Neuronetics, Inc.

standing by, welcome to the Neuronetics second quarter 2021 financial and operating results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Klossner. Please go ahead.

Good morning, and thank you for joining us for Neuronetics' second quarter 2021 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 impact of COVID-19, and other operational issues and metrics. Actual results could 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 Neuronetic's 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 and the Form 10-Q, which will be filed later today. 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 to by excluding certain non-cash 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 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.

Good morning and thank you for joining us. I'll begin by providing an overview of our second quarter performance, followed by an operational update. Steve will then review our financial results, and I will conclude with our thoughts for the balance of 2021 before turning to Q&A. Starting with the review of the second quarter, Total revenue was $14.2 million, up 46% from the second quarter of 2020, driven by strong year-over-year growth in treatment session revenue. Our U.S. treatment session revenue was up 65% over the second quarter of 2020 as a result of three things. One, the increased impact from the work of our NPCs are doing in the field to train our existing accounts. our patient education programs, and three, the continued growth in our installed base. As a result of these initiatives during the second quarter, the number of treatment sessions utilized has increased 62% over the quarter of 2020. As previously noted, our goal for 2021 is to have treatment session revenues approach 2019 levels by year end. I'm happy to report that we have already exceeded this goal through the first half of the year. In the middle of May, we experienced a dip in average daily treatment sessions. As you know, we monitor this metric weekly. The start of this movement coincided with the CDC announcement removing masks and social distancing requirements for those vaccinated. Many of our larger customers saw this same trend as people opted to travel for the first time in 18 months. rather than begin treatment. We believe that this was transitory, as we have seen the daily average rebound back to 3,000 treatment sessions per day level we mentioned on our last call. Unless this new strain of COVID causes more disruption, we believe our utilization will continue to grow as our accounts grow their participation in the Precision Pulse program. On the capital equipment side, U.S. Neurostar Advanced Therapy System revenue increased by 10% over the second quarter of 2020 and grew by 47% sequentially over the first quarter of 2021. The year-over-year and sequential growth is a positive indicator of the return of a more normalized capital environment bolstered by strong customer demand for new systems. We had mentioned in our last call that we expected our capital team to gain traction in the second quarter. As expected, our BDMs were able to close several of their leads from the first quarter and continue to generate high-quality opportunities. We expect them to be increasingly more productive through the balance of the year. During the quarter, we hosted a unique business development event, the Neurostar Summit, with a large group of potential customers and several existing ones. The event was held in Austin, Texas, and over 80 physicians and practice managers from over 50 different accounts were present. Attendees were highly engaged throughout the event, which focused on providing prospective customers an in-depth understanding of the Five Stars to Success program, which is our prescriptive program that educates our customers on the value the Neurostar team brings to them. As a reminder, STAR-1 is our clinical protocol. STAR-2 is reimbursement and office support needs. STAR-3 is training staff on how to best educate patients. STAR-4 is marketing within the practice, and STAR-5 is marketing outside the practice. The immediate results were very encouraging, as we closed a number of capital sales at the event and several subsequent to it. To date, the results of the event have been extremely favorable, and we believe several additional systems will close in the coming months. Given these positive results, we are planning on hosting other similar events in the third and fourth quarter, where we expect strong turnouts. Events like these are just one of the areas we are investing in to increase awareness and better educate physicians. The second quarter represented continued progress towards the commercial transition we initiated in early 2021. We remain focused on executing on the initiatives to build awareness and motivate patients with depression to request NeuroStar. We are accomplishing this by training our customers on the best practices to educate patients who are searching for an alternative to drugs by showing the benefits of NeuroStar. Beginning with our marketing campaigns, we continue to successfully leverage our digital and social media channels to educate patients and connect them with physicians in their area. During the quarter, we generated over 41 million ad impressions, and our ongoing emphasis on these campaigns have driven a 34% increase in year-to-date website visits. Not only are we engaging with patients in the right channels, but our refined messaging is resonating with these patients. The number of people who have requested an appointment with a NeuroStar provider through our website is up over 100% year to date. A significant percentage of these patients requesting appointments with NeuroStar are being routed through our concierge call center. The call center has ramped quickly since its launch, and we saw more than a 30% increase in the number of accounts who are qualified to receive leads over the first quarter of 2021. We continue to be excited by the strong response rates from our campaigns, which not only validate our approach and our messaging, but highlight the strong demand for an alternative treatment to drugs. This influx of interest is a great opportunity for us to work with our customers to help as many of these patients as possible beat their depression with the NeuroStar Advanced Therapy for Mental Health. If you recall, our initial market research results demonstrated aided awareness of NeuroStar as a non-drug alternative in patients with depression was under 9%. After six months of our DTC marketing, our most recent research reflects an aided awareness of NeuroStar at 15%. We are encouraged by this trend. turning to an update on the Five Stars and the Precision Pulse program, which are designed to make sure that our customers are able to assist as many patients as possible. The adoption of the Five Stars program continues to be extremely high, as our NPCs continue to educate existing customers on its benefit. At the end of the second quarter, nearly 100% of our customers were participating in the program and progressing through the various levels. We also continue to see strong interest in the Precision Pulse Program. The number of participating accounts grew by 40% during the quarter, and currently 42% of accounts have joined the program since we rolled it out this February. We expect to see more customers participate as we progress through the year. Encouragingly, accounts in the Precision Pulse Program, on average, increase treatment session utilization by 17% in the second quarter compared to the first quarter. Overall, these programs are garnering high levels of participation and are leading to increased awareness and high levels of treatment session being delivered. Lastly, I wanted to provide an update on our clinical and regulatory strategy. At this year's Clinical TMS Society meeting in June, we had a major presence, which included sponsored presentations poster presentations, and a strong presence on the podium. The energy at the event around the company and our technology was high, and the event served as a great opportunity to reengage with many of the society members, physicians, key opinion leaders, and customers who we had not interacted with in person for over 18 months. Importantly, some key pieces of new data were presented during the conference. Dr. Harold Sackheim, a thought leader in TMS, presented an analysis based on data from our industry-leading patient outcome registry. This analysis found that in patients completing a course of therapy, the results in routine clinical practice were more effective than in the original sham-controlled trials. In Dr. Sackheim's analysis, he found Neurostar delivered an 83% response rate and a 62% remission rate. This is a large improvement from the early clinical trial, which produced a 58% response rate and a 37% remission rate, and continues to be a massive improvement over the results achieved by medication. Dr. Salkheim's data demonstrated that NeuroStar has the highest published response and remission rate in the industry. As it relates to our regulatory strategy, we continue to have a productive dialogue with the FDA to explore pathways to label expansion and clearances for additional indications. Our previously scheduled meeting with the FDA has been rescheduled a few times due to internal conflicts within the agency. While we are disappointed with the delay, we are working with the staff to get a meeting scheduled as soon as possible. In advance of this meeting, we recently received a letter from the FDA acknowledging our prior submission and suggesting they would consider use of our real-world data to support a clearance for a label expansion. The letter had a number of questions that we will discuss with the FDA once we are able to meet. But overall, we view the communication as positive. We look forward to continuing our dialogue with the FDA to help clarify our path forward. Overall, I am pleased with our performance during the first half of the year. The continued early execution by our commercial organization and the positive response in the market from both customers and patients reinforces that what we are doing is resonating. I am confident that we are focused on the right initiatives to execute on our growth strategy as we seek to expand upon our market leadership position and bring relief to more patients suffering from mental health disorders. I'd now like to turn the call over to Steve to provide a financial overview. Thank you, Keith.

