. Many clinics are now returning to normal with an estimated 80-85% open and patient numbers also increasing. Although the risk of further lockdowns remains, Brainsway believes this risk is moderate as clinics have now instituted measures like social distancing, cleaning and disinfecting the equipment between sessions to mitigate the impact of COVID-19 going forward.

Sales during this period have been hampered as customers have had difficulties finalizing orders and accepting deliveries of ordered systems. In addition, Brainsway has been unable to deliver the onsite training required before treatment centers can begin using their machines. The impact of this has primarily been delayed orders with little evidence of cancelled orders though. Towards the end of the second quarter, Brainsway observed an increase in orders, which is likely to consist of a mixture of new orders and fulfilling delayed orders.

Brainsway has implemented a range of initiatives over the last few months to try and reduce costs while maintaining sales momentum. This has included furloughs, reduced salaries, and reduced R&D activity. Physicians have been hesitant to make capital expenditures over the past few months, and Brainsway has been offsetting the impact of this with aggressive lease tactics. This has been more targeted around structuring leases so that payments are delayed rather than reducing prices. In addition, Brainsway has continued to promote TMS through virtual mental health conferences and digital physician education programs.

Reimbursement

MDD

Brainsway continues to extend reimbursement coverage for the treatment of MDD, gaining coverage from Humana (NYSE:HUM) in the first quarter (approximately 20 million covered lives) and PEHP in the second quarter (approximately 170,000 covered lives). There is also a trend toward payers relaxing the reimbursement requirements for patients to allow for Deep TMS coverage after failing just two prior antidepressant medications rather than the four failures previously required. Health Care Service Corporation (approximately 16 million covered lives) continued this trend in the second quarter following similar reductions from Cigna (NYSE:CI) and Aetna in previous periods. This change gives patients earlier access to covered TMS treatments and should help to increase the market for TMS. It also indicates increasing acceptance of TMS as an effective treatment for MDD by insurers.

OCD

Brainsway is working with payers to gain reimbursement for OCD and recently submitted the results of a 192 patient post-marketing clinical study to a peer reviewed journal, which it expects to be published in early Autumn. This data showed that approximately 58% of OCD patients benefited from treatment, with benefits generally beginning within about 18 sessions. Brainsway has also been investigating extended treatment courses with results showing a continued reduction of OCD symptoms, which raises the prospect of extended treatment protocols.

Although Brainsway is yet to receive reimbursement coverage, some patients have been covering treatment costs themselves, and some centers have been able to get reimbursement after going back to the insurance company a number of times. Brainsway have not given guidance on reimbursement timing, but Greenbrook mentioned on their earnings call that they don’t expect TMS treatment of OCD to gain reimbursement in 2020.

Pipeline

Brainsway continues to seek clearance for new indications for their TMS system which has the potential to expand their addressable market and strengthen their competitive position. They are currently working with the FDA to gain clearance to use TMS to assist with smoking cessation, and they aim to initiate at least one clinical trial by the end of the year, likely for opioid abuse.

Figure 6: Brainsway Pipeline

(Source: Brainsway)

Smoking Cessation

Following final positive results from their multicenter smoking cessation study Brainsway submitted a 510(K) application to the FDA in April, and discussions are ongoing. If FDA clearance is received, Brainsway expect to execute a controlled market release in early 2021.

The trial enrolled 262 eligible subjects randomized into two groups: an active treatment group with TMS targeting addiction-related brain circuits, and a sham (placebo) control group. Participants had smoked for 26 years on average, and most had unsuccessfully attempted to quit smoking multiple times.

The primary endpoint of the study was a comparison between the two groups of the four-week continuous quit rate (CQR), representing abstinence during a consecutive four-week period. Of the 168 participants who completed the study, CQR was 28.4% in the treatment group compared to 11.7% in the sham group (p=0.0063). An important secondary endpoint was the reduction in the number of cigarettes smoked. At baseline, the average number of cigarettes smoked per week was 132 for the active group and 127 for the sham group. By the sixth week of the study, the average number of cigarettes smoked per week declined to 31 for the active group and 48 for the sham group (p=0.0125).

