BrainsWay Ltd.
Q2 2019 Earnings Call Transcript

Published: 26 Aug 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Brainsway Second Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]I would now like to hand the conference over to your speaker today, Bob Yedid. Please go ahead.

[Bob Yedid:]

Thank you, Samar. I'd like to welcome all of you to Brainsway Ltd second quarter 2019 conference call. With us today are Brainsway's Chief Executive Officer, Yaacov Michlin; and Chief Financial Officer, Hadar Levy. They will provide an overview of the company's business activities and developments for the second quarter. After the prepared remarks, we will open up the call for questions-and-answers.Before I turn the call over to Yaacov and Hadar, I would like to remind you that this conference call including both management's prepared remarks and the Q&A session may contain projections or other forward-looking statements regarding future events or the future performance of Brainsway, including without limited to any statements relating to commercial plans or activities, financial projections, clinical studies, R&D plans and/or anticipated timelines. When used in this call, the words "anticipate," “could,” “enable,” "estimate," "intend, "expect," "believe," "potential," "will," "should," "project and similar expressions as they relate to Brainsway are as such forward-looking statements. These statements are only predictions and Brainsway cannot guarantee that they will in fact occur. Brainsway does not assume any obligation to update that information. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and these cause actual results to differ from those anticipated by Brainsway at this time. Additional risks concerning factors that could cause actual events, results or achievements to materially differ from those contained in the forward-looking statements are found in the company's registration statement on Form F1 and in other filings with the Securities and Exchange Commission.Today the company issued a press release announcing its financial results for Q2. So participants in this call who have not already done so, can find this release on Brainsway's website as we provide a summary of the results on this call.With those prepared remarks, it's now my pleasure to turn the call over to Brainsway's Chief Executive Officer, Yaacov Michlin. Yaacov?

[Yaacov Michlin:]

