Nexstim — Update 25 April 2016

Nexstim is a medtech company using non-invasive brain stimulation for brain mapping and therapy. It sells a system that generates pulses of a high-intensity focused magnetic field: repetitive Transcranial Magnetic Stimulation (rTMS). The diagnostic version of the system enables high precision mapping of brain motor and speech functions (NBS). This is done after a high resolution MRI scan, which shows the individual’s brain morphology. This gained a CE-mark in 2003 and FDA clearance in 2009. These systems are sold in the EU and US with an installed based estimated at over 130 systems. Nexstim is developing a therapeutic version for rehabilitating stroke patients (Navigated Brain Therapy, NBT). In a Phase III study, a February 2016 futility analysis showed that the active and control groups were producing similar, high response rates. Nexstim intends to file a de novo 510(k) in Q216 for a US marketing authorisation for a stroke claim. Other indications could include severe depression, tinnitus, neuropathic pain and memory regain in dementia.

Nexstim was formed in 2000 and has been primarily backed by venture capital. So far, shareholders have invested €55m and the Finnish Funding Agency for Innovation, Tekes, has contributed a €500k capital loan and a €2,697k interest-bearing R&D loan. The last funding (of €5.3m) was in late 2015 and the company has cash to last until Q316. Nexstim is based in Helsinki, Finland, with offices in the US and Germany. It now has 33 employees. The former CEO, Janne Huhtala, left the company on 20 April; the chairman, Martin Jamieson, will act as interim CEO role until a substantive replacement is appointed.

There are two products:

In NBT, the same disposable tracking device and MRI scan data are used to position the coil relative to the brain to deliver a series of magnetic pulses to the wrist extension motor location with a few millimetres reproducibility. While many aspects of NBS are the same as for NBT, they are not interchangeable. NBS offers more extensive diagnostic capabilities and user interface, while NBT houses specific applications focusing on targeting and dose calibration.

Despite a long history of use of various TMS machines and multiple trials over several decades, the robust evidence for rTMS remains limited. A detailed 2014 European consensus statement (Lefaucher et al, 2014) found differing degrees of evidence, Exhibit 3. Note that many other indications have been tested, often in small-scale studies. The area is still developing, however, and a hand-held, user-operated TMS device was FDA cleared in 2015 for migraine pain.

Stroke survivors face multiple challenges. A majority (80%) suffer weakness in one side of the body (hemiparesis). Most stroke patients are given rehabilitation to help regain function, Exhibit 4.

Patients with only upper body disabilities are often assessed using the Upper Limb Fugl-Meyer Assessment (UEFM) shown in Exhibit 5. UEFM quantifies the patient’s limb movements. Each aspect is scored as none (0), partial (1) or full (2); there are 63 parameters (126 points) assessed in total of which 33 relate to motor functions. A total score of 90/126 is assessed as recovery. Nexstim states that it focuses on the 33 motor parameters although published abstracts simply note use of UEFM. There are several other scoring and assessment systems.

In the Phase II, NCT01049802, 29 patients were recruited between three and 12 months after their stroke. All had moderate/severe one-sided upper limb impairment. There were two groups: 19 active and 10 sham treatment. The Phase II study was detailed in a presentation abstract at the International Stroke Conference 2014. The data were being updated in the presentation as the final four patients completed their six-month follow-up after abstract submission. The data, Exhibit 5, showed a 13.8 point improvement in the treated group vs a 7.1 point improvement in the sham group. The reported statistical significance was p<0.05.

