Brainsway (TASE:BWAY) Q2 2020 Earnings Call

0:00 Greetings. Welcome to BrainsWay's second quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Bob Yeted with LifeSci Advisors. You may now begin. Thank you, Rob, and welcome to BrainsWay's second quarter. 2020, or in this conference call. With us today are BrandsWay's President and Chief Executive Officer Christopher Vaniaco and Chief Financial Officer Judy Huber. The format for today's call will be a discussion of second quarter trends and business updates from Chris, followed by a detailed discussion of financials from Judy.

0:52 Then we will open up the call for your questions. Earlier today, BrandsWay released financial results for the second quarter ended June 30, 2020. A copy of the press release is available on the company's investor relations website. Before I turn the call over to Chris and Judy, I would like to remind you that this conference call, including both management's prepared remarks and the question and answer session, may contain projections or other forward-looking statements regarding future events or the future performance of BrandsWay, including but now limited to Any statements related to commercial plans or activities, financial projections, clinical studies, R&D plans, and or anticipated timelines. These statements are only predictions, and BrandsWay cannot guarantee that they will, in fact, occur.

1:42 BrandsWay does not assume any obligation to update that information. Investors are cautioned that all forward-looking statements involve risks and uncertainties, such as reliance on third parties, and shifting market conditions, particularly the COVID-19 pandemic, which may cause actual results differ from those anticipated by BrainsWay at this time. Additional risks concerning factors that could cause actual events, results or achievements to materially differ from those contained in the forward-looking statements can be found in the company's registration statement on Form 20F, and its other filings with Securities and Exchange Commission. With those prepared remarks, it's now my pleasure to turn the call over to Chris Vaniaco, CEO. Chris?

2:33 Thank you, Bob. Welcome, everyone, and thank you for joining us today. Today we reported second quarter 2020 revenues of $4.8 million, which were below the revenues for the same period last year, but are nonetheless on the higher end of the guidance range, We are very pleased that this represented a 16% sequential growth over the last quarter despite the impact the pandemic has had on many medtech companies. As I described in the last earnings call, many clinics continue to progress toward near-normal operations, and most importantly, patients are steadily returning Many clinical practices have worked to develop protocols to allow patients back into their offices. A significant number of these clinics are offering a virtual, touchless treatment experience.

3:37 As continues to be noted in many press reports, the impact of COVID-19 extends far beyond physical health and is having a significant effect on mental health for many people. Unfortunately, this trend has continued to worsen as the pandemic continues. I will highlight just a few of the sobering statistics around this mental health impact. I previously noted the recent Census Bureau survey finding that one in three Americans are reporting symptoms of depression or anxiety. I would like to add that this is a staggering high rate since this is more than three times the rate from a similar survey conducted in the first half of 2019. Young adults especially seem to be struggling.

4:23 According to a survey by the American College Health Association, 41% of college students reported feelings of depression from March through May of 2020. Consequently, patient visits with psychiatrists are up over 40% during this period versus the pre-COVID period. While a lot of these visits occur via telepsychiatry platforms, this reflects an important increase in access to professional mental health care. This all serves to highlight how important a role BrainsWay needs to play with patients suffering from both depression and OCD, and we're trying to do exactly that. We continue to have an enthusiastic response from our current and potential customers with our increased focus on education and awareness. through both digital physician education programs presented by BrainsWay, as well as by attending various virtual industry conferences.

5:24 Specifically from April through July, about 2,800 registrants enlisted in the 44 webinars presented by BrainsWay. This is up from 31 webinars from our last earnings call, which was just seven weeks ago. We attended two recent virtual mental health conferences. The Elevate by Psych Congress virtual experience and the online OCD conference. The Elevate by Psych Congress included global mental health organizations and industry leaders, and the online OCD conference included individuals suffering from OCD, their family members and supporters, and the professionals who treat them. Both of these events were excellent opportunities for us to raise awareness around our innovative deep TMS treatment.

6:13 In addition, we are gaining meaningful traction with our newly launched streamlined website, which is intended to provide a more seamless web experience for both patients and providers. Education materials are now more accessible to meet the heightened need of people seeking treatment. Over each of the past two months, our organic user volume has increased monthly by 9% and 13%, respectively. with July reaching our highest volume in the past 12 months. We are encouraged by these results and believe this strategy will allow us to continue increasing market awareness of our groundbreaking TMS technology. Turning to our expenses, as clearly seen from the quarter's financial results, we continue to act aggressively to offset the effects of COVID-19 from a financial perspective without diminishing any of our core capabilities.