Thank you, Bob. Welcome to Brainsway second quarter 2019 earnings call. We enter the second half of the year with growth and strong confidence in our business. I will focus my remarks today on what is driving the growth in our business and review the catalyst anticipated from our pipeline.I would like to begin with a very brief remainder of Brainsway business, our Deep TMS technology and key targeted markets. Although Deep TMS system has FDA clearance on major depressive disorder or MDD and marketing authorization for obsessive-compulsive disorder or OCD, and outside the U.S we have CE Mark for additional indications.Our Deep TMS system has demonstrated clinical efficacy in MDD and OCD is well tolerated and has the potential to address a wide variety of psychiatric, neurological and addiction disorders. We believe that our Deep TMS technology has significant key advantages over available Focal TMS solutions, including greater depth, extensive neuron activation, and deep and broad treatment.A significant market opportunity exists for our FDA clear indication. Based on market estimate, there are 16 million MDD U.S adult patients. We estimate that over 3 million U.S adult who suffer from MDD do not reach remission after trying 3 to 4 antidepressant drugs and have private or public insurance coverage.There are about 2 million OCD U.S adult patients. Of those, we estimate that about 400,000 OCD adult patients are considered treatment resistant and looking for a different solution other than drugs and cognitive and behavioral treatments. We at Brainsway continue to work to gain insurance coverage in the U.S for OCD therapy.As a reminder, in the second quarter, we completed a successful NASDAQ IPO with gross proceeds of over $30 million and began trending on the NASDAQ on April 17.Let's turn to our key results for the second quarter. We are very pleased with our second quarter results. We installed 40 Deep TMS systems. In addition, 30 Deep TMS OCD coils were shipped to current and new customer has released a total of 115 OCD coils shipped as add-on helmet to our Deep TMS system to current and new customers. I reminded you that Brainsway received FDA marketing clearance in this indication only in August 2018.We drove quarterly record revenue of $5.7 million, a robust increase of 53% over the second quarter of 2018. Moreover, we enjoyed a substantial increase of 43% in the recurring portion of the revenues. This recurring revenues demonstrate the benefit of the Brainsway business model in which a significant portion of our Deep TMS customers enter into a lease or risk sharing arrangement with a minimum annual payment that generates recurring revenues over 3 to 4 year period. This recurring revenue provides greater predictability for our growth and we believe it offer investors greater visibility of Brainsway results.While our CFO, Hadar Levy will review our financial results in greater detail, you will note an increase in our operating expenses year-over-year in the second quarter. This is primarily due to the investments we are making in the future growth of our business as planned and established as goal in our recent U.S IPO.We added a net of five new sales reps in Q2 when compared with Q2 of 2018, including one in Germany, along with additional logistics and training personnel to work with our customers. We plan to add three new sales reps in Q3 of this year. A key part of our strategy is that we intend to accelerate our growth by increasing the size of our sales force and enhancing our marketing activities globally. We also continue to ramp up our R&D activities, which I will detail shortly.Next, though, I would like to discuss another important growth driver for us, building clinical evidence for Deep TMS for key publication. In the second quarter, results of our pivotal study demonstrating the Deep TMS show a significant clinical benefit compared to SHAM in treating OCD as an adjunct therapy in an approximately 100 patient clinical trial were published in the American Journal of Psychiatry. These OCD patients previously had insufficient response to pharmacological therapy or a failed or a insufficient response to cognitive behavioral therapy.Deep TMS achieved a 38% response rate among patients after six weeks of treatment, which was statistically significant improvement over the only 11% achieved by the SHAM group and a 45% remission rate was achieved after an additional four weeks of follow-up without treatment, which was also statistically significant greater than the 17% achieved for the SHAM group.More recently, a third-party study demonstrated that Deep TMS plus standard medication was significantly more effective at generating remission rate and reducing depression level among MDD patients compared with standard medication alone was published in the Journal of Psychiatric Research. This was actually the third head to head randomized control trial of its kind comparing Deep TMS, Focal TMS and medication in depression patients. A total of 228 patients were randomized to either four weeks of Deep TMS or Standard TMS each in conjunction with standard pharmacotherapy or to a control group treated with pharmacotherapy alone. There was 72, 75, 81 patient in each arm of the study respectively. The remission rate for Deep TMS was nearly 60%, for Standard TMS it was about 43% and both were statistically significantly higher than the control group which was only 11%.Public studies such as these two are critical in order to continue building and growing body of clinical evidence regarding the efficacy of the treatment with our Deep TMS in MDD and OCD. We intend to leverage this [technical difficulty] data in multiple ways including to drive usage of Deep TMS and in our interactions with payers in regard to reimbursement.With that I would like to provide a brief update on our efforts to expand into additional territories including the Far East. We enter into exclusive distribution agreements with Unison Healthcare Group, among the largest distributor of medical equipment in Taiwan, and Prime Medix, a provider of safe and innovative healthcare solutions in the Philippines. These agreements follow other recent distribution agreements for Deep TMS in South Korea and Thailand, as well as the receipt of regulatory clearance in Japan. Additionally, Brainsway terminated its distribution agreement with its Israeli distributor, and we’ve started selling directly to customers in Israel.Furthermore, we added [ph] our first salesperson in Germany and agent in the European Union together with our ability to sell our new generation stimulator in Europe, we expect continued growth in Europe.An update about changes in our U.S management team. Hadar Levy, our CFO, joining me for this call will relocate to the U.S and assume the additional role of Chief Operating Officer. This newly created position of COO located in the U.S is expected to enhance the alignment of our global organization and support the next phase of Brainsway growth in the U.S., which is our largest market.Joseph Perekupka, Senior Vice President of Sales and Operations for North America has notified us that of his intention to resign from Brainsway effective October 15, and he has agreed to stay on until that time to assist in the transition. We would like to take this opportunity to thank Joe for the role he played in our activities in the U.S and on behalf of the entire Brainsway team, we wish Joe well in his future position.Moving on to our next planned indication for Deep TMS, let's review our robust clinical pipeline. First of all, smoking cessation, we announced the completion of target recruitment in the second quarter. We have just reached the goal of 165 patients completing treatment for smoking addiction in our randomized double-blinded multicenter study. Final results are expected in Q4.Secondly, PTSD. Recruitment is proceeding nicely. Interim results expected by year-end 2019 as planned. Opioid abuse. We're working with the FDA in an effort to initiate the study, following the selection of Brainsway by the agency as part of its innovation challenge and receipt of a Grade IV designation by the FDA. Last, multiple sclerosis. We continue working towards initiating a multicenter study to treat fatigue symptoms in multiple sclerosis patients with Deep TMS and hope to file an ID soon.Our research and development activities are also focused on developing a multichannel stimulator and closed loop stimulator with real-time EEG reading capabilities and we hope to start selling the first closed loop devices for research purposes in the near future.I will now pass the called on to Hadar, our CFO, for a detailed review of the second quarter financials. Hadar, please.

