8-K: Neuronetics Announces Greenbrook TMS Acquisition Amidst Mixed Q2 Results

Neuronetics reported a 7% year-over-year revenue decrease in Q2 2024, but announced a definitive agreement to acquire Greenbrook TMS, aiming for a vertically integrated mental health care model.

Summary

• Neuronetics' Q2 2024 revenue was $16.5 million, a 7% decrease year-over-year, primarily due to lower treatment session revenue impacted by the Change Healthcare cybersecurity breach.
• The company recognized revenue on 50 NeuroStar systems, meeting the high end of their guidance.
• Treatment session revenue decreased by 5% due to customers prioritizing cash for operations over purchasing new sessions.
• Despite revenue challenges, utilization in the local consumables segment increased by 18%.
• The Better Me Program (BMP) showed significant improvements, including a 6.4x increase in 24-hour follow-up rates and a 3.7x increase in motor threshold determinations.
• Neuronetics launched NeuroStar TMS therapy for adolescents, with over 425 patients treated since April and several major insurance providers updating their policies to include adolescents as young as 15.
• Gross margin was 74%, a 150 basis point increase from the previous year.
• Operating expenses were $20.7 million, a 3% increase year-over-year.
• Net loss for the quarter was $9.8 million, or $0.33 per share.
• EBITDA for the quarter was negative $8.0 million.
• Neuronetics secured a new debt facility of up to $90 million with Perceptive Advisors, including an initial tranche of $50 million.
• The company expects Q3 revenue to be between $18.5 million and $19.5 million and maintains full-year revenue guidance of $78 million to $80 million.
• Neuronetics announced a definitive agreement to acquire Greenbrook TMS, with Neuronetics shareholders owning approximately 57% of the combined entity.
• The combined company anticipates mid-teen year-over-year revenue growth in fiscal years 2025 and 2026 and expects to be both adjusted EBITDA positive and cash flow positive for full fiscal year 2025.
• The merger is expected to close in the fourth quarter of 2024.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While the Q2 results were disappointing, the acquisition of Greenbrook TMS and the potential for future growth and profitability are positive. The sentiment is cautiously optimistic, with a focus on the potential benefits of the merger.

Positives

• The Better Me Program (BMP) is showing strong results, significantly improving patient follow-up and treatment rates.
• The launch of NeuroStar TMS therapy for adolescents is progressing well with positive adoption rates and expanding insurance coverage.
• Gross margin increased by 150 basis points, indicating improved cost management.
• The new debt facility provides financial flexibility and supports ongoing investments.
• The acquisition of Greenbrook TMS is expected to create a vertically integrated company with significant scale and cost synergies.
• The combined company is projected to achieve mid-teen revenue growth and be cash flow positive in 2025.
• The company is piloting a TV advertising campaign in Tampa, Florida to increase awareness of NeuroStar TMS.

Negatives

• Q2 2024 revenue decreased by 7% year-over-year, primarily due to the Change Healthcare cybersecurity breach.
• Treatment session revenue decreased by 5% as customers prioritized cash for operations.
• Net loss for the quarter was $9.8 million, a significant increase compared to the previous year.
• EBITDA for the quarter was negative $8.0 million.
• The Change Healthcare cybersecurity breach caused delays in payments and impacted customer purchasing patterns.

Risks

• The Change Healthcare cybersecurity breach continues to impact revenue and customer purchasing patterns.
• The company's ability to achieve or sustain profitable operations is uncertain due to its history of losses.
• The company relies heavily on the sale and usage of the NeuroStar Advanced Therapy System.
• The company faces risks related to the scale and efficacy of its salesforce.
• Availability of coverage and reimbursement from third-party payors for treatments using the company's products is a risk.
• The company is subject to risks related to physician and patient demand for treatments using its products.
• The company faces competition from other technologies and therapies.
• The company is subject to risks related to product defects.
• The company's revenue has been concentrated among a small number of customers.
• The company faces risks related to obtaining and maintaining intellectual property protection.
• The company is subject to risks related to developments in clinical trials or regulatory review.
• The company is subject to risks related to the terms of its credit facility.
• The company's ability to successfully roll-out the Better Me Provider Program on the planned timeline is a risk.
• The company's self-sustainability and existing cash balances are a risk.
• The company's ability to achieve cash flow break-even in the fourth quarter of 2024 and on a full-year basis in 2025 is a risk.
• The merger with Greenbrook TMS is subject to risks and uncertainties, including the ability to meet expectations regarding the timing and completion of the merger, the occurrence of any event that would terminate the merger, and the approval of the merger by shareholders.
• The merger could disrupt management's attention from ongoing business operations.
• The merger could affect the relationships with customers and operating results.
• The merger could result in legal proceedings.
• The company faces risks related to the retention of employees of Greenbrook following the merger.
• The company's stock price may decline significantly if the merger is not completed.

