Neuronetics, Inc. (STIM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Neuronetics Fourth Quarter 2024 Financial and Operating Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Klausner. Please go ahead.

Good morning, and thank you for joining us for the Neuronetics fourth quarter 2024 conference call. Joining me on today's call are Neuronetics' President and Chief Executive Officer, Keith Sullivan; and Chief Financial Officer, Steve Furlong. 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 Greenbrook acquisition and other operational issues and metrics. Actual results can 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, which will be filed later this month. 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 provide 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 the 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' President and Chief Executive Officer, Keith Sullivan.

Thanks for the introduction, Mark. Good morning, everyone, and thank you for joining us today. I'll begin by providing an overview of our recent performance and key accomplishments in 2024. Steve will review our financial results, and I'll conclude with some thoughts on 2025 before turning to Q&A. Let me start with our performance in the quarter, which includes nearly 1 month of Greenbrook operations. Total revenue was $22.5 million, an increase of 11% over the fourth quarter of 2023. During the quarter, NeuroStar system revenue was $3.8 million, with 46 systems shipped. U.S. treatment session revenue was $12.9 million and U.S. clinic revenue, which represents Greenbrook revenue was $4.4 million, reflecting a solid quarter for the company and continued positive momentum. 2024 was truly a transformative year for Neuronetics, marked by a number of significant achievements, which include; number 1, transforming our business to become a vertically integrated mental health care provider through the acquisition of Greenbrook TMS; second, significantly expanding our Better Me Provider program based on its tremendous success; third, securing an FDA clearance for the NeuroStar system to treat adolescent patients, making NeuroStar the first and only TMS option available to treat this underserved patient population. Fourth, refinancing our debt facility to provide more financial flexibility and strength to our balance sheet. And fifth, although a 2025 event, we further strengthened our balance sheet to support our growth trajectory with our recent $18.9 million capital raise. Steve and I will be discussing each of these achievements during our prepared remarks today. I'd like to begin by reviewing the success of the BMP program. This program is establishing a nationwide network of accounts that follow patient care and responsiveness standard that were developed in collaboration with expert TMS clinicians aimed at delivering timely and consistent care to those who need it most. The program was piloted within a select group of customer sites in 2023 and the first half of 2024. Based on the success of the pilot, we began the process of a nationwide rollout in July of 2024, expanding participation to over 350 sites. Demand to participate in the BMP program remains strong. There are currently more than 125 additional sites committed to the program that are actively working to achieve the 5 standards prior to the next enrollment date of April 15, 2025. Through a combination of an increased number of training classes through NeuroStar University and enforced adherence to our best practices, this program has been a massive success. When practices begin to implement the program standards, their patient volume on average increases by 36% simply by providing a timely response to patients by a staff member that have the knowledge to educate patients about the benefits of the NeuroStar therapy. Once practices are fully in the BMP program, they are treating 3x more patients per site per quarter than practices who are not in the program. On average, these sites went from treating 3 patients per quarter to over 10 patients per quarter. In addition, customer sites who participate in the BMP program are addressing patients in need materially faster, roughly 2.2x faster when comparing results of 2024 versus 2023. The outcomes demonstrated by BMP validate the benefits of our model for teaching practices how to better serve their patients with NeuroStar. Another milestone achieved during 2024 was our acquisition of Greenbrook TMS. As our largest customer for many years, we intimately understood their business and saw a unique opportunity to combine 2 leading TMS companies, creating an organization with the scale and expertise to revolutionize mental health care in the U.S. This combination makes Neuronetics a leading TMS supplier and provider in the United States. By combining our innovative technology platform, proven training process and the BMP program with Greenbrook's established treatment center network, we are positioned to expand patient access to life-saving mental health treatments whilst improving our growth and financial position. Our integrated network now serves a broader patient population while maintaining exceptional care standards across markets. An exciting acquisition benefit is our ability to implement BMP lessons across the entire Greenbrook network. We have a clear road map to enhance operational efficiency and patient care by implementing BMP's comprehensive standards and workflows at Greenbrook's existing sites. We view these implementations, along with a number of other Greenbrook commercial initiatives as key growth drivers for 2025. Beyond growth opportunities, we have identified significant cost synergies across both organizations. By the end of 2024, we captured over 90% of the identified $22 million in annualized cost synergies, surpassing initial targets. Combined with ongoing cost structure optimization, these synergies will create a more efficient organization and give us confidence in becoming cash flow positive in the third quarter of 2025. Further strengthening our market position in March of 2024, NeuroStar received FDA clearance as the first and only TMS treatment approved as a first-line therapy for depression in adolescents aged 15 to 21. Real-world data showed 78% of adolescent patients achieved clinically meaningful improvement. This milestone expands our total addressable market for major depressive disorder. We have quickly gained traction with wins in adolescent insurance coverage, making it easier for adolescents to qualify for treatment. Treatment sessions volume ramped up throughout 2024, yielding 10% growth in new patient starts versus 2023. Since clearance, we have seen an 18% increase in customer sites treating adolescent patients, which now includes more than half of our customer base. The increase in insurance coverage positions us for continued growth in this segment through 2025. 2024 was about building a stronger, more integrated Neuronetics. Through our successful Better Me Provider program, expanding our market opportunity with the adolescent clearance and the strategic Greenbrook acquisition, we have created multiple growth drivers that work in tandem while at the same time, strengthening our balance sheet. These factors position us for accelerated, sustainable and profitable expansion in 2025. I'll now turn the call over to Steve to review the financial results.