[Hadar Levy:]

Thanks, Yaacov. We are extremely pleased with our financial performance in the second quarter of 2019, as strong demand for our Deep TMS Systems continues to drive top line growth. Our total revenue in the second quarter was $5.7 million, a substantial 53% increase over the prior year quarter. Of that, $3.2 million was recurring lease revenue, which represented an outsetting 43% increase in recurring revenue over the prior year quarter and accounted for over 57% of our total revenues.During the quarter, we saw our active installed base increased to 456 Deep TMS Systems, which represented an increase of 40 systems for the first quarter of 2019. During the second quarter, we shipped 30 Deep TMS OCD coil. We have now reached to a total of 115 OCD coils as add-on helmet to our system since having received marketing clearance less than a year-ago back in August 2018.Gross profit for the second quarter of 2019 was $4.3 million, an increase of $1.4 million from $2.9 million during the second quarter of 2018. Gross margin for the second quarter of 2019 was 76%, which is slightly lower than the second quarter of 2018 with a gross margin of 77%. The modest change in the gross margin was a result of increasing our service and operation costs as a result of higher sales.Research and development expenses for the quarter were $2.4 million compared to $1.3 million in the same period in 2018 due to a continued development of our Deep TMS technology, including conducting clinical trials for treatment of post-traumatic stress disorder, smoking cessation and other brain disorders.Sales and marketing expenses for the second quarter were $3.3 million, an increase of $1.4 million over the prior year. The increase was primarily driven by an expansion of the sales force and enhanced marketing activities. General and administrative expenses for the quarter were $1.4 million as compared to $700,000 for the same period in 2018. The increase was driven by increased costs associated with becoming a public company in the U.S and our typical nature of company's listing on the NASDAQ and were expected by our team.Total operating expenses for the second quarter totaled $7 million compared to $3.9 million in the second quarter of 2018. For the second quarter ended June 2019, we include the net loss of $3.5 million or $0.17 per share as compared to $1.8 million or $0.12 per share for the three months ended June 30, 2018.Moving to the balance sheet. We ended the second quarter with cash and cash equivalents of $27.6 million compared to $7.7 million as of March 31, 2019. Cash usage during the quarter was in line with our expectation after the completion of the company's U.S IPO, which generated $26.3 million in net proceeds. Following our $3.3 million debt repayment, we have no debt.Once again, we are enthusiastic about our strong balance sheet and believe that our substantial cash position will allow us to expand our sales and marketing efforts further to drive additional adoption of the Deep TMS System, continue to invest in R&D in order to add new indication and move towards profitability.That concludes my remarks concerning our financial highlights. I will now turn the call back over to Yaacov.

[Yaacov Michlin:]

Thank you, Hadar. To summarize our performance in the second quarter and recent highlights, 53% growth in revenues, 40 Deep TMS Systems installed, 30 OCD coils shipped, we’re expanding sales force and territories, growing clinical evidence of the effectiveness of our therapy and key progress achieved in advancing our clinical pipeline. Moreover, we are well supported by a strong balance sheet with cash and cash equivalents of over $27 million as of June 30, 2019, securing our future growth plans.Thank you very much. And I now turn it to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] And the first question comes from the line of Craig Bijou. Please ask your question.

[Craig Bijou:]

Great. Thanks for taking the questions and congrats on a strong quarter. I know you guys don't provide guidance, but just wanted to see if you guys could help us think about what we should expect from a revenue perspective in the second half. If you look at over the last few -- four quarters, you have increased revenue sequentially by roughly $500 million -- sorry, $500,000 on average each quarter. So is that the right way to think about the cadence of Q3 and Q4 from a revenue perspective?

[Yaacov Michlin:]

Thank you, Craig, for the question. As you know, we are not providing at this stage specific guidance as to revenue. But as I mentioned in the call, the structure of our lease agreements and the focusing on what we call the fixed lease annual fee and risk share model with an annual minimum fee allows certain visibility. And obviously we have -- I think we are positioned well in terms of the additional territories outside of the U.S to grow also the revenues in terms of the direct sale. However, at this stage we are not giving specific guidance as revenues, so I cannot relate to the number.

[Craig Bijou:]

Okay. So it sounds like OCD didn't contribute much revenue during the quarter. And correct me if I'm wrong there, but now that you have 115 helmets out there, I just wanted to know how should we start to think about the utilization of those systems, or how should we think about that utilization today where it could go? And then the timing of any revenue contribution from OCD, specifically?