Future Outlook

Neuronetics expects a return to normalized treatment session ordering patterns in the second half of the year, anticipates mid-teen year-over-year revenue growth for the combined company in 2025 and 2026, and expects to be both adjusted EBITDA positive and cash flow positive for full fiscal year 2025.

Management Comments

• Keith Sullivan stated that the company's financial performance during the quarter was below expectations, but they believe the negative headwinds from Change Healthcare are transient.
• Keith Sullivan highlighted the positive results from the Better Me program and the launch of NeuroStar TMS therapy for adolescents.
• Steve Furlong mentioned that the new debt facility provides additional financial flexibility and supports ongoing investments.
• Keith Sullivan expressed excitement about the acquisition of Greenbrook TMS and the potential for a vertically integrated company.
• Keith Sullivan stated that the merger will create a stronger, more efficient, and more effective organization that can better serve patients and NeuroStar providers.
• Keith Sullivan mentioned that the combined company will be able to leverage its scale and capabilities to become the organization to provide innovative care solutions for practices looking to treat patients suffering from mental health conditions.
• Steve Furlong stated that the company is very comfortable with the Q3 guidance and that collections have rebounded.
• Steve Furlong mentioned that the $15 million in cost synergies is an initial take and that the company will work through the integration to realize those synergies.
• Keith Sullivan stated that the combined company anticipates a 15% growth between the two companies for next year.
• Steve Furlong stated that the first priority is getting to the $15 million synergy number and that the second priority is increasing the efficiency in utilization in the Greenbrook stores.

Industry Context

The announcement comes at a time when there is a growing focus on mental health and innovative treatment options. The merger of Neuronetics and Greenbrook TMS reflects a trend towards consolidation in the mental health services industry, aiming to create larger, more efficient organizations capable of providing comprehensive care.

Comparison to Industry Standards

• Neuronetics' revenue decline in Q2 contrasts with some other medical device companies that have shown growth, indicating the impact of the Change Healthcare issue was significant.
• The company's gross margin of 74% is competitive with other medical device companies, but the operating expenses and net loss highlight the challenges in achieving profitability.
• The acquisition of Greenbrook TMS is a strategic move to create a vertically integrated model, similar to some larger healthcare providers that control both the technology and the service delivery.
• The projected mid-teen revenue growth for the combined entity is ambitious and would position the company as a leader in the TMS therapy space, if achieved.
• The cost synergies of $15 million are significant and would improve the financial profile of the combined company, but the success of the integration will be critical.
• The goal of achieving cash flow positivity in 2025 is a key milestone that would demonstrate the viability of the combined business model.

Management Changes

Stakeholder Impact

• Shareholders of Neuronetics and Greenbrook TMS will be impacted by the merger, with Neuronetics shareholders owning approximately 57% of the combined entity.
• Employees of both companies will be impacted by the integration, with some management changes and potential cost synergies.
• Customers of Neuronetics will benefit from increased brand recognition, potential improvements in business operations, and expanded training opportunities.
• Patients will benefit from increased access to mental health therapies and a more comprehensive approach to care.
• Suppliers and creditors will be impacted by the changes in the combined company's operations and financial structure.

Next Steps

• Neuronetics and Greenbrook will file preliminary and definitive joint proxy statements with the SEC and on SEDAR+.
• Shareholders of both Neuronetics and Greenbrook TMS will vote on the proposed merger.
• The merger is expected to close in the fourth quarter of 2024.
• Neuronetics will focus on integrating Greenbrook TMS and realizing cost synergies.
• The company will continue to expand the Better Me Program and roll out SPRAVATO treatment in Greenbrook locations.
• Neuronetics will pilot a TV advertising campaign in Tampa, Florida.
• The company will continue to advocate for further policy updates and providers with payers for adolescent treatment.

Key Dates

Keywords

NeuroStar, TMS, Greenbrook TMS, Mental Health, Depression, Acquisition, Revenue, EBITDA, Better Me Program, Adolescent Treatment, Merger, Healthcare, Psychiatry, Insurance Reimbursement