Nexstim Plc (NXTMH) Earnings Call Transcript & Summary

Welcome to Nexstim's webinar for investors, analysts and media. In this webinar, Nexstim CEO, Mikko Karvinen; and CFO, Joonas Juokslahti, will be giving a presentation that will take about 0.5 hour followed by a Q&A session. The webinar will be recorded and we will inform you later on where you can find for recording. [Operator Instructions] We've reserved an hour for the webinar. In case we do not have time to answer all questions, we will email you later given that you have given us your full name with any questions. And now, let's move on to the webinar. First presenting is Nexstim's CEO, Mikko Karvinen. Go ahead, Mikko.

Thank you, [indiscernible], and welcome, everyone, to this Nexstim Plc webinar. My name is Mikko Karvinen. I'm the CEO of Nexstim. We will be presenting you today with the 2021 financial results and also the second half results for '21. We're very happy to present the results as, first of all, this was a record-breaking year for Nexstim in many ways. And also the second half of 2021 was the first profitable review period ever in Nexstim's history. So we'll be going through the details together with our CFO, Joonas Juokslahti. I'll now switch on to the presentation slide in a moment. Here we go. So at Nexstim, we focus into personalized brain diagnostics and therapy. Today, we will be going through the second half of '21 and the full year '21 financial results in this webinar together with our CFO, Joonas Juokslahti. I'll begin in the beginning with our story. So a brief look into our mission, vision and value. So we're a Finnish, globally operating medical technology company, and we have a very important mission, which is to enable personalized and effective therapies and diagnostics for challenging brain diseases and disorders. And we progressed also with our vision during '21 in our innovation, creating a possibility for a better life. And with our technological know-how, we set a new standard for the treatment of challenging brain diseases and disorders. In everything we do in Nexstim, we're guided by our values. We're based on science and clinical evidence. Our systems that we manufacture and we use for patient treatments, are based, of course, on solid science and are evaluated through clinical trials and clinical evidence before any approvals. We strive for financial success, and we've also shown financial success very recently. As an example, from '21, we're posting positive results from our second half and have been very successful also in growing our revenue in a fast pace. Our team is full of passion and commitment into this important mission and the work that we do in Nexstim. And our -- anything we do is through ethics and responsibility. For example, in the area of designing our systems and manufacturing, we do all this work in Finland, and we take a high responsibility into having everything done ethically in an ethical manner. If we look quickly through a few key megatrends that support our role, and I want to highlight on the right the integrated Nexstim system, the unique proprietary NeuroMatic navigated TMS technology that we use for both diagnostic and therapy applications. And our competitive advantage is within the neuronavigation and how we model the E-field when inducing electric stimulation into the brain and the cortex. And if we look at the megatrends in -- from the aging populations' point of view. The population is aging and a significant decline in the working age [indiscernible] population in Western countries is what we're experiencing. And brain disease is increased with aging. And this is the fact that both the areas of brain tumors or brain diseases such as mental diseases, depression and also chronic neuropathic pain, they are, on average, increasing also with this aging population. So in that sense, the megatrend is also working towards us helping more patients also in the future with our systems. Technological development in healthcare is actively also researching and enabling wider use of new applications, and especially in the treatment of challenging brain diseases and disorders. We've seen a lot of change that from -- for example, from the severe depression or depressive disorder, major depressive disorder treatments, more and more patients are seeking for treatments that are outside of just the pharma approach and looking for a non-drug-treatment such as the Nexstim Systems. And we see that in the future, there will be more and more usages of systems like Nexstim Systems and the TMS. TMS area where drugs have either not been able to help the patients or the patients seek for something else than a pharma approach to their disease, whether it's a disorder such as depression or chronic neuropathic pain, as examples. The healthcare cost pressure is also our megatrend, both in private and the public healthcare sector. There is a need for more effective and faster rehabilitation for all patients. And especially, if we look at the working age population that would be affected by whether it be a brain tumor or depression or chronic neuropathic pain, a lot of the patients are still working age and are needed to be rehabilitated fast to the society and to be able to be productive members of the society as fast as possible. Then let's take a quick look before digging into the financial progress of '21. I still want to remind about the progress we've made with our business and products. So our -- we have 2 businesses derived from our technology platform. The first one is Diagnostics business and the second one is Therapy business. Now when we use our system for diagnostic purposes, we call it -- market it at the name of NBS, Navigated Brain Stimulation system. And when we use it for a therapy application, it is NBT, Navigated Brain Therapy system. If we start with the Diagnostics side, the status is such that we have over 200 systems sold. The application we use at NBS system is pre-surgical mapping of the brain, both motor and language functions prior to a surgery such as a tumor surgery. We are both CE-marked and FDA-approved for pre-surgical mapping of the brain, and we're the only TMS system in the world that has these both approvals, both CE-marked and FDA-approval for pre-surgical mapping of the brain with a TMS