Thank you, Keith. Unless otherwise noted, all performance comparisons are being made for the fourth quarter of 2024 versus the fourth quarter of 2023. Total revenue was $22.5 million, an increase of 11% over prior year revenue of $20.3 million. U.S. NeuroStar Advanced Therapy System revenue was $3.8 million, and we shipped 46 systems in the quarter. U.S. treatment session revenue was $12.9 million, a decrease of 14% year-over-year, primarily due to the removal of Greenbrook treatment session revenues from this revenue line subsequent to the acquisition's close. U.S. clinic revenue at $4.4 million, representing Greenbrook's revenues subsequent to the acquisition. Gross margin was 66.2% compared to 77.6% in the prior year quarter, down 1,140 basis points from the prior year. The decrease in gross margin was primarily a result of the inclusion of the Greenbrook clinics business. Operating expenses during the quarter were $25.8 million, an increase of $5.6 million or 28% compared to $20.2 million in the fourth quarter of 2023. The increase was mainly attributable to professional fees incurred on acquisition and the inclusion of Greenbrook's expenses subsequent to the acquisition. During the quarter, we incurred approximately $1.3 million of noncash stock-based compensation expense. Net loss for the fourth quarter was $12.1 million, or $0.33 per share as compared to a net loss of $5.4 million or $0.19 per share in the prior year quarter. EBITDA was negative $10.5 million as compared to negative $3 million in the prior year quarter. EBITDA in the fourth quarter includes approximately $10.6 million in nonrecurring expenses. Most of these expenses were associated with the close of the Greenbrook acquisition. Excluding these expenses, EBITDA would have been positive $0.1 million for the quarter. As of December 31, 2024, cash and cash equivalents were $18.5 million. This compares to cash and cash equivalents of $59.7 million as of December 31, 2023. In July, we secured a debt facility of up to $90 million with Perceptive Advisors, $50 million of which we accessed in July to fully repay our SLR Capital Partners term loan and $10 million of which we accessed in December to further support our combined enterprises operations. After the end of the year, we successfully completed a public offering, raising $18.9 million in net proceeds, strengthening our balance sheet and providing additional flexibility to execute on our growth strategy. This financing gives us incremental flexibility, allowing us to potentially accelerate high-return initiatives like our buy-and-bill program for SPRAVATO, expand our Better Me Provider program implementation and enhance our market analytics capabilities. This additional capital positions us to pursue these value-creating programs while maintaining both a strong balance sheet and cash flow breakeven in the third quarter of 2025. Now, turning to guidance. For the first quarter, we expect revenue of $28 million to $30 million. We expect full year revenue in the range of $145 million to $155 million. This compares to pro forma combined revenue of $129.8 million in 2024. For the full year 2025, we expect gross margin to be approximately 55% as a result of the inclusion of the Greenbrook Clinic business. We expect total operating expenses for the full year to be in the range of $90 million to $98 million. Regarding Change Healthcare, the disruptions experienced throughout 2024 are largely behind us. We have successfully implemented alternative processing solutions and restored normal operations. While this created some headwinds in 2024, we do not anticipate any material impact on our revenue in 2025, positioning us well for efficient processing going forward. I would now like to turn the call back over to Keith.