The calculated time course (by Edison) of average scores is shown in Exhibit 6 including the six-week treatment period and subsequent one-week, one-month and six-month follow-ups. The sham-treated patients had a higher average baseline score (31.5 vs 23.8 treated). Stroke trials are always variable and the effect of two extra treated and two further strongly performing sham patients narrowed the gap relative to the 2014 preliminary data (based on 17 treated and eight sham patients). The active treatment narrowed the gap by the end of treatment, after which recovery was steady. Note that averages can be skewed in small groups by a few very low or very high scores.2

The definition of a clinical improvement is 4.25-7.25 (see analysis by Page, 2012); Nexstim used a five-point gain as a clinical benchmark, but did not differentiate in assessing outcome scores as patient responses are very variable. We note that the procedure targeted wrist motion so it would be interesting to see if this aspect improved.

Nexstim notes that at six months, 84% of treated patients made at least five points of progress as against 50% of sham patients. This compares to about two-thirds of patients in the active group in the now ended Phase III, where the sham data are stated to be similar. It should be noted that a large subgroup of Phase II patients ceased rehabilitation after the six-week treatment period (nine treated patients and six sham), but the difference was not statistically significant.

The Navigated Inhibitory rTMS to Contralesional Hemisphere (NICHE) trial Phase III study (NCT02089464) recruited 199 patients with two groups: active and sham, Exhibit 8.

The NICHE Phase III trial ran from May 2014 at 12 rehabilitation sites in the US. The trial included two interim futility analyses; the second of these was triggered at the end of February at a point when all 199 patients had been treated. This showed that the trial could not meet its primary endpoint. Management decided to unblind the study with 138+ patients having completed the six-month assessment so having a full data set. Nexstim does not believe that more patient data will improve the case.

It has been disclosed that the NICHE protocol differed from Contrastim in that the sham group was partly active to give the scalp-tingling sensation of treatment. This sham protocol is not disclosed and Nexstim intends to file a patent on it. It is not certain that a treatment protocol patent is enforceable, if granted, but it could stop a direct competitor promoting it. The Brainsway H-coil rTMS system contains a sham coil that generates an “active” sham that feels like treatment. The Neuronetics rTMS system now claims a device to minimise scalp effects (Exhibit 9 below).

At this stage, investors cannot distinguish between an active sham with treatment efficacy, a strong placebo effect or, worse, that both active and sham treatments had little effect relative to rehabilitation. Nexstim believes that it can make a regulatory case for an active sham effect since both groups did better than would normally be expected.

Interestingly, an update (Kakuda 2016) on the large but uncontrolled 15-day protocol being run in Japan found a significant upper extremity response relative to baseline. Two 20-minute sessions of low-frequency stimulation (MagVenture’s system) to the contralesional hemisphere were provided with occupational therapy every day (excluding Sunday). The difference for 1,725 patients on discharge was an average of 4.1±4.2 on the Fugl-Meyer score (46.8 to 50.9). This was below the threshold for clinical significance set by Nexstim, but was statistically significant p<0.001.

The case for treatment rests on several hypotheses, each with various lines of published clinical evidence. Unfortunately, in many academic studies, the sample sizes are small and different trials can be contradictory. This is partly a function of the brain itself, since whereas the general pattern of brain function is constant, individuals will differ and the brain adapts. Management believes that other systems are less reproducible than Nexstim’s navigated technology, but many of these also have sophisticated tracking and use MRI 3D images. Exhibit 9 reviews concepts behind the trial.

Nexstim intends to file for a de novo 510(k) for NBT with the FDA (Exhibit 10). This might take six to 12 months for a review. As highly labour-intensive physical and occupational therapies are currently the only widely used treatments for post-stroke motor disabilities, this may encourage the FDA to allow use. If the application is refused, it is likely to be because the FDA does not accept that the clinical evidence base is yet adequate.

If the FDA approves the indication, Nexstim still has to gain reimbursement and medical acceptance. The indication is already CE-marked in Europe so can be sold now. Further trials are likely to be needed and an economic study required. The treatment of post-acute stroke varies by geography, but typically involves occupational and physical therapy.

In Europe, stroke patients often receive prolonged (up to 60 days) hospital-based monitoring to minimise the risk of recurrence of stroke and to ensure compliance with rehabilitation therapies. The Nexstim system fits neurological department needs very well, but further systems may be needed in the rehabilitation-focused departments, which are less technology orientated.