Total revenue for the second quarter was $14.2 million, an increase of 46% over second quarter 2020 revenue of $9.7 million. During the quarter, total U.S. revenue increased by 49% over the prior year quarter. The U.S. revenue growth was primarily driven by an increase in U.S. treatment session revenue. U.S. Neurostar advanced therapy system revenue was $2.6 million. Compared to the prior year revenue of $2.3 million, it was up 10%, and compared to the first quarter of 2021, was up 47%. The increase was primarily driven by our BDM team gaining traction in the new territories, resulting in an increase in the number of Neurostar systems sold relative to the prior year quarter. The company sold 36 systems, up from 35 in the second quarter of 2020, and up significantly from 23 systems sold in the first quarter of 2021. U.S. treatment session revenue was $10.8 million. an increase of 65% over second quarter 2020 revenue of $6.5 million, primarily driven by a significant increase in treatment session volumes relative to the prior year. On a sequential basis, U.S. treatment session revenue increased by 12% over the first quarter of 2021. Revenue per active site was approximately $12,000. compared to approximately $7,400 in the prior year quarter. As a reminder, we calculate this metric by dividing total U.S. treatment session revenue by the beginning of quarter active sites. Gross margin for the second quarter of 2021 was 80.6%, compared to the second quarter 2020 gross margin of 76.2%. The primary driver of the increase was a favorable product mix of treatment sessions versus capital sales. Operating expenses during the quarter were $18 million, an increase of $3.7 million compared to the second quarter of 2020, primarily driven by higher marketing expense and stock-based compensation expenses. During the quarter, we incurred approximately $1.9 million of non-cash stock-based compensation expense. Net loss for the second quarter of 2021 was $7.5 million, or 29 cents per share, as compared to a net loss of $7.8 million, or 41 cents per share, during the second quarter of 2020. EBITDA for the second quarter of 2021 was negative $6.3 million, as compared to negative $6.5 million for the second quarter of 2020. Moving to the balance sheet, as of June 30th, 2021, cash and cash equivalents were $115.8 million. Now turning to guidance. For the full year 2021, we continue to expect revenue in the range of $59 million to $63 million. consistent with our previously issued guidance. Our guidance assumes there are no major COVID resurgences that impact our customers or patients. In addition, we expect that our BDMs and NPCs contributions will increase during the second half of the year as they continue to gain experience and progress towards full productivity. For the third quarter of 2021, we expect revenue in the range of $15 million to $16 million. As we communicated early in 2021 when we raised capital, we would be evaluating our spending based on trends we were seeing in the business. As a result of the early success from our marketing and customer education and training efforts, we have decided to increase our investment in these areas of the business. as well as in research and development and clinical to drive our future growth. The company now projects total operating expenses for the full year 2021 to be in the range of $68 million to $72 million. I would now like to turn the call back over to Keith.