7:09 Our significant expense reduction program remains ongoing. However, as we mentioned on our last call in June, our financial results in the second quarter reflect that we are still in a challenging COVID-19 environment where physicians, like most other businesses, are hesitant to make capital expenditures and new financial commitments. In order to mitigate this, we have put an attractive lease pricing program in place. I'm pleased to report that we began to see an increase in orders towards the end of the second quarter. We believe this is reflective of an overall increase in the willingness of providers to resume operations and in patients to proceed with treatment plans that were, to some extent, halted early in the quarter with the shelter-in-place restrictions.

8:00 That said, we continue to operate in a dynamic and fluid healthcare environment as we see spikes in COVID-19 infection rates and various hotspots It is fair to say that at this point, we are encouraged by the general direction of the trend. I would like now to provide an update on some of the progress we have achieved recently with reimbursement. Let's begin with depression. As we mentioned on our last earnings call, there has been a recent trend of payers relaxing the reimbursement requirements for patients to allow for deep TMS coverage after failing just two prior antidepressant medications rather than the four failures previously required.

8:47 Now, Healthcare Service Corporation continued this trend. They are one of the largest Blue Cross Blue Shield health insurer groups in the United States, operating plans in Illinois, Montana, New Mexico, Oklahoma, and Texas. I'm pleased to report that on July 1st, They reduced their requirement from failing four prior depressions to two before being eligible for deep TMS coverage. This will increase access to deep TMS for nearly 16 million Blue Cross Blue Shield members in these five states. These prior treatment failure reductions are an encouraging trend for our business. You may recall in our last call that we announced similar reductions from Cigna and Aetna. We believe that ongoing adoption and implementation will positively impact our business as more patients now have access to DTMS or can qualify after fewer treatment failures.

9:48 In addition, I'm pleased to announce that PEHP, which serves Utah's public employees, is now for the first time covering BrainWay DTMS for depression. They cover over 170,000 lives. For OCD, we continue to work with payers in our efforts to secure reimbursement. As I said in our last call, in support of this effort, we recently gathered post-marketing clinical data of 192 patients from 22 deep TMS sites. Our analysis of this real-world data revealed that about 58% of OCD patients benefited from deep TMS treatment and that the onset of improvement usually occurred within about 18 sessions. We also saw that extending the treatment course beyond 29 sessions resulted in the continued reduction of OCD symptoms, raising the prospect of examining extended treatment protocols for this hard-to-treat disorder.

10:44 Again, we look forward to sharing these further details on the results of this postmarking study in the future. We're also working to bolster the already robust clinical data surrounding the efficacy of DTMS in depression patients even further. and we look forward to sharing this information with providers, payers and the investment community in the future. As far as our clinical pipeline, we have discussed in previous calls that in addition to our FDA cleared treatments for depression and OCD, we've had various ongoing or planned studies and several potential new indications for DTMS. Our discussions with the FDA on our 510 application for smoking cessation are ongoing and we plan to make Before turning over the call, I want to emphasize that Judy and I have significantly increased BrainsWay's overall outreach to the investment community.

11:43 We are sharing BrainsWay's compelling growth story as well as continuing to build relationships with both institutional and retail investors that will serve us well. We have had a great number of virtual one-on-one meetings with investors in Thank you, Chris. We continue to be pleased with the way our business is performing amidst the ongoing COVID-19 pandemic. Let's turn to our key financial results for the second quarter of 2020.

12:30 We generated quarterly revenue of $4.8 million, a decrease of 15% over the second quarter of 2019. Our recurring revenues, primarily derived from leases, were $3.4 million, an increase of 4% year over year. These recurring revenues were 70% of our total revenue. The recurring, reliable nature of the majority of BrainsWay's revenue is a highly attractive feature of our business. as most customers enter into three- to four-year leases for our deep TMS systems. Revenues for the first half of 2020 were $9 million, a decrease of 17% over the first half of 2019. As of June 30, 2020, BrainsWay's installed base holds a 557 deep TMS system, which reflects a quarter-over-quarter increase of 19 units.