In the US, Medicare covers about two-thirds of stroke patients (due to age) with the rest having other insurance cover. The US procedure is a short period of acute care in hospital: a three-day stay is needed to qualify for Medicare rehabilitation care. Patients then move to Skilled Nursing Facilities (SNF) for care and rehabilitation as required. Medicare pays the first 20 days fully then there is a co-payment of about $157 per day for another 80 days ($12,560). There is no Medicare care for more than 100 days after a hospital admission. Private insurers, if they cover the procedure, will have their own arrangements but these may be similar. This may create a market gap as SNF locations with occupational and rehabilitation capabilities would not necessarily be the natural place for a sophisticated TMS system like NBT.

In the US, it is also necessary to get Current Procedural Terminology (CPT) codes for reimbursement. The existing rTMS market for depression may offer an analogy. There are two codes for depression: one to set up the treatment, another for repetitive sessions. No national reimbursement is yet available; see the Blue Cross policy, which considers rTMS as investigational. A 2009 economic study in depression assumed a price of $300 per session. However, there is some evidence of end user prices at $400-500 per session or $15,000 for a six-week course. The cost in Europe, where available, is about $319 per rTMS session (Vallejo-Torres 2015).

The business plan assumes a low cost per instrument, to gain placements, of about €80,000 with a cost per use for the disposable tracking system, used for navigation, of €80 (about US$90). This is a significant proportion of a possible $300-overall procedure value. Patients could receive 18 treatments so €1,800 per patient to Nexstim. A provider will also have the device cost and maintenance; systems are stated by Nexstim to have a seven-year working life (€11,500 per year in depreciation), although this may be an overestimate as older systems are still functioning.

Our previous assessment from October 2015 of the market potential was €1.42bn in consumables and €171m in devices at peak (2030) based on the annual incidence of stroke in the US and Europe, adjusted for acute deaths. If the FDA allows marketing and if strong efficacy evidence to can be gained, this forecast could still be valid. However, the potential need for more robust evidence to ensure reimbursement is assumed to push this back till at least 2021. Given the lack of data and uncertain regulatory position, Edison has replaced this model with a more conservative sales projection that does not depend on a specific market. This is discussed under Valuation.

The Navigated Brain Stimulation System (NBS), sold since 2008, has assumed a much greater importance being Nexstim’s only US-approved product. NBS is the only clinical system approved by the FDA for motor and speech mapping prior to surgery; there are also research use systems available as investigational devices. NBS is also CE-marked and Nexstim is the only company with a speech module on the European market, see Exhibit 12 detailing other TMS systems.

Mapping works when a tumour is eloquent, that is it occurs in regions of the brain that enable the individual to interact with and process the world, via motor actions, tool use and speech. Mapping can show that the motor or speech cortex is not directly involved in the lesion, allowing surgery to proceed and remove more tumour mass. To enable speech mapping, a NexSpeech module is added to NBS, which includes a separate monitor, an air-cooled coil and software to map and analyse the speech areas of the brain.

Apart from TMS-based mapping, which is ideally done in advance of surgery to enable accurate planning but can be done intraoperatively, the only alternative is direct cortical stimulation (DCS). DCS involves placing electrodes directly on the brain during the operation, but before lesion resection. DCS speech mapping is a stressful and difficult procedure, as the patient has to be awake during the operation (intraoperative) while electric stimulation is applied to the brain. DCS is performed in only a few locations globally.

NBS has shown to have a beneficial effect on operating decisions regarding the size and location of the operable area. Surgeons are often reluctant to remove brain tissue to avoid damaging the patient further and may not even operate. Mapping removes this uncertainty, Exhibit 11.

Frey et al commented: “The integration of navigated transcranial magnetic stimulation into the surgical workflow crucially improves preoperative planning, patient counseling, and surgical procedures and leads to longer progression-free survival rates and better neurological outcomes by expanding the indications and extent of resection.”