system. Now it is helpful for the surgeon, first of all, to have this knowledge of the motor and speech functions prior to making decisions on the surgery, for example, whether to operate or not. And then when in the surgery, this information also helps in decision-making. And in that sense, it helps also for better treatments or better outcomes from the surgeries and also for the patients, a faster recovery in that sense. The Therapy business, where we operate with the NBT Devices, we have over 50 systems, including the therapy software. And we've most recently, actually, we've sold systems that have both the NBS and NBT capabilities in the same system. And we call this, for example, in the U.S. market, an NBS5+ System, where there is the pre-surgical mapping applications, but also a depression application included in the system. So there's a bit of overlapping within these systems. But over 50 systems, Nexstim Systems, include the therapy systems, Therapy software at the end of '21. And in the depression indication, which is the main therapy indication right now, we are also both CE-marked and FDA-approved. So we can sell and market the NBT systems for depression treatment in the EU and also in the United States. And in the United States, in addition, we also have existing reimbursement for major insurance providers, and it's a wide reimbursement for this treatment of depression, major depressive disorder with TMS Device and that helps our customers which are typically clinics in the U.S., private clinics to purchase a Nexstim System and then, of course, to treat patients with insurance coverage. And finally, we also have a chronic pain application for the NBT that we use -- we have CE-marked to sell and market it in Europe. And we have currently some systems already have used for clinical use in Europe. And then as an example, the Helsinki University Hospital uses an NBT system for -- frequently for the treatment of chronic neuropathic pain patients, and have seen about a 50% remission or 50% of the patients have significant, meaningful, clinically meaningful help for their chronic pain symptoms. And on the depression side, our patient registry source that we have -- after 300 patients, we have a 50% remission rate and a 77% clinical response with the treatments, major depressive disorder treatments done in the U.S. with the Nexstim NBT system. So good results also on the therapy side. Then let's move on to the main topic of today, and we'll begin with the business summary for 2021. Year 2021 was Nexstim's historically best full year, measured by net sales, operating result and result for the review period. We also posted our first positive result for the period in the second half of '21, and this was the first positive results in the history of the company. So this is a big moment, and special thank you for, of course, the Nexstim team, our customers, our business partners and investors for making this a reality for Nexstim in the second half of '21. Our business continued to grow very fast despite the changes in the operating environment caused by the COVID-19 pandemic. So 2021 was still very much a COVID-19-affected year, and we managed to operate in a very, very efficient and a growing manner still despite the environment. And in some cases, it wasn't easy, but as a clever and agile company, we managed to overcome things like doing more remote demonstrations of our system for clinical and sales and marketing of the system. We also managed to deliver the systems to the hospitals despite some of the restrictions for mobility and entering hospitals. We also managed to look at components and to oversee that we have relevant components and supplies of them during '21. So there was a lot of things that affected it. But fortunately, the end result was that the system sales increased the most during the year 2021, up to 3.7 million was the system sales, and there was an increase of a 113%. So a substantial increase of that sales of systems for '21. Recurring revenue also had healthy growth and accounted for EUR 2.7 million, and an increase of 13.1%. When we look at the best reported full year to date, from a net sales perspective, we ended up at EUR 6.4 million, and there was a large increase of 55.5% in comparison to 2020. And also on the operating results side, I'm where we see that we posted a 56.4% decrease in our operating loss and ended up with EUR 1.5 million of loss in the operating results in comparison to EUR 3.3 million in 2020. When we look at the spread between Diagnostic and Therapy, Diagnostic business was the faster growing in '21. So our net sales grew in the Diagnostic business area by 71.4%, up to EUR 3.7 million. And in the Therapy business, we also saw very fast, fast growth by 37.9% in '21, and it amounted to EUR 2.7 million. So very healthy growth, amazing growth in both of these businesses. But the Diagnostic business sales growing even faster than the Therapy business in '21. And in the springtime of '21, we had a successful rights issue. It was oversubscribed and we managed to get a EUR 6.6 million in new capital raised in this issue. And this, of course, was a very, very big help for, first of all, growing our business during '21. But as you can also see from our cash position at the end of '21, we still have quite a bit of that left, and Joonas will be guiding you soon with our details and also the cash reserves, but very much needed capital was raised during the spring of '21. And then finally, as a strategic investment, we informed an investment in the service company of a California clinic, which is Piedmont Neuroscience Center Management, LLC, and this is management services organization, which provides some services for the clinic that treats patients with depression. And the value of the investment is around EUR 0.5 million. And we see that this type of partnerships with providing services through these MSOs these management services organizations, 2 clinics, specifically neuroscience centers in the U.S. is something that we will focus very much to also in the year '22 to make new clinics in the U.S. But I'll speak a bit more about that once Joonas has gone through some of the financial details of 2021. So with that, I move to Joonas now to go through some of the key financials for 2021.