13:18 Over the last 12 months, even taking into account the impact of COVID-19 over the past two quarters, have increased by 111 systems, or 24%. As Chris noted, in response to the impact of COVID-19 on our business, we initiated a cash preservation program in late March with the goal of increasing efficiency and managing spend without impeding our growth efforts. This program remained in place throughout the second quarter. This included cuts to sales and marketing activities, temporary employee salary reductions, as well as postponing certain product development projects. That said, the company is still proceeding with its broader growth strategy, as demonstrated by certain recent sales hires. We remain highly focused on properly balancing our cash preservation and prudently managing our balance sheet during this temporarily challenging period, with the need to appropriately invest in the long-term acceleration of our business.

14:12 Moving on, gross profit for the second quarter of 2020 was $3.8 million, compared to $4.3 million during the prior year period. Gross margin for the quarter was 79% compared to the second quarter of 2019 gross margin of 76%. This increase was due to lower manufacturing overhead costs as a result of our cost reduction efforts. Gross margin for the first half of 2020 were approximately 7 million or 78% compared to 8.3 million or 77% during the prior year period. Research and development expenses for the quarter were 1 million as compared to 2.4 million in the second quarter of 2019. and primarily consisted of costs associated with the continued development of our patented DTMS technology. Research and development expenses for the first half of 2020 were $2.8 million as compared to $4.1 million in the prior year period. Sales and marketing expenses for the quarter of 2020 were $2.2 million, a decrease of $1.1 million over the prior year period.

15:12 The decrease is in line with the company's efforts to enhance efficiency as well as to lower operational expenses given the financial impact of the ongoing COVID-19 pandemic. Sales and marketing expenses were $5.9 million for the first half of 2020 as compared to $6.1 million in the prior year period. General and administrative expenses for the quarter were $824,000 as compared to $1.4 million in the prior year period, again, due to our focus on expense control. G&A expenses for the first half of 2020 were $2.1 million as compared to $2.4 million in the prior year period. Total operating expenses for the second quarter were $4 million compared to $7 million in the same period last year. Total operating expenses for the first half of 2020 were $10.8 million as compared to $12.7 million in the prior year period. Operating loss for the second quarter was $215,000 compared to $2.7 million for the same period in 2019.

16:09 Operating loss for the first half of 2020 totaled $3.8 million as compared to $4.3 million in the prior year period. For the second quarter ended June 30, 2020, we incurred a net loss of $571,000 compared to a net loss of $3.5 million reported in the second quarter of 2019, a year-over-year improvement of $2.9 million. Our coordinated efforts to reduce costs resulted in BrainsWay's realizing substantial reduction in our net losses both year-over-year and sequentially. It should be noted that some of these cost reductions were one-time occurrences, such as furloughs, and not expected to continue in subsequent quarters. Net loss for the first half of 2020 totaled $4 million, compared to $5.4 million in the prior year period. As for the balance sheet, the end of the quarter with cash and cash equivalents was $17.8 million, compared to $21.9 million at December 31, 2019.

17:06 Cash used during the second quarter was in line with our expectations, given that most of the COVID-19 cost reduction efforts were implemented in the second quarter. We believe that our strong balance sheet will allow us, at the appropriate time, to expand our sales and marketing efforts, to drive additional adoption of the DTMS system, and to continue to invest in R&D in order to explore new potential indications for our innovative technology. We continue to operate in a rapidly evolving healthcare environment. and although most clinics are now open and many patients have returned for treatment, as Chris noted, restoring the necessary commercial confidence of clinical practices to enable them to integrate DTMS is a process. With that said, based on the initiatives we put in place to raise awareness of DTMS, the progress we've achieved with reimbursement and our ongoing cost-cutting measures, we are confident that significant momentum in our business will emerge once the impact of COVID-19 subsides. With that, Chris will conclude before taking your questions.

18:04 Chris? Thank you, Judy. To conclude, we're proud of the resilience demonstrated by our loyal and growing customer base during this unprecedented period. We're honored to partner with them to provide our groundbreaking treatment to those who need it most. I would also like to thank our committed employees for their continued support and dedication, which has produced significant achievements during the first half of the year, Despite the challenging environment, we continue to conduct business in. With that, I will now ask the operator to please open up the call for questions. Operator? Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question today, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue.