Thanks, Steve. Turning to our expectations for the remainder of 2021, we will continue to be focused on building awareness of Neurostar among depression patients and training our customers on the best practices to educate them who are searching for an alternative to drugs on the benefits of NeuroStar. Specifically, we will work to optimize our digital and social media campaigns, expand our concierge call center efforts, launch new customer programs, and continue to put the pieces in place to execute on our clinical and regulatory strategy. As we progress through the year, we continue to be encouraged by the success of our new commercial strategy. As our BDMs and NPCs spend more time with customers, and as we fully implement and refine our Five Stars to Success and Precision Pulse programs within a greater population of our customer base, we expect to continue to see a positive impact of these initiatives throughout the back half of 2021 and into 2022. I'd now like to open the line for questions.

Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. First question comes from Margaret Katzor with William Blair.

Hey, good morning, everyone. Thanks for taking the questions. I wanted to follow up a little bit first on some of the early comments you talked about in terms of the dip in treatment metrics in mid-May. You did talk about maybe seeing that rebound back to 3,000 treatments per month. So I guess, did you guys hear that this was more of a delay in patient starts, or is it patients delaying showing up for that initial doctor visit? And then could you see a bull list of patients as they come back later on throughout the year?

So good to talk to you, Margaret. The initial blip that we saw was in treatment sessions, patients putting off the start of their treatment. And then we saw it rebound back a few weeks later.

So, Margaret, another metric that we surveyed some of our large customers, and the no-show rate actually went up significantly. And so many of our customers you know, continue to contact new patients to make sure they show up for that initial MT. And what they saw in May and early June was that level of people that didn't show up, you know, rose to close to 15%. So we think it's just a delay relative to the revised CDC guidelines.

Okay. That's helpful. And part of the reason for the ask is we've got low single-digit to low double-digit utilization growth over the next two quarters sequentially. So What we're trying to figure out is how doable is that with the top crowns kind of growing in that mid-teens or a little better, and is that what's assumed in your guidance as well?

Yes. You know, we're a little, I would say, concerned with the Delta variant right now and, you know, the impact it could have on our customers and patients. You know, again, we are forecasting an increase in utilization and treatment session volumes going forward. Again, it's just, you know, we're still in that environment of somewhat unknown. But, yes, I mean, we are forecasting a continued momentum in Q3 and Q4. Obviously, if you look at our year-to-date performance, compared to 2019, it's strong from a treatment session perspective. And so, again, it's a very back-end loaded plan for the year, but, you know, we did reaffirm guidance, and we are pushing towards, you know, getting to where we said we would.

Okay. And just if I could squeeze one more in because you referenced Delta a little bit, but are you seeing any of that impacting your business right now? Because you didn't include it in guidance, so it seems like maybe you're not, other than, you know, just the general worry like some of the rest of us.