Thanks, Steve. Let me leave you with some key thoughts on our path forward. As we enter 2025, we have 2 clear strategic priorities that will drive our growth. First, we are focused on rapidly scaling our Better Me Provider Program across our customer base. The program's proven success in driving patient throughput represents a significant opportunity for all our qualifying customers. We plan to implement these comprehensive practice standards and accountability measures across both our existing customers and Greenbrook sites, aiming for similar performance improvements throughout our entire network. We have 2 action items for 2025 for the BNP program. First, we have directed our practice development manager team towards increasing the number of BNP accounts. We currently have 350 sites in the program. Another 127 locations are working to enter it. On an average, each of these new sites needs to meet an additional 2 standards to qualify. By year-end, we expect to have over 500 sites in the program or nearly half of our customer base. We will focus training and marketing on these sites to help patients searching for nondrug alternative for their depression, find our providers. Second, our capital team will focus on selling additional systems to our BMP sites as those sites grow and need more capacity. In addition to our BMP Program, we are executing our Greenbrook growth strategy with a focus on revenue capture. We have identified several opportunities to drive growth over the next several years. I'll focus on 3. First, we are optimizing our regional account manager team. In mid-November, we held a training session for this team at NeuroStar University, where we rolled out new messaging to educate potential referring physicians on the benefits Greenbrook can offer their patients who have failed multiple antidepressants. We have created an automated patient transfer process combining educational tools, QR codes, our intake team and TMS and SPRAVATO coordinators. This allows us to connect with patients while they are still at their physician's office rather than requiring a follow-up contact. It is now a seamless and simple process. Second, we are nearly 40% through the SPRAVATO buy-and-bill rollout of our clinics. From just 7 locations in December, we now have over 35 clinics utilizing this billing method, which provides access to more payers and improves revenue threefold over the administer and observe method of billing. We will offer buy-and-bill SPRAVATO in most Greenbrook clinics by the end of 2025. Finally, we are standardizing operations at Greenbrook across all 95 clinics. We have placed patient coordinators who educate the patients on the benefits of TMS and SPRAVATO back in most clinics for in-person consultations, knowing patients feel more comfortable when they can see and experience our centers. We will continue to train to provide a consistent patient experience across all Greenbrook locations. With our combined 550-plus clinics across 49 states by year-end, which is comprised of 95 Greenbrook clinics and our anticipated over 500 BMP practices, we will have a network of clinics that will provide exceptional care with a wide geographic coverage. The broad geographic coverage, in-depth market analytics and combined QR code deployment have already improved patient referral process, reducing referral to treatment time by approximately 40%. From a profitability perspective, we have a clear path to being cash flow positive in the third quarter of this year. Our enhanced scale, proven practice optimization program and strengthened balance sheet gives us confidence that we will build sustainable long-term value for our shareholders. We look forward to updating you on the progress in the coming quarters as we work to transform our business and patient care. With that, I'd like to open the line for questions.

[Operator Instructions] Our first question is going to come from the line of William Plovanic with Canaccord Genuity.

I just want to start out with just on Greenbrook. It's been about 80 days now, I think, since the merger. You talked about implementing the BMP and standardizing. Where are you -- and you say by year-end, but you're already 3 months into this. Number one, how much longer before at least all the basics are in place and implemented? And then number 2, kind of what have you seen in terms of standardization in those sites and kind of the return on that in terms of patient flow and what have you?

Bill, this is Keith. We have conducted training on -- as we mentioned in the script on -- for the RAMs. We've also had several trainings for the technicians that are in the clinics. And we have done -- Dr. Grammer has done education of the providers. So we are -- we see the changes as continuing on throughout the year. And as we identify opportunities to improve the efficiencies, we will continue to conduct these trainings. They've all been virtual with the exception of the RAMs. So it's really an easy system for us to implement so.

Okay. And then for Steve, in terms of the guidance, first on revenue, the $145 million to $155 million, just what kind of how are you looking at it? How much of this needs to work to hit those numbers? Like what's the spread between the low end and the high end and kind of what works or what yields you need to see off a lot of these programs to get there? And is there upside, if this is done earlier or better than expected? And then on the OpEx side, just if I use the $6.6 million in one-time charges in the fourth quarter on the OpEx you had, that gets me to $19 million-and-change or maybe an $80 million run rate versus the guide of $90 million to $98 million. Just wondering where the investments are going there, that incremental amount?