18:55 You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question is coming from the line of Jeffrey Cohen with Leidenberg Salmon. Please receive your question. Hi, Chris and Judy. How are you? Good. How are you doing, Jeff? Just fine. Good morning. Nice ads of 19 for the quarter. Can you kind of correlate with us what that looks like as far as patients and treatments and number of centers that are open?

19:43 Trying to get a better understanding of how the lease payments track April, May, June, and number of centers and your comments about highest volume in 12 months. So utilization or patients or number of centers? Thanks. Thanks, Jeff. So to talk about the number of centers, you know, I think at the lowest point, I think we may have mentioned that we had probably on the majority of our centers stayed open during the COVID period, probably, you know, somewhere in the 60 to 75% range. And we believe that we're probably now up over about, you know, probably close to the 80, 85% of the range with centers being open.

20:29 Did that help answer your question, or do you have something else specific about that? So the open center lease volumes were theoretically down 20 or 30 percent in April or May, it sounds like is what you're saying. And then talk about the volume a little bit. Judy, you mentioned the highest volume in 12 months in July. So could you talk about that as far as, Are you referring to number of treatments, number of patients, number of centers, or all of the above? I don't know if we said the highest volume in July, Jeff. Judy, I don't think you said that, right? The highest volume in July? No, I think we saw increasing orders in our highest order volume in June is what we said.

21:16 June. Yeah. Okay. Highest order volumes in June. Okay. In the past 12 months. Okay. No, no, no. I was referring to actually web presence, our website visit. That might have been what you were talking about, which we saw highest organic growth in our web presence in June. That may have been what you were referring to, but we did have a good number of orders that we got in June. So as you know, our focus really on April and in May was really focused really on education. and you know things started to open up in June and we put a number of these things in place regarding special promotions from a leasing perspective and we saw a very good high volume of orders towards the end of June which I think was which is a great trend and we obviously hope that continues.

22:17 Okay, got it. And then lastly for me, Judy, talk a little bit about the back half OpEx and We did see a significant reduction in OPEX in Q2 as a result of the efforts that we made. I think that, as I also noted, some of those were discrete and that they were kind of one-time occurrences, such as the furloughs and the temporary salary reductions. So we don't expect those to continue. And we are looking and continue to review the investments that we're making in the back half of the year to be able to enhance the growth strategies that we have in place.

23:08 So I do expect that we will see increases in OPEX in the Q3 and Q4 timeline. Not quite as high as probably the Q1 area, but definitely higher than what we see in Q2, given the one-time nature of some of the cost reduction measures that we had. Okay, got it. Thanks for taking the questions. Thanks, Jeff. Our next question is from the line of Jason Bedford with Raymond James. Pleased to see with your questions. Hi, good morning, and I hope everyone is doing well. Just a few questions. On the increased order flow at the end of June, can we assume that this is continued in July and early August?

23:56 Good morning, Jason. What I'll say is that we've had, I think, still good trends happening. Probably not to the extent, again, within our business, and I think we've talked about this in the past, typically most of our order volume happens in the last month of the quarter. But we've been presently surprised with the number of orders that we received early in this quarter as well. So we feel pretty positive, but we're cautiously optimistic, I would say. Okay. And just the order flow in June, was that more a fulfillment of the backlog that had been built, or was this – So it's a combination.

24:48 I think that we definitely had a fair number of new orders in June that we received. But given the fact that a lot of the centers were closed in April and May, we definitely had some fulfillment of orders from either the end of Q1 or the first part of Q2. So I think that the majority of orders that we received in Q2 were new. Okay. And I apologize, I missed the exact comment, but you alluded to some favorable pricing terms. Is that something that will continue, and are you seeing a direct impact from pricing? Yeah, we're not, you know, giving favorable pricing terms.

25:35 I think what we're doing is, so we're not reducing our ESPs or anything like that. What we're doing is we're working with our financial partner just to make the ease, at least in the beginning, as they acquire the technology a bit easier. So we're pushing the payments out a little bit. That's what we're doing. Okay, got it, got it. Yeah, so the specific there. and then just a couple others. The gross margin strength, you mentioned lower manufacturing overhead and I realize it's going to jump around a bit but is this kind of high 70s a working level going forward? I think we remain optimistic that we will continue that.

