DEFA14A: Neuronetics to Acquire Greenbrook TMS in All-Stock Transaction; Reports Q2 2024 Financial Results

Neuronetics announces a definitive agreement to acquire Greenbrook TMS in an all-stock transaction, aiming to create a leading mental health provider, while also reporting a 7% decrease in Q2 2024 revenue.

Summary

• Neuronetics reported a 7% decrease in revenue for Q2 2024, totaling $16.5 million compared to $17.6 million in Q2 2023.
• U.S. NeuroStar Advanced Therapy system revenue decreased by 11% to $4 million, with 49 systems shipped compared to 54 in the same quarter last year.
• U.S. treatment session revenue decreased by 5% to $11.7 million, attributed to customer cash flow difficulties stemming from the Change Health cyberattack.
• Gross margin increased to 74% from 72.5% in Q2 2023.
• Operating expenses increased by 3% to $20.7 million.
• Net loss widened to $(9.8) million, or $(0.33) per share, compared to $(4.9) million, or $(0.17) per share, in Q2 2023.
• EBITDA was $(8.0) million, compared to $(3.3) million in Q2 2023.
• Cash and cash equivalents were $42.6 million as of June 30, 2024, down from $59.7 million at the end of 2023.
• Neuronetics and Greenbrook TMS have entered into a definitive agreement for Neuronetics to acquire all outstanding shares of Greenbrook in an all-stock transaction.
• The combined company's pro forma revenue for fiscal year 2023 would have been approximately $145 million.
• The combined company expects mid-teens year-over-year revenue growth in fiscal years 2025 and 2026.
• The combined company expects to realize at least $15 million of annualized cost savings, primarily in fiscal year 2025.
• The combined company anticipates being Adjusted EBITDA positive and cash flow positive for the full fiscal year 2025, excluding one-time transaction costs.
• Major insurers, including Humana, BlueCross BlueShield of Michigan, Cambia Health Solutions, Medi-Cal, and Aetna, have expanded TMS therapy coverage for adolescents.
• Neuronetics launched its Better Me Provider program nationwide to enhance patient care and accessibility.
• Neuronetics secured a debt facility of up to $90 million with Perceptive Advisors, with an initial tranche of $50 million.

Sentiment

Score: 6

Explanation: The sentiment is mixed. While the acquisition of Greenbrook TMS and expansion of insurance coverage are positive developments, the Q2 2024 financial results show a decline in revenue and increased losses. The forward-looking statements are cautiously optimistic, but subject to significant risks and uncertainties.

Positives

• Gross margin increased by 150 basis points to 74% in Q2 2024.
• Major insurers are expanding TMS therapy coverage for adolescents, increasing the potential patient base.
• The Better Me Provider program is showing promising results in improving patient care and accessibility.
• The acquisition of Greenbrook TMS is expected to create a vertically-integrated organization with increased revenue scale and cost synergies.
• The new debt facility provides financial flexibility and supports ongoing investments in commercial initiatives and clinical indication expansion.

Negatives

• Q2 2024 revenue decreased by 7% compared to Q2 2023.
• U.S. NeuroStar Advanced Therapy system revenue decreased by 11% year-over-year.
• U.S. treatment session revenue decreased by 5% year-over-year, attributed to customer cash flow difficulties.
• Net loss widened to $(9.8) million in Q2 2024 from $(4.9) million in Q2 2023.
• EBITDA was negative $(8.0) million in Q2 2024, compared to negative $(3.3) million in Q2 2023.
• Cash and cash equivalents decreased from $59.7 million at the end of 2023 to $42.6 million as of June 30, 2024.

Risks

• 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 its NeuroStar Advanced Therapy System to generate revenues.
• The success of the company depends on the scale and efficacy of its salesforce.
• Availability of coverage and reimbursement from third-party payors for treatments using the company's products is crucial.
• Physician and patient demand for treatments using the company's products is subject to change.
• Developments in competing technologies and therapies could negatively impact the company.
• Product defects could harm the company's reputation and financial performance.
• The company's revenue has been concentrated among a small number of customers.
• The company's ability to obtain and maintain intellectual property protection is important for its long-term success.
• The company's ability to successfully roll-out its Better Me Guarantee Provider Program on the planned timeline is uncertain.
• The company's self-sustainability and existing cash balances are critical for its continued operation.
• 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 not guaranteed.
• The Greenbrook acquisition is subject to risks and uncertainties, including the ability to meet expectations regarding timing and completion, shareholder approval, and potential termination fees.
• The announcement of the Greenbrook transaction could disrupt management's attention from ongoing business operations and affect relationships with customers.
• The Greenbrook and Neuronetics stock price may decline significantly if the transaction is not completed.

Future Outlook

The company expects total worldwide revenue between $18.5 million and $19.5 million for the third quarter of 2024 and between $78.0 million and $80.0 million for the full year 2024; total operating expenses are expected to be between $78.0 million and $80.0 million for the full year 2024; the combined company anticipates to be Adjusted EBITDA positive and also cash flow positive for the full fiscal year 2025, excluding one-time costs related to the transaction.

Management Comments

• 'Despite continued industry headwinds that impacted our customers during the quarter, were pleased to see the continued momentum within our business and the positive impacts our training and education initiatives are having, in particular our Better Me Provider program,' said Keith J. Sullivan, President and CEO.
• Keith J. Sullivan also stated, 'I am especially enthusiastic about our announced agreement to merge with Greenbrook TMS. This transaction brings together two of the leaders in the mental health space in the U.S., which will allow us to provide access to innovative care to patients suffering from mental health conditions.'

Industry Context

The announcement reflects a trend towards consolidation in the mental health services industry, with companies seeking to expand their reach and service offerings through mergers and acquisitions; the expansion of insurance coverage for TMS therapy, particularly for adolescents, signals growing acceptance and recognition of this treatment modality within the healthcare system.

Comparison to Industry Standards

• Neuronetics' revenue decline contrasts with some other medical technology companies that have shown growth in the same period, suggesting company-specific challenges.
• The acquisition of Greenbrook TMS is similar to other strategic mergers in the healthcare sector aimed at achieving economies of scale and expanding market presence.
• The expected cost synergies of $15 million are in line with typical synergy targets in similar transactions.
• The goal of achieving EBITDA and cash flow positivity in 2025 is a common objective for growth-stage medical technology companies.

Stakeholder Impact

• Shareholders of both Neuronetics and Greenbrook will be impacted by the acquisition, with Neuronetics shareholders owning approximately 57% and Greenbrook shareholders owning approximately 43% of the combined company.
• Customers of both companies are expected to benefit from increased brand awareness, more consistent delivery of best practices, and access to centralized services.
• Employees of both companies may experience changes in roles and responsibilities as a result of the integration.
• The combined company aims to provide access to innovative care to patients suffering from mental health conditions.

Next Steps

• Neuronetics and Greenbrook will file preliminary and definitive joint proxy statements with the SEC and on SEDAR+.
• Shareholder meetings will be held to approve the transaction.
• The transaction is expected to close during the fourth quarter of 2024, subject to customary closing conditions.
• Neuronetics intends to cause the common shares of Greenbrook to be delisted from the OTCQB and to cause Greenbrook to submit an application to cease to be a reporting issuer under applicable Canadian securities laws.

Key Dates

Keywords

Neuronetics, Greenbrook TMS, TMS Therapy, NeuroStar, Acquisition, Mental Health, Depression, Financial Results, Revenue, EBITDA