Thank you, Mikko. Good afternoon, everyone. Today, in the morning, Helsinki time, we had the chance of publishing some good news in the form of Nexstim Plc financial statements release. The year 2021 was a great year of growth for Nexstim. And not only did we see a record growth pace and record revenue, but we also had the best year in terms of operating result and the result for the period. The total net sales for the full year grew by 56% to EUR 6.4 million. The Diagnostic NBS business grew by 71% to EUR 3.7 million, whereas the Therapy business grew at a really good pace of 38% to EUR 2.7 million. Now as for usual, we also review our total net sales by dividing it to sales of new systems and recurring revenue. And as we already saw in the first half, the year 2021 has been a really good year for sale of new systems. And that trend already -- that still continued in the second half and the growth of sale of new systems was 113% to EUR 3.7 million for the full year. At the same time, the strategically really important recurring revenue grew at a pace of 13% to EUR 2.7 million. Now while reviewing the revenue growth, it's really important to also take a look at the gross margin and gross margin ratio. And I'm really happy to see that in 2021, the gross margin ratio increased from 76% to 82% in comparison to 2020. The personnel expenses were EUR 4.3 million, with growth of 17%. At the same time, the other operating expenses grew by 27% to EUR 3.1 million. And the growth of operating expenses are mainly due to the non-recurring cost saving measures taken due to COVID-19 in the comparative period in 2020, the spring in Q2. The best operating result in the history was minus EUR 1.5 million, and that shows the operating loss decreasing by 56%. Now same as the webinar for our first half results, I wanted to use the simple graph, which represents our -- the development of net sales and operating result through recent years 2019 through 2021, and that's below the key financials table. The orange columns represent our net sales growth, and we can see that this has been accelerating and below that the blue columns represent our operating loss, which have been cut in half each year. Now when we take a look at the result for the period, that was also the best in the history of the company and that was minus EUR 0.8 million. Now even if we are reviewing full year figures here, I would like to note, as Mikko already said that the second half of 2021 was the first positive period for the company, and that is a real good milestone for the company internally and externally. The negative cash flow from operating activities decreased by roughly 30% to EUR 2.1 million. I would like to note that roughly EUR 0.5 million of this includes an investment EUR 0.5 million to secure a normal continuation of our -- of the manufacturing of our products during the shortage of components globally. At the end of the year, our cash position was EUR 5.2 million and the increase in cash position was mainly due to the successful rights issue during last spring. Now if we take into account the cash position and our increased profitability as well as the USD 4 million signing payment received from the significant license deal we published earlier this year. We can say that Nexstim is not planning any new funding rounds at the moment. Now to end with even more positive note, the future outlook for 2022 goes as follows. The company expects its revenue to continue to grow during year 2022 and the operating result for the year to be positive. Now I would like to remind everyone that next week on Tuesday, the 8th of March, we will be publishing the annual reports with the full financials. And that is a really good information package, and I really recommend everyone to take a look at that. It's a really good publication. And with that, back to you, Mikko.