[Yaacov Michlin:]

So this is a great question. As you know, when we are shipping an OCD, in most cases we are charging relatively small amount for the treatment of a small number of patient upfront. But other than that, it's a totally risk shared model concept. As I mentioned in our call, we just got the approval in August. Since then we managed to install one -- ship 115 coils, which we see as a great achievement. We see continuous growth of the usage of the OCD, but obviously, the -- we expect that the boost will come following the receipt of the reimbursement by the insurer. We are working hard to get these. In the next coming weeks, we will open a center to assist our clinics to file for the reimbursement. I guess that the big ramp up will happen when we will have the first insurer approving reimbursement for OCD. Other than this, we are doing some marketing efforts and I think the publication in the American Journal of Psychiatry and the growing clinical evidence and the good result at our clinics that are using OCD are achieving is helping us to grow the use of our device. And we are optimistic about the potential of this indication and I think we are well-positioned to the growth in OCD.

[Craig Bijou:]

Great. That's helpful. One more from me. I was hoping that you guys could provide a little bit more color on the departure of Joe, your Head of Sales. So, what steps are you taking to ensure smooth transition there, and how should we think about any potential disruption to the sales force or just sales in general?

[Yaacov Michlin:]

Okay. It's a great question. So first of all, Joe has been with us for about four years since actually the start of the structure of the current organization in the U.S., and we appreciate what he did with us and for us. Both me and Hadar were traveling a lot of the U.S. Hadar Levy, our CFO, is now becoming also the COO is very much familiar with activities in the U.S., the sales person and the sales team, we are in close touch with the clients. And maybe more importantly, I think we managed to build a very strong team in place in the U.S. We have a manager of the sales in the East Coast and we have the manager of the sales of the West Coast and we have a strong marketing person in the U.S. So although we regret any departure, but I think for the organization, I think that we should handle it hopefully smoothly and we don't expect any issues. We are going to expand the team in the U.S in the near future. So we are continuing to grow.

[Craig Bijou:]

Great. Thanks for taking the questions, guys.

[Operator:]

Thank you. And our next question comes from the line of Jayson Bedford. Please ask your question.

[Jayson Bedford:]

Thanks and good morning or good afternoon for some. I wanted to just follow-up on the OCD line of questioning. The units that you sold in the quarter, I'm just curious of the 30. How many were to new customers versus your current install base? And again just as a follow-up to that, when you look at your large install base that have -- don't have OCD helmet today, is reimbursement the primary source of push back there?

[Yaacov Michlin:]

So, to your first question, first of all, thank you Jayson. So it's about a 50-50 in terms of new customers and current customer in the split of the 30 additional OCD coils. As to the main reason of why certain customers are not ordering their OCD, there are some clinics that are not treating OCD at all. There are psychiatrists that are not dealing with OCD. This is the situation. However, we think that the major driver is the existence of reimbursement and we believe that once reimbursement will be granted, then not only that we will see a substantial increase in the use, but also I think we will ramp up the pace of new shipments and installations.

[Jayson Bedford:]

Okay. That's helpful. You mentioned a new stimulator, NexGen stimulator in Europe. Can you just talk about the features and benefits of that system and when that may be launched in the U.S?

[Yaacov Michlin:]

Okay. So thank you for the clarification. So it's just -- it's -- actually we launched this new stimulator in the U.S a few months ago after FDA clearance, but we didn't have the approval in the Europe yet. So now it was actually clear. So we're also starting selling the new stimulator. But it's not a new product, it's the product that we are being selling in the U.S in the last month. Just to mention, it's our own stimulator. It's a very robust in its technical capabilities. It allows us smooth exchange between the coil [ph], and it positions us very well for the future for the additional feature that we are working, the linkage to the EEG, the multichannel. So we have -- I don’t want in this investor call to get into this -- the technical specification, but we think it is a top stimulator compared to what is currently in the market.

[Jayson Bedford:]

Okay. That's a helpful clarification. In terms of the sales reps, I think you said you added five relative to this time last year. Did you add many reps in the second half of last year? I'm just wondering what was the increase from the beginning of the year?

[Yaacov Michlin:]

So just to add to this, we -- as we said, when we were on the road for the IPO and also we mentioned in the IPO, we expanded the sales force relatively in a slower pace before we raise the money on the NASDAQ. Now as I mentioned, only in Q3 we are going to add three more sales persons and we will continue to grow also in Q4. So obviously now we accelerated to a pace of growth. And as we mentioned before, our plan is if you compare to 2018, so towards mid to end of 2020, we want to double our sales force in the U.S.

[Jayson Bedford:]

Okay. Last one from me just on gross margin. It always seems to be a little bit softer in 2Q, at least relative to 1Q, at least in the last couple of years. Do you expect gross margin to improve off of this level going forward?