Bill, this is Steve. I think the best way to look at the guidance range of $145 million to $155 million is $65 million to $70 million is earmarked from standalone Neuronetics with $80 million to $85 million being earmarked from Greenbrook TMS. In terms of variables within those numbers, I would say, we don't have to be heroic to hit those numbers, but the programs that we're putting in place do need to continue to work. So we are forecasting growth on the Neuronetics side, primarily driven by the continued success of our BMP program. And on the Greenbrook side, it's really the 3 growth drivers that we discussed. It's improving utilization in the NeuroStar chairs within the Greenbrook clinics. It's the continued rollout of SPRAVATO to as many clinics as it makes sense. Obviously, some clinics don't have the population to support SPRAVATO and then the conversion from administer and observe to buy-and-bill. And so we do have plans for all 4 of those initiatives throughout 2025, and they are all considered as part of our guidance. In terms of OpEx, the onetime charges in Q4 were actually closer to $10 million. We did have a $4 million software capitalization impairment charge. If I look at our OpEx, normalized, it was close to $75 or so million. But then when I factor in Greenbrook's operating expenses, which are primarily their corporate expenses to support the individual clinics, I do come up really with the starting point, around $108 million entering into 2025, and that is without the synergies that we have identified. If you look at the $90 million to $98 million guidance at a midpoint of $94 million. So that would imply somewhere between $13 million and $15 million of cost synergies on the operating expense side, which is what we're forecasting. And as a reminder, greater than 90% of those cost savings have already been realized as we enter 2025. So there's no risk in that number at this point.

Our next question comes from the line of Max Kruszeski with William Blair.

It's Max on for Margaret. I was just hoping you guys could touch on the margin profile of Greenbrook a little bit. Core NeuroStar gross margin floated around 75% in the past. And now with the guide down to 55% in 2025, can you guys just speak to any levers you can pull, whether it be in 2025 or beyond to maybe help improve the margin profile a bit?

Good question, Max. Yes. So there's definitely opportunities for improvement. And so when we look at margins, again, consolidated Neuronetics margins were about 77%. Our operating and manufacturing teams have been able to take out costs out of the NeuroStar for the past couple of years. And the margins on NeuroStar are actually approaching about 60%. On the treatment session side, again, it's really just a computer code, but there are some ancillary items that accompany the treatment sessions. And so their net margin is about 97.5%. To your point, the clinic margins during 2024 for Greenbrook were in the 27% and 28% range. The implied guidance for 2025 is actually to have those margins improve to the mid-30%s, so 35%. And the primary driver of that were the elimination of 35 clinics during 2024, and they were the most underperforming clinics, which were dragging down the margins. And so, if I look at my 77% and their 35% margins, that's how we get to the 55% consolidated. And we will continue to work on both sides to improve our NeuroStar margins as well as the clinic margins as we work through '25.

That's helpful. And then just on Greenbrook, would it be fair to say that the 95 accounts you guys are in now are your most productive accounts? And if not, what percentage of these accounts would you say are the most productive? And do you have any plans to bring this number down further? And then just a quick follow-up to that is, how many of those accounts is SPRAVATO currently in? That's it for me.

Okay, Max. Currently, we are at 95 clinics, and our plan is to stay there. They are the most profitable clinics that Greenbrook had. And we have looked at each one of those to see if we can make an impact on them and grow them this year. So we're very comfortable at 95 clinics. And we don't have a plan to expand. We're going to focus on the ones that we currently have. And in -- for SPRAVATO, we have 63 of our clinics that are offering SPRAVATO. And today, we have 35 of those that are capable of offering buy-and-bill.

And our next question comes from the line of Adam Maeder with Piper Sandler.

Congrats on the deal. Maybe one to start on the guidance. I just want to better understand quarterly sequencing of revenue on the top line. I think the Q1 guide is $28 million to $30 million. That's a pretty healthy ramp throughout the year that's kind of embedded there and certainly realize part of that's seasonality. But just wanted to double-click on the Q1 framework and how you see the rest of the year playing out and just the level of confidence in achieving that full year outlook? And then I have a follow-up.

Thanks, Adam. Greenbrook experiences the same type of seasonality that Neuronetics has, again, primarily driven by the reset and of the insurance plans and also the reset of patient deductibles. And so if we go back the 6 years that I've been here, our Q1 revenue as a percentage of the total year is somewhere between 19% and 20%. And then it ramps. It's a nice rebound in Q2 when a lot of the deductible issues are already behind patients. So Q2 and Q3 revenues are about 25% each per quarter. And then again, our strongest quarter has always been Q4, and that will be approximately 30% of annual revenue. Again, as a reminder, we've been working collaboratively with Greenbrook at all levels since we signed the definitive agreement in August. And so we've got 6 months of efforts behind us, and we're already seeing dividends across the board. And so we have a high level of confidence exiting Q1 that we're going to have a lot of the process improvements, improved efficiencies and just some changes in learnings between the 2 companies fully in place as we enter Q2. And so again, we're very comfortable with the Q1 guide and the remainder of 2025.