Thank you. Thank you very much, Joonas, and we've now ended the '21 review and the happy progress in many areas of our financials. I'd like to end the presentation today with taking a look at our key strategic objectives for this year, 2022. So 2021 was a great year in progress in many areas. We've taken the view of also publishing our key strategic objectives as part of our financial statement release. And we've done this now twice earlier. And when we look at our strategic objectives for year 2022, we're very focused. So I'll reveal that there are 2 of them. And we look at the first one. Number 1, we want to continue the profitable net sales growth, leading into our first operating profit making financial year, while also minimizing future capital needs. And I'll split this objective into some areas, so how to achieve this? First of all, our organic growth will come from the both Diagnostic and Therapy businesses. We see that there's large opportunities for growth in both areas. We -- there's a need for systems that combine both the NBS and the NBT, the so-called NBS5+, which has both diagnostic and therapy capabilities. We see more and more customers, hospitals that want to do the pre-surgical mapping of the brain prior to surgery, then they want to possibly do a post-operative mapping of the brain and some of them even want to do therapy for patients afterwards, whether they be in rehabilitation for deficits from surgery or they might be also some patients that suffer from depression because of their condition. So this is one source of sales growth in a concrete manner for '22, is the sales of Diagnostic and Therapy systems and in some cases, that they are in the very same system provided to the hospital, customers, mainly. We also had a news piece very early this year in the mid-February about licensing our technology to Magnus Medical, Inc., a U.S. early-stage start-up company that will be using our technology for neuropsychiatric disorders. And the NBT technology, in particular, was licensed, that we got EUR 3.5 million initial upfront payment. And then we will have about EUR 13 million estimated royalties that are estimated to be paid in the future during the royalty period. But this EUR 3.5 million is going to be revenue for '22. It's going to be revenue, new type of a revenue for Nexstim, which is licensing revenue, but that's also going to be part of both the growth and also the profitability. So it's going to be a bit of a combination of this licensing revenue and licensing profit and profit from the licensing deal and then also drive from our organic growth through the NBS and NBT sales, the Diagnostic and the Therapy businesses. Now final comment on this is minimizing future capital needs. So as you heard from Joonas presenting our numbers at the end of '21, we have EUR 5.2 million in cash reserves. And we also got the EUR 3.5 million since that as an upfront payment. So our cash position right now is very good, and we look forward to a period where we don't have any funding rounds that are -- we are planning right now. And of course, if there are some investments in the future to our business which we see that would provide a good return for Nexstim and our shareholders, we will, of course, then be looking, considering -- reconsidering that. But at the moment, our operative business can run very well with the cash reserves we have and we can minimize the future capital needs by executing our strategy and operating our business. To the second point in our key strategic objectives. So as I mentioned, we have 2 objectives for this year. The second one is expansion of Nexstim's network of exclusive neuroscience center partner clinics, especially in the United States. The Piedmont Neuroscience Center, management services organization that I mentioned that we've invested into, the strategic investment we did at the end of year '21, we look forward to, of course, operating that new business, but also in expanding and having new neuroscience center type of partner clinics that Nexstim invests into opened in the United States. And we want to progress on this path in addition to our operational business and get this type of investment model. Because we see that there's a larger value chain in treating patients with mental disorders such as major depressive disorder and just by being a system provider or a service, we can do a lot more by being a service provider for those clinics. So providing the Nexstim systems to get the treatments done and also the exceptional results we can get by using a Nexstim system, but then have broader possibilities of servicing these clinics and helping them concentrate in what they do best, which is treating the patients and getting excellent treatment results. And we see that this will be backing our way also for the future profitability in a sense that we get the revenue from the system and the recurring revenue that we used to, but we're also adding other components that are going to be making us more profitable in the future. So those 2 are the main key strategic objectives for the year '22. And we, of course, look forward to reporting progress during this year onwards in these both objectives. So from the presentation, official presentation side, I thank you. I thank you for your listening. And I hope that we have some questions, and I can switch into the question mode and happy to answer some questions that I'm sure that Joonas can also address the ones that have maybe detailed questions on the financials. So thank you at this point already. [Operator Instructions] And I can see there's a few questions already, so I'll start answering. [Operator Instructions]