ADHD

Brainsway recently announced positive results from their feasibility study of Deep TMS for the treatment of adults with Attention Deficit Hyperactivity Disorder (ADHD). The results showed a statistically significant improvement in patient-reported assessments of inattention along with a significant increase in activity within the dorsolateral prefrontal cortex, a part of the brain previously shown to have reduced activity in adults with ADHD.

The study enrolled 75 adults, ages 18-60 years, with ADHD who had not previously received TMS. The study included one treatment group targeting the right prefrontal cortex, a second group targeting the left prefrontal cortex and a control group with a sham coil. Participants underwent a treatment phase consisting of 15 daily sessions over three weeks. During each session, subjects performed six minutes of cognitive training. fMRI scans were conducted before and after the treatment phase. Patients underwent clinical evaluation at screening, after the three-week treatment phase and then at four and eight weeks after completion of the treatment phase, which included symptom assessment using validated questionnaires, and a full cognitive assessment, including evaluation of memory, executive function and attention skills.

Significant improvements were observed in the Inattention/Memory Problems subscale of the Conners’ Adult ADHD Rating Scale (CAARS) self-report questionnaire, in both right and left treatment arms compared with the sham control group (p=0.033). fMRI brain activation was greater for the right stimulation group and was associated with larger symptom improvement. The response rates (defined as at least a 25% reduction in the CAARS observer questionnaire) measured one month following treatment were 26%, 23%, and 18% for the right, left and sham arms, respectively. These differences, however, were not statistically significant in the limited sample size of this feasibility study.

A prior study from 2016 compared Deep TMS targeting the right prefrontal cortex with focal TMS using a figure-8 coil or sham TMS. In that study, the percentage of patients who showed a reduction of 30% or more in the CAARS observer questionnaire was 33% in the Deep TMS group, 8% in the sham group, and 15% in the focal TMS group.

PTSD

In a recent Brainsway study, Deep TMS did not demonstrate sufficient efficacy relative to sham controlled treatments of PTSD patients. Based on this interim analysis, Brainsway decided not invest additional resources in continuing the study but are considering future PTSD studies using alternative parameters.

Subjects in the study received either 12 Deep TMS or sham treatments over the course of four weeks, with two booster sessions at five weeks and nine weeks. Treatments were administered following tailored symptom provocation in the form of a pre-prepared audio recording of a script of the traumatic event. The primary endpoint was a comparison between active and sham treatment groups of the change in CAPS‑5 score from baseline to week five.

The interim analysis was conducted on the first 87 eligible subjects who completed the study protocol, and it revealed a significant reduction of PTSD symptoms in both the active and sham groups but insufficient difference between the groups. The clinical benefit observed in the sham group may possibly be explained by the brief exposure therapy as part of the tailored provocation.

Opioid Cessation

There is currently an opioid overdose epidemic in the U.S. which continues to grow. TMS is a potential treatment to assist addicts with cessation and may be able to lessen the impact of this crisis.

Figure 7: Opioid Drug Overdose Death Rates

(Source: Alta Mira)

Brainsway is a participant in the FDA Innovation Challenge: Devices to Prevent and Treat Opioid Use Disorder and will work directly with the FDA to accelerate the development of TMS as a treatment for opioid addiction. Brainsway is planning on beginning clinical trials for the treatment of opioid addiction within the next 12 months. Brainsway’s positive smoking cessation results could potentially point towards positive results in an opioid cessation study as smoking cessation is associated with long-term abstinence following treatment for opioid use disorder, suggesting a strong link between the neurobiology of nicotine and opioid addiction.

Competitive Advantages

Brainsway has a number of competitive advantages which I believe will help it to maintain or grow its market share and in time reach a reasonable level of profitability.

Patents – Brainsway has a differentiated technology that is protected by a number of patents and there are both theoretical reasons and clinical data which support this technology being superior to competitors. Competitors refute this technology advantage though, and the clinical data is not definitive.