Speech and motor cortex mapping with NBS require auxiliary technologies such as neuronavigators (visualisation aid of the brain) and stereotactic tools (3D coordinate system for disease targeting), used by an estimated 1,870 and 520 hospitals; NBS is compatible with all these tools. The US and Europe represent around 80% of the global market potential with an estimated (Nexstim data) 82,000 brain surgical operations per year. Nexstim sold 120 units up to December 2014. The list price is stated by management to be about €210k, but Nexstim sells many systems through distributors so the reported value will be much lower and an approximate 25% discount is assumed, to about €165k each in 2015. In late 2014, there was a change to the NBS system when a reusable tracker device was replaced by a disposable unit. Disposables are assumed to cost €122 each, although the difference to the tracker unit used for NBT, at a lower price, is not clear.

Nexstim has so far targeted key opinion leaders at leading universities and teaching hospitals in the fields of neurosurgery and radiology, notably in the US and Germany, using a small sales and marketing team. Reimbursement codes for pre-surgical mapping using NBS already exist in the US in the form of an emerging technology code (CPT III) and in Germany (OPS).

Nexstim is still focused on stroke. However, it would make sense to broaden the base of indications and the obvious and fastest target is severe depression, with plenty of clinical data. There are, however, multiple TMS systems available (Exhibit 12).

For example, Brainsway gained 510(k) approval by showing in a 230-patient, 16-week therapy trial in depression that 38.5% of active treatment patients responded (response = a gain of 50% plus in the scoring system) vs 21.3% sham therapy, p=0014. The five-week remission rate was 32.6% active vs 16.6% sham, p=0.005. Neuronetics using different criteria showed a 13.4% remission from depression as against 5% on sham therapy, p=0.017 in 197 patients. With three FDA-approved systems and more with CE marking, the market already looks well covered and Neuronetics is well established, with over 600 systems. However, major demand has yet to develop and as it does reimbursement should become standard. For example, Neuronetics thinks it worthwhile identifying clinics that treat over 20 patients in a year as having higher expertise.

The precise navigation of NBT may offer clinical advantages. Other indications, Exhibit 3 above, are less secure, but it is possible that a tail of other applications will be verified such as OCD and ADHD; some might become big markets but the need for repeated rTMS sessions over several weeks might limit the potential. TMS might also have a role in memory stimulation. Bagherzadeh et al (2016) showed an effect in health individuals and this might, with further trials, translate into a benefit in elderly patients.

The obvious sensitivity relates to whether the FDA will allow a de novo 510(k). This is hard to assess given that the NICHE trial did not achieve its primary endpoint. In any event, a decision is not likely till late 2016 at the earliest and H117 is more realistic. If positive, Nexstim will need to establish clinical acceptance and reimbursement almost certainly needing another clinical study. Europe is an accessible market now but the issues of acceptance and reimbursement are made more complex by the underlying fragmentation of the market. Nexstim may also need to develop simpler and cheaper systems that are more suited to routine occupational therapy centres such as the SNF used in the US. While the stroke saga is unfolding, in our view, Nexstim should develop other indications. A 200-patient depression study would give an entry to what is still an underdeveloped market. There are other possible markets like pain and tinnitus. Nexstim is well placed to develop its technology and the rTMS clinical market is still at an early growth stage.

As management has not confirmed a revised strategy, the new valuation is based on a scenario developed by Edison and not based on any specific indication, in which Nexstim sells up to 50 NBS units and up to 100 NBT units per year at 70% (unchanged) and 55% (formerly 70%) probability, respectively. NBS reflects commercial uncertainties not technical risk. NBT’s 55% probability is an overall assessment of the probability of gaining a stroke indication quickly (moderate), the probability that another indication could be accessed (high but data needed) and the intangible benefits of NBT navigation (moderate to high as no comparison data are available). Exhibit 13 shows these assumptions (before risk adjustment), which give a 2030 indicative revenue of €146m. This can be compared to Exhibit 12 in the September 2015 initiation note. The strategy is focused on building disposable tracker volumes; device use rates are hard to forecast.