Yeah, we're not seeing anything now. We're not seeing anything. And, you know, our accounts are, you know, geared up to be able to handle COVID patients, so we're not seeing any close down or any reaction like that.

Perfect. Thanks, guys. Our next question comes from Matt O'Brien with Piper Sandler.

Hey, guys. It's Adam on for Matt. Thanks for taking the questions. I wanted to start with a question on the guidance, kind of following up on Margaret's line of questioning. So, you know, the guide implies a nice ramp in the back half of the year. So maybe just talk about your level of confidence in that guidance range. And then, you know, as you talked about kind of rebounding to that average 3,000 sessions per day exiting Q2, you know, if we pull that forward or extrapolate to the back half, it implies some pretty nice upside. So, You know, how sustainable is that run rate? You know, how do we reconcile that with the guide? Are you expecting seasonality of vacations in Q3? And then I had a follow-up. Thanks.

You know, from a confidence perspective, again, the metrics that we continue to track remain extremely favorable. You know, I do think it's important to note that, you know, our capital team is essentially 100% new in terms didn't get out in the field until February 1st. You know, between February and the end of June, not only were they closing transactions, but also rebuilding their sales funnels. And that's what really gives us the confidence for the second half of the year. You know, the sales funnels are much more robust than they were at the start of the year. And now it's just a matter of, again, continuing that push on the capital side. From a treatment session perspective, Again, we track utilization and purchases daily, and we can see real-time the impact of the marketing programs. You know, the uptake and the precision pulse has been extremely positive, and, you know, those benefits are really incurred by system purchases and ultimately utilizations. And so we have real good insight into how those are progressing and and, you know, the level of utilization and purchases that those customers in the Precision Pulse are transacting. You know, we learned some lessons with the five-star. We've made some modifications. And, again, the progress to date has been extremely positive, and we believe with some of the adjustments that we've made, it will be even more positive for the second half of the year. You know, again, in looking at year-to-date treatment sessions, Compared to 2020, it's not a fair comp because of COVID last year, but compared to 2019 year-to-date, you know, we are above those levels through the end of June, which is a really positive indicator since the impact of these programs is just starting to impact us.

That's helpful, Collin. I appreciate that. And then just on the follow-up, maybe to dig into a little bit more on the capital side of things, You know, how would you assess the current status of the capital environment? You know, the capital came in a little bit light of our forecast, but it does sound like there's good appetite from customers at the recent sales events, and you're going to continue that initiative into the back half of the year. So is the expectation to see kind of a meaningful build in the back half? And anything that you guys are seeing from a competitive standpoint that's impacting system placement, or is it really – you know, just timing and kind of change in priority towards treatment sessions. Thanks so much for taking the questions.

Certainly. So we were very encouraged by our Neurostar Summit. You know, the fact that we could get 80 physicians and office managers to give up at least a day of their practice and at least a day of their family time was impressive, especially, you know, coming on the heels of COVID. So, you know, that they would travel down to Austin, Texas to learn about this product was impressive to all of us. I think we were very encouraged by it, and the level of response by those attendees was high, and they So we sold a number of systems out of that. As we said in the remarks, we expect to sell a number more as other physicians are building out offices and preparing their staff to get into Neurostar TMS. So I think the capital environment is rebounding. I think there is, you know, greater awareness out there as physicians From the TMS Society meeting, there was a lot of discussion about increasing volumes of TMS offerings within their practice. So, you know, I see this rebounding the way, you know, normal capital equipment sales are. And I think to be successful in that, I've always been taught that if you have five systems in your pipeline that you swear are going to close, you're going to get one. And so we just need to give our team time to be able to build up that pipeline, and they're doing so. So they're getting at those levels quickly. and they're building quarter over quarter as we had expected they would. On the competitive side, I would say in the first quarter we saw a significant presence from our competitors. This quarter we have not seen as much. So, you know, we are moving through our five-star program and our precision pulse program as quickly second to our great results that we offer, and our customers and potential customers are buying into all of that.

Appreciate the fulsome response. Thank you.

Our next question comes from Bill Povlanik with Canaccord.

Great, thanks. Good morning. Good morning. I'd like to dig into the BDMs a bit more if I could, Keith and Steve. So could you give us some color on, you know, where you are in terms of the number of BDMs today as you actually go into Q2 and go into Q3? What type of turnover you've seen in that? And kind of what you mentioned that the funnel is stronger. Any more granularity on kind of the funnel metrics would be helpful as well. Thanks.