Regulation – Vendors need regulatory clearance to market their devices, and this is a time consuming and expensive process. Brainsway already has clearance for two indications and is seeking approval for a third while obtaining clinical data to support clearance for additional indications, making it increasingly difficult for new entrants and smaller companies to compete.

Economies of scale – There are significant economies of scale in areas like manufacturing, sales and marketing and R&D, which is evidenced by Brainsway’s operating leverage. Brainsway is not the market leader though and may be at a cost disadvantage to Neuronetics (NASDAQ:STIM). As one of the market leaders, Brainsway likely has a cost advantage over most competitors.

Economies of scope – Brainsway is more aggressively pursuing clearance for a range of indications than any other company, and additional indications can be treated by swapping helmets on the unit. Customers have an incentive to purchase Brainsway units so they can treat the maximum number of patients.

Financial Analysis

Despite a recent decline in revenue due to COVID-19 lockdowns, Brainsway’s business continues to perform strongly. Over the past 12 months, the installed base of TMS units increased by 24%, and the installed base of OCD coils increased by 28%. The impact of lockdowns on revenue has been somewhat muted by the fact that approximately 50% of revenue comes from 3 to 4-year leases of the Deep TMS units.

Figure 8: Brainsway Revenue

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

Figure 9: Brainsway Revenue Growth

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

Brainsway continues to move towards operating profitability as a result of operating leverage as the business scales. The company has been able to minimize losses despite the impact of lockdowns through a cash preservation program enacted in late March with the goal of managing spend without impeding growth efforts. This included a number of short-term measures like furloughs and salaries reductions which are expected to reverse in future periods. Based on past operating leverage and comparable companies, Brainsway should achieve operating breakeven at an annual revenue level of approximately 80-100 million USD. This is similar to Neuronetics’ projection of operating breakeven at approximately 80 million USD annual revenue.

Figure 10: Brainsway Profit Margins

(Source: Created by author using data from Brainsway)

Figure 11: Brainsway Operating Expenses

(Source: Created by author using data from Brainsway)

Figure 12: Brainsway Operating Leverage

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

Greenbrook TMS

Greenbrook operates 124 TMS NeuroHealth Centers across 15 states in the United States. The company was founded in 2011 and is growing rapidly through a mixture of organic growth and acquisitions. To date, they have treated approximately 11,000 patients with over 420,000 treatments.

Greenbrook believes that the slow adoption of TMS is the result of a poor alignment with traditional psychiatry practices which can be alleviated with a specific TMS service channel. If this is true, Greenbrook could be expected to accelerate adoption significantly as they implement patient acquisition and conversion tactics on a large scale. This should ease the burden of educating customers and patients for TMS vendors and could add weight to the case for expanded reimbursements.

Figure 13: Greenbrook Value Chain

(Source: Greenbrook)

The TMS service provider landscape currently consists primarily of individual psychiatrists with a TMS device in their office as well as a small number of multi-location psychiatric practices or behavioral health groups. The next largest U.S. TMS provider after Greenbrook has less than 30 locations versus Greenbrook’s 109 centers. Greenbrook is expanding their footprint rapidly and now has treatment centers in states with a total population of approximately 160 million.

Figure 14: Number of TMS Centers

(Source: Greenbrook)

Figure 15: Number of New Patient Starts

(Source: Greenbrook)

Figure 16: Number of TMS Treatments

(Source: Greenbrook)

Although there are 7 TMS devices currently cleared by the FDA, Greenbrook currently only source devices from Neuronetics, Brainsway, and MagVenture. The impact of Greenbrook on TMS vendors is somewhat uncertain in the long run. They are likely to drive awareness of TMS as the best option for second line therapy and increase patient access to TMS, but if Greenbrook were to become the dominant provider, it could lead to lower revenues and margins for manufacturers like Brainsway. A more concentrated buyer group is likely to lead to more efficient sales for TMS vendors at this stage, though.

Competitors

There are a number of companies competing in the TMS market with broadly similar offerings and with a number of them recently receiving FDA clearance, competition is increasing. There is also significant competition from other forms of neuromodulation and from pharmaceutical companies, both of which have significantly greater market penetration.