So far, Nexstim’s revenues are from the sale of NBS equipment and servicing. Unit NBS list price is over €200k but Nexstim will receive a lower price after the distributor discount; this is all opaque. In Q414, a new NBS system was launched, which uses a single-use tracker with an RF chip. The original NBS system used a reusable headset. This means that the base of an estimated 117 old-style NBS units (120 NBS units installed by December 2014) generates no consumable revenues.

Nexstim plans for an operational life of seven years per system, modelled in the previous estimates. This is now not modelled, as in reality this will depend on use rates and machine reliability. A further change is that we assume price inflation of 2% (formerly price deflation was assumed), as the market still appears to have substantial growth potential.

There are no real forecasting indicators for NBT given current uncertainty, but the installed base projected is about 1.5 times the current Neuronetics base, which seems reasonable given the Nexstim claim of precise NBT navigation and the possibility of a stroke indication. A marketing cost of 17.5% of sales has been added to reflect the extra costs and discounts needed, but device marketing can be slow (sales were lower than hoped in 2015 due to some contract delays) and the fixed costs can be high. Previously, sales costs were included in the overall cost forecast.

Valuation depends on the installed base and NBT use rates. There is no data, but Edison assumes five NBT treatments per day for 50 weeks a year. Volumes could be much higher, perhaps 10 per day, or lower. The NBS use rate is assumed to be 100 per year.

A key value element is cash. Nexstim is funded to Q316 on management’s current plans. Further trials, if feasible, will take more investment. NBT sales will take more time than previously envisaged but immediate marketing costs will be lower. There is therefore a significant dilution element that is currently hard to assess. In the previous model this was assumed at €50m to drive US marketing. An estimate of €13m in equity to 2017 is made on the basis of a more stable cost base but this figure is subject to high uncertainty. Any post 2018 funding is treated as debt.

Exhibit 14 shows a breakdown of the discounted free cash flow over 2016-30 used in our valuation.

The terminal value, based on a 2030 projected cash flow of €20.4m, is €156m in 2030. This is based on a 1% long-term growth rate and a 12.5% discount rate. A terminal growth rate is used as device markets have long product life cycles. Discounted to 2016, this is valued at €29.9m. Exhibit 15 shows a pre-dilution value of €28.7m or €3.58/share. However, subtracting the possible cash need to 2017 (as new shares) implies a value of about €1.56 (fully diluted, including options). The number of shares in 2017 depends on the prices at which new shares are issued, so this dilution estimate is only a very approximate guide.

In 2015, unit sales (10 units) were €1.985k with other sales of €0.543k, up from €415k in 2014. It is assumed that at least €400k is from service revenues so perhaps €145k was consumable sales.

The cost of goods was €995k, of which €174k was allocated to inventory using Finnish accounting standards. Nexstim purchases units from a manufacturer and has no in-house assembly; the manufacturer changed in 2015 so costs may also have altered in the period; some delayed orders were noted by management. The disposable sells for €122 (before distributor discount) and generates a revenue stream; on Edison estimates, this might have been over 1,100 procedures in 2015 but this was not disclosed.

The cash outflow in 2015 was about €9m pre-financing. This is forecast to drop to an outflow of about €8.4m in 2016, although this depends on further clinical trial and regulatory costs. Cash was €6.9m at the year-end, stated to be sufficient until the end of Q316. Nexstim carried out a capital raise of €5.3m gross at the end of 2015. A capital loan from Tekes of €0.5m is being repaid from 2017 at €100k per year. There is also a Tekes long-term loan of €2.7m at favourable rates.

Exhibit 16 has financial results and Edison forecasts.