So the first question is from Fredrik Thor from Redeye, and it asked, could you expand a bit on the capitalized fixed assets for fiscal year '21 and what it relates to? Maybe Joonas, do you want to pick up that one?

Sure. So in addition to patents and other IP, the fixed -- capitalized fixed assets mainly consist of development costs related to our -- development costs related to continuing development of our already commercialized products, and we see that those costs will have an impact over multiple years.

Yes. Thank you, Joonas. There's also Fredrik continuing with a question on the backlog. So we mentioned a EUR 1 million backlog in the [indiscernible] review and what is the split between NBS and NBT?

I can maybe continue on that. So we have published a press release of each or most of the orders during the second half. And we can -- it's fair to say that the strong emphasis is on the NBS systems. But many of those nowadays tend to have the hybrid capabilities, so meaning that there are the therapy capabilities in the system, even if it's an NBS system.

Okay. Thank you, Joonas. And then there's also quite a financial focus on the next question. It's also from Fredrik. For 2023, what can we expect in terms of EBIT margin without upfront and potentially with royalties? Should we expect a decrease before Magnus have ramped up sales? That's a very good question. And I think it might be quite early to speculate on the '23, as we are only giving an outlook on '22. But I understand the kind of need to understand year '23. And I have to say that if we look at the licensing business, the Magnus licensing agreement is the first one for Nexstim in this area of licensing and it's a very significant deal for us. I wouldn't expect that we're going to do similar deals necessarily every year. So it is, in that sense, a bit of an exceptional deal. There are, of course, possibilities that we might license our technology. We license it now to therapy and I would say, quite a narrow area in that sense that there are still a lot of possibilities. For example, the Diagnostics area, the Diagnostics business, there might be some licensing possibilities there. There might also be some licensing possibilities for other geographies than the U.S. So there could be licensing deals-- but I don't want to go into the exact detail of commenting on the 2023 financials, but I understand -- I understand the so-called worry on what happens between '22 and '23. And I can tell that this is a big focus also for Nexstim's management. And we want to ensure that '23 will also be, of course, a financially successful year but without commenting on the details yet. And there are also some things that I don't want to mention, which are in relationship to competitive situation, of course, and then there are some things where we have to, for example, on the licensing side, we need to respect our confidentiality agreements. So that's where I can take it, unless there's anything else, Joonas, you would want to add on that question about '23?

No, I think that was a good answer.

Okay. Thank you. Then we have a question, anonymous question about, will the Magnus Medical upfront be recognized in the first half of '22? Or is there a deferred recognition element? Maybe you, Joonas, could take that one?

Yes. So we are estimating that all or most of the upfront payment will be recognized as revenue in the first half. And if there will be a deferred element, that would be a minimal one and recognized during the second half.