That's good color, Steve. And for the follow-up, I wanted to circle back to SPRAVATO and the medical management opportunity for the Greenbrook centers. So I guess the first question is, of the $80 million to $85 million for your Greenbrook revenue assumption for 2025. Hopefully, I have that right. What is attributed to SPRAVATO and medical management? Where can that go in the future? And I would just love to hear a little bit more about the buy-and-bill model.

Yes, Adam. So there's very little med management built into that guidance figure. Again, Greenbrook was founded on TMS and essentially, their service was to offer patients TMS when the providing psychiatrist didn't offer it. And so they would refer the patient to a Greenbrook facility. They would get treated for the 7 weeks and then the patient would go back to their psychiatrist. And that really hasn't changed. And so again, the 2 growth drivers are increased chair utilization and also SPRAVATO. And so I would say, 75% of the growth is about SPRAVATO. So both improving the 63 clinics that currently offer it to maybe 80 or 85 clinics, and then moving to the buy-and-bill type of operation. And again, Keith mentioned it at 35. If we could get that to 50 or so during the year, it would be great. And as a reminder, it's not like we're just flipping a switch moving to buy-and-bill. There are a lot of behind-the-scenes activities working with the payers and getting the contracts and negotiating the price. And so it does take a little time even though we've already identified our ability to convert to buy-and-bill. It does take months to get everything in place and to start submitting the claims and then collecting. But again, the lion's share of the growth for Greenbrook is targeted on SPRAVATO.

Our final question is going to come from the line of Danny Stauder with Citizens JMP.

Just one follow-up on some of the SPRAVATO buy-and-bill transition questions that we've heard already. Appreciate the color there. And it sounds like this is already included in the OpEx guidance, but could you comment on the capital outlay this requires any capacity constraints that this could have as you contemplate your plans for free cash flow in 3Q '25?

Danny, it's Steve. Yes, from a CapEx perspective, supporting the SPRAVATO rollout, it's really not that significant. So from an infrastructure perspective, we do need rooms, which the majority of our clinics already have. And then as a video or camera system and beds that the patients relax on after the treatment and then are administered or observed by the attending psychiatrist. So that's $10,000 a clinic. So not crazy at all. It's really on the inventory side that we're working with our distribution partners on. And so having to purchase a dose of SPRAVATO is approximately $800. You need to keep a week's worth of inventory on hand. And as we roll that out, that inventory commitment could easily approach $5 million. We are working on getting lines of credit. And now with the capital raise of nearly $19 million, we do have a little bit of leverage if we had to use our own cash to get that flow going. But it's our intention to leverage our distribution partners. And right now, Janssen does make their distributors offer 120-day terms. And so if we submit our claims and get them paid, the normal turnaround time is about 60 days. And so again, once we get that cadence and work through some of the usual early bugs in the claims system, we'll think that 120-day term will be sufficient to make sure the cash flow doesn't strain my balance sheet.

Great. I appreciate that. And then just one follow-up on productivity. You've talked about driving and improving productivity across both Greenbrook sites and existing customers. But can you just remind us what that looks like today? I think in the past, you've given us a figure of 4 treatments per day per system. Is that still the case? And where you expect that to go in 2025 and where it is a more steady state range or metric that you're comfortable with?

Yes. I mean the comparison that we're using now for Greenbrook is with our Better Me program partners. And we've seen for those sites that are in that program and have really embraced the 5 requirements, they're averaging between 6 and 8 patients per day for NeuroStar. You are correct that Greenbrook is currently averaging about 4 patients per day. And as we work through efficiencies in 2025 and 2026, we do plan on seeing -- or we do expect to see Greenbrook increasing from 4 to 5 to 6 to get to the levels of our BMP partners. And so, if I look at their installed systems, active systems, if we increase that 4 patients per day to 5 patients per day, that's an approximate $10 million in annualized revenue. And so, I'm not implying that we're going to be able to get them to [ $5 million ] by May. But as we work towards training and education, we're confident that we could exit 2025 at or close to that level.

Appreciate it. I'll try to squeeze one more in here. Just on BMP, the 125 additional sites for the April 2025 data, is it your intention to take all of those if they meet the criteria or is there a max number of adds you're keeping in mind?

Our goal is if they all make it, that we would add them all into the program but they have to meet all 5 standards. And so as they -- as we get closer to April 15, if we could get 30 to 50 of those sites in the program, it would be a home run for us.

And I would now like to hand the conference back over to Keith Sullivan for his closing remarks.

Thank you all for your interest in Neuronetics. We'll look forward to updating you on our next quarterly call. Have a great day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.