So, good morning, Bill. So, we have 22 territories outlined, and currently we have 21 of those filled. We had a, I'll call it a company-sponsored departure earlier in the second quarter. But outside of that, we haven't had any turnover in that team. And I think as far as their Their opportunities, I think we mentioned that they had over approaching 400 opportunities in Salesforce in the first quarter, and I think we have not quite double that, but we have a significant number that were developed in the second quarter. So their pipeline is quickly growing, and events like the Neurostar Summit certainly help that.

Thank you. And then on the, you know, as you talk about the five-star program, just like to get a feeling for, you know, how many accounts are on that? How many have reached five stars? How long do you think that'll take? And, you know, what type of performance, once they hit all five stars, is that a, you know, just like the Precision Plus, is that a 15%, 20% improvement? Is that a 50% improvement? Kind of just help us understand the benefits as you drive these accounts through and kind of how many you have kind of going through that funnel today. Okay.

So as I mentioned, our first star is our clinical protocol, and the second is reimbursement and other office needs. So with those first two stars, almost all of our accounts are now listening to what the clinical protocol would be. They're all welcome our help on the reimbursement front doing benefits investigations and helping them identify what insurance companies, you know, they should be offering in their practices. So I think in our remarks we said close to 100% of our accounts are involved, and I think that's, you know, with those two stars, that gets us to that number. So it's star three, four, and five, that we are really focusing on. And star three is training the person who answers the phone in the reception desk to be able to talk to these patients. And then the second part of that is training the counselor on how to talk to patients within their practice and patients outside their practice. So, you know, I think today we have under 20 accounts that are at star five that are marketing outside of their practice on a regular basis. And I'm excluding our service providers from that number. But, you know, individual accounts that are at a star five level are generating, on average, $360,000 in practice revenue a year. So, There's a lot of upside on that. Even at 360,000, that's only treating about four patients a month.

Okay. And then last, thank you. That's very helpful. Thank you. Last question for me is just how many patient starts were there in the second quarter? Thanks for taking my questions.

Bill, we'll have to get back to you on that exact number.

Okay. Thanks.

Thank you. And as a reminder, if you have a question, please press star 1 on your telephone. We have a question from the line of Marie Thibault with BTIG.

Hi. Yes, good morning. Thank you for taking the questions. I want to try to dig into the utilization a little bit more. By my math, it looks like the average utilization for the quarter dipped below 3,000 per day by quite a bit. and I just wanted to try to get an understanding of just how substantial that mid-May dip was, and if you could give us sort of the utilization rate that you exited Q2 at. That would be very helpful.

Hi, Marie. This is Steve. Yes, the dip in mid-May was about 8% to 10% from a utilization perspective, and that lasted a few weeks. Again, surveying some of our top customers, That duration did fluctuate, and so some customers suffered from that dip a little bit longer while others recovered in early June. It was primarily right around Memorial Day is when I think the peak happened. But we saw it internally that we did get back to that 3,000 level in June, and we did exit the quarter at that level once again. So we are confident internally. we will be able to get to the rates that we do have built into our guidance. Again, as a reminder, Q3 seasonally is usually flat to Q2 just because of the vacations. I think that's going to be exacerbated this year since nobody took vacations last year. But again, that will be offset by the success of our programs and the training, education, and co-marketing efforts our practice consultants are pushing forward with.

Okay. So your Q3 guidance does contemplate pronounced summer seasonality. That's good to hear. And then I guess I just have to ask about communication because in April, you know, we heard the 3,000 treatment sessions per day metric. And then in June, you were at a Southside conference and discussed another encouraging treatment metric. Given that you have real-time track start data, why is this the first that we're hearing about the mid-May dip?

I don't think we had an opportunity or a forum to discuss it at the point. I mean, this is really the venue to talk about what happened in the quarter after the quarter.

Okay. And then I guess just a housekeeping one for you, Steve. Where were we at for active sites at the end of Q2?

Active sites, we were about 950. Okay.

Very helpful.

Thanks for taking the questions.

Thanks, Mary.

Thank you. And this concludes our Q&A session. I would like to turn the call back to Mr. Keith Sullivan for his closing remarks.

Thank you, Operator. And thank you again for joining us on the call today. We look forward to updating you on the progress next quarter. Thank you.

And with that, we thank you for your participation in today's conference. And you may now disconnect.