Yes. Thank you. No additions to that. So it's very likely that most of the revenue indeed would be recognized in the first half of '22. [Operator Instructions] We also have time, of course, to talk later on if someone wants to be in contact either by e-mail or call and that's possible. Okay. There's one new question from Fredrik. An overall growth in NBS was strong and will be strategically important for Nexstim's own operations given the deal with Magnus Medical. With more internal resources, what do you hope to achieve in upcoming years? That's a very good question. And I think that this year '21 has shown that there's a lot of potential in the Diagnostics business, first of all. So Nexstim can, by taking our Diagnostics business forward, there's huge possibilities of getting both growth and high-margin growth. So as you see, the Diagnostic system sales was the most -- the area of most increased revenue during this year. And this was also year '21. And it was also the year where we had the highest posted margins, gross margins, and we also posted the first positive result, for example, in second half. So there's a lot of potential in the Diagnostics business. I also still want to say that despite the Magnus Medical deal, the Therapy business has a huge potential also, because we've taken the strategy of operating or having the therapy capabilities also within the same system, so the future NBS such as the NBS5+, they will have both diagnostic and therapy capabilities. So if a hospital buys that nowadays, most of the hospitals actually want the therapy capabilities also within them. So there will be hospital use of NBS systems that will have therapy capabilities in the future in all markets, and that includes the U.S. Then we have our own clinic -- strategic investments into the clinics. The Clinic business will have possibilities that the neuroscience centers are so-called allowed in the Magnus Medical deal as we posted in the release on the 14th of February. We can operate neuroscience centers and we can do strategic investments into those neuroscience centers management services organizations. So we can have management services organizations in the future, also in the U.S. that help neuroscience centers treat their patients. So that's going to be for our purposes and for our profitability purposes. We see that there is a significant potential still in that area. And then finally, the therapy business outside of the U.S. So the Therapy business outside of the U.S. is not, in any means, it decreased by -- or restricted by the Magnus agreement. Of course, we can't do SAINT type of treatments, as such, but we can do therapy treatments such as cell NBT systems in the future or therapy systems in the future, for example, markets like in the EU. And of course, potentially in the future also to the Asian markets. So there's still a lot of potential in that. But I do understand that certain restrictions, purely to the NBT system in the U.S. will be somewhat restricting, of course, that growth potential in the U.S. But the Diagnostics business, the partnership clinics and the therapy outside of the U.S. have huge potential still left for the company. Okay. And then we have a question from [indiscernible] from Trinity. First of all, congratulations on achieving profitability. Looking ahead, is this something you see becoming a consistent feature or will you continue to invest and when appropriate? A very good question, indeed. Thank you. Our strategic objective, the main objective when we renewed our strategy already from 2020 to '24 was to get Nexstim into a profitable path and profitability -- long-term profitable path. And I see that, of course, second half of '21 was shown to be the first one that we actually made flat numbers. But also '22 now, we're having an outlook for the first ARPU positive operating results also for the year. And without going into the detail of the '23 or the '24, but I would say that, of course, we're coming towards the end of the strategy period, which ends at '24. And I don't see any reason why we should have less ambition to the future profitability when we get towards the end and with the strategy period. At the same time, we do know that there might be some very interesting investment possibilities in the future that might arise. One of them might be that maybe we want to accelerate certain parts, certain growth, whether it be in the Diagnostics business or the clinics, the partnership clinics I mentioned or some other areas, we might, of course, then introduce new investments, and that might mean that we get funds, for example, grants or some other funding methods to fund those investments. And then finally, we have had quite a bit of a science, of course, and a clinical evidence as part of our values and we still have that. And there might be some interesting trial works. There might be some interesting work in the area of possible new indications, and that's also an area where we might invest still in the future. But purely looking at '22, where our financial guidance currently ends at, we're probably going to see more of an operational execution year. And then when we look towards the end of the strategy period, '23 and '24, we might have some questions around these investments, but we are not willing to drop out our profitability objective when we reach to the end of our strategy period. I hope that answers the questions. And that's, at least, quite openly how we feel at the moment. It seems like we don't have any questions right now posted. We still have time if there's some final -- maybe final questions on anything in relationship to our business or financials. Thank you. Thank you all for participating. Thank you, [indiscernible] Fredrik, for the questions, very good questions. We, of course, hope to see the positive news flow and the possibilities of reaching out during this year with positive news flow. But of course, in August, on the 12th of August, we will be publishing the first half of '22 numbers, so officially then. But before that, as Joonas mentioned, our annual report on the 8th of March comes out, the '21 annual report and then, of course, looking forward to publishing other news flow in relationship to how we progress with our business going forward. So thank you, everyone, and I wish you a great week forward and a happy upcoming springtime. Thanks.