[Yaacov Michlin:]

I would say, first of all, we have only 1% difference and there are two factors working in different direction. For example, the OCD usage will probably -- is expected to increase our gross profit. However, and it should be mentioned that the agreement that I mentioned in the Far East, obviously the selling prices in these territories might be lower than what we are selling in the U.S. So this will work as a counter effect. So I cannot now predict what will be the impact. So there are two factors working to opposite direction.

[Jayson Bedford:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Jeffery Cohen. Please ask your question.

[Jeffery Cohen:]

Good morning, Yaacov and Hadar. How are you?

[Yaacov Michlin:]

Thank you, Jeff.

[Jeffery Cohen:]

So could you give us a little further detail and colors as far as the Q4 results for the readout of the smoking cessation study. How might we see that in the public domain? Do you expect that at a conference or in a journal or as a press release? And could you also comment as well on PTSD with the year-end interim results?

[Yaacov Michlin:]

So, as I mentioned, I think that the great achievement in this prospective is we completed treatment of 165 completers and this is our -- that was our target goal for the study. It will probably take us weeks to months to open analyze the result, clean the data and publish the result. I guess that what we're currently planning to do is to issue a PR and to set a call like this right after. I cannot expect now what will be the timing of this, but this is the plan. As for the PTSD, because it's an interim result, we might do the same depending on the robustness of the data. So these are two interesting news that I hope both will work in the positive way that are expected during Q4.

[Jeffery Cohen:]

Okay, got it. And could you further expand upon your commentary regarding the -- you expect to file an ID. What was that indication? Can you remind us, please?

[Yaacov Michlin:]

Yes. We had a very interesting feasibility result from a group of researcher in the, [indiscernible] Berlin that show the good results with our system in treating fatigue symptoms of multiple sclerosis patients. Based on this good result and based on the concept and -- behind it, I would not get into the details here and the mechanism of action of it. We decided to go for a more robust pivotal study. So I mentioned that we expect in the next week to file an IDE to launch this -- a pivotal study in multiple sclerosis.

[Jeffery Cohen:]

Okay, got it. And what was the update today on opioid abuse as far as clinical work?

[Yaacov Michlin:]

We have discussions back and forth with the FDA. And August delayed us a little bit on both side because of the vacations and we have a very nice interaction with the FDA. I do hope that we will agree on a protocol in the coming weeks and we will announce it and be able to file an IDE and move forward also with this important study.

[Jeffery Cohen:]

Okay, got it. And then lastly for me, could you talk a little bit about Japan, the current status and what you could expect over the coming months as far as the regulatory environment and partnerships?

[Yaacov Michlin:]

Yes. So we have a strong distributor in Japan, a company called CMI. Actually, I went on a road trip and met with them and the other distributor just recently. We got the PMD approval early this year. In general, the Japanese authorities granted like national reimbursement for TMS. We are working with our distributor in the Japan that the reimbursement will apply also to Brainsway. I hope it will happen in the next month and then our distributor is totally equipped and ready and we are ready to fully commercial launch of our product in Japan just after the inclusion of us and the national reimbursement.

[Jeffery Cohen:]

Perfect. Okay. That’s it for me. Thank you very much.

[Yaacov Michlin:]

Thank you, Jeff.

[Operator:]

Thank you. And our next question comes from the line of Steven Lichtman. Please ask your question.

[Unidentified Analyst:]

Hi. This is David on for Steve. Thanks for taking my questions. Just following on the Japan comments, do you have any -- could you provide any color on how we should model the impact of that opportunity for the rest of 2019?

[Yaacov Michlin:]

I'm not -- honestly, it was hard to hear you. Can you please repeat the question?

[Unidentified Analyst:]

Yes. Hi. Just following on the Japan comments, could you provide any color on how we should model the revenue impact from that for the rest of 2019?

[Yaacov Michlin:]

I don't see any practical impact of Japan on revenues for 2019.

[Jeffery Cohen:]

Okay.

[Yaacov Michlin:]

As the launch is expected towards the end of the year and then the impact will start in 2020.

[Jeffery Cohen:]

Thank you.

[Operator:]

Thank you. There are no more questions at this time. Please continue.

[Yaacov Michlin:]

Okay. So thank you very much. In closing, we had a very strong quarter and we believe that we are well positioned for continued growth in the future. I would like to thank you all very much for joining today's call and look forward to our next call. Thank you very much.

[Operator:]

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.