Neuronetics

Neuronetics is a commercial stage medical device company focused on TMS treatment of psychiatric conditions. Neuronetics received FDA approval for the treatment of MDD in 2008 and has CE mark and approval in Japan.

Neuronetics’ business has been impacted by COVID-19 even more than Brainsway due to their greater reliance on risk sharing in their business model. They believe that May will represent the low point for treatment session volumes for the year though, and by the end of Q2, estimated approximately 80% of customers were open compared to 70% in May. New patient starts were also at a low in early May but by the end of June were approaching the levels seen in January and February. Capital equipment sales effectively stopped in April but increased strongly in May and June, although not to the same extent as system utilization.

During lockdowns, Neuronetics has focused on initiatives like a call center pilot, virtual training, and digital marketing. The call center pilot connects patients who visit the website to a call center operator who can then schedule an appointment with a psychiatrist in their area. Neuronetics is seeing positive results from this initiative and is planning a broader launch later in 2020. Neuronetics has a large direct sales and customer support team than competitors, which they believe is a source of competitive advantage. Going forward, Neuronetics is planning on refining its marketing efforts and coaching customers to help them create their own demand.

In the future, they also plan on expanding geographically and proving their technology as a treatment for other conditions, including bipolar depression and PTSD. Neuronetics recently received Breakthrough Device Designation from the FDA for the treatment of bipolar depression and has submitted initial clinical plans for discussion with the FDA. They are also working on a next-gen platform, which appears to be an admission that their technology has fallen behind Brainsway and MagVenture. Work on this has slowed as a result of COVID-19 though.

Although Neuronetics is the clear market leader, there are indications they are on the backfoot. Competitors have differentiated technology and are progressing with obtaining clearance for a range of indications, but Neuronetics remains focused on sales and marketing rather than improvements in areas like manufacturing, technology, and clinical research.

Neuronetics currently has the largest installed base, but Brainsway is rapidly gaining, which may indicate customer preference for their product. Clinical data also shows that MagVenture’s product is superior to Neuronetics even though it requires significantly shorter treatment times.

Figure 17: TMS System Installed Base

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

Figure 18: MDD Remission Rates for TMS Units

(Source: NCBI)

MagVenture

MagVenture’s TMS technology is FDA cleared and CE approved for the treatment of MDD. MagVenture has FDA clearance and CE approval for their theta burst (TBS) protocol treatment of MDD which reduces treatment times from 20 minutes to 3 minutes allowing significantly greater throughput of patients. TBS utilizes pulses at a frequency that mimics brainwaves, increasing neuroplasticity and allowing effective treatment in a shorter period of time. MagVenture also recently received FDA clearance for the adjunct treatment of OCD with existing therapies like drugs and behavior therapy. MagVenture’s clearance for multiple indications and TBS technology puts them in a strong position to compete with Brainsway.

Figure 19: Search Interest for TMS Vendors

(Source: Created by author using data from Google Trends)

Table 5: Listed TMS Company Comparison

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

Valuation

The market continues to take a dim view towards TMS companies, even predating COVID-19. It is difficult to know what is driving this, given the generally strong financial performance of TMS companies in recent years (excluding the impact of lockdowns) and positive catalysts like an increasing number of indications with FDA clearance, generally positive clinical trial results and increasing support for reimbursement from insurers.

Figure 20: Listed TMS Company Stock Price Performance

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

I have been conservative with my projections for Brainsway but still believe the company is deeply undervalued. Based on a discounted cash flow analysis, I estimate that Brainsway is worth approximately $20 USD per share. The only reason to believe that Brainsway will not eventually reach this type of valuation is if TMS fails to gain wider acceptance and remains a niche service with poor support from insurers. If this were to occur, Brainsway would likely have difficulty scaling its business to the point where it is profitable and hence would have limited value. Based on evidence like increasing patient numbers, increasing numbers of treatment centers and an expanding number of approved indications I believe this scenario is unlikely.

Figure 21: Comparable Company EV/GP Ratios

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

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.

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