26:20 Obviously this quarter again we were given that fact that we did have some Temporary salary reductions and furloughs, which was a direct impact on the manufacturing overhead, we do see that impact in this quarter. But I think that we should be in the upper 70s going forward as well. Okay. And then maybe lastly on the pipeline, an OCD, when are we going to see the publication of the post-market post-approval data And then, you know, can you talk about maybe the influence that may have on getting reimbursement? Yeah, so I think we mentioned on the last earnings call, I think we're hopeful that we'll see, you know, in the fall publication, you know, the publication.

27:08 I can't dictate, obviously, what's happening with the journals and how the review process has happened, but I think we'll probably see in early fall. I think it's additional ammunition that we could use talking to the payers, and they're always looking for more data, and obviously seeking peer-reviewed data is the best. So, I mean, that's basically where we stand right now. Okay. I'll jump back in queue and let someone else ask. Thanks, Jason. Our next question is from the line of Steve Lichtman with Oppenheimer & Company. Please proceed with your question. Thank you. Good morning, guys.

27:53 Chris, it sounds like you're getting a lot of participation in the webinars. Any color, either qualitatively or quantitatively, you can provide on sort of how that's been feeding the pipeline of new customers? Steve, great question. Good morning. We started this effort, I think, probably very quickly and probably quicker than some other medtech companies. And it's been amazing because we've gotten some of our customers involved in this process. And we really started it probably in April. And we continue that efforts all the way, you know, even through last week. I think I mentioned we did about 44 of them to date. We still have more that are planned. Thank you very much.

29:00 Ido Marom, Colleen Hanlon Ido Marom, Colleen Hanlon Ido Marom, Colleen Hanlon Thank you for joining us.

30:56 Reductions were better than our thinking. I think on the last call you talked about still thinking about adding Salesforce. Can you talk about that a little bit, about how you may be more aggressive on that front, even while you're keeping OPEX down? Yeah, thanks, Steve. Great question. So, in fact, we have added two additional salespeople in the last month. since the last earnings call. So now we're up to 14 salespeople. So we're continuing to kind of watch that balance. And, you know, currently today we still have some additional salespeople in our forecast for the second half of the year.

31:43 But, again, we're watching that balance. Yeah. Thanks, Chris. Thanks, Judy. Thanks, Steve. Thanks, Steve. Our next question is from the line of Kyle Mixon with Cantor Fitzgerald. Please proceed with your question. Hi, Chris and Judy. Thank you for the questions. Just given there is an uptick in COVID cases in certain regions, we're wondering if you have a sense of whether there is risk of prolonged or permanent customer shutdowns. And also, is there any chance your customers in this type of situation would return their system? And I guess how would that affect your economics? Yeah, thanks, Kyle. Good morning. I don't want to call it a new normal, but we're in this state where we've seen patients really come back to our providers.

32:36 And it's been kind of steadily as the education with patients over the last couple of months. So, again, April and May was really very quiet. They were continuing to treat the patients that were on treatment, but they were definitely taking less patients on. And that started to really change in June and continues in July. So they're starting to take on new patients. We haven't had any specific returns relating to any customer shutdowns at this point. However, we have experienced a slowdown in some payments for customers due to the inability for them to reopen their practice.

33:26 So for these customers, we have stopped recognizing revenues. which has hampered our recurring revenue growth, although we expect that many of these centers will open back up and the revenues will resume. So we're not expecting the impact from returns. And Kyle, I'll just add on a positive note there, we have had over the last several weeks customers that currently have systems that have reopened and are looking to expand as well or have stayed open the whole time and have wanted to expand because of the Height and nature of what's happening with depression and around OCD. So it's been on the other side as well. Yeah, that's extremely helpful. Thanks, guys. And I know you did talk about, you know, volume and I guess the flow recently, but can you talk about specifically new patient starts and how that kind of trended towards the end of June and maybe more recently in July, if you can? I know Greenbrook posted some impressive metrics in this area recently and just wondering what you guys saw.

34:28 We saw very similar things to what Greenbrook was presenting on the earnings call last week as well. The data that we have shows exactly the upward trend as well. I think, again, in this new normal with COVID, Patients, you know, this particular thing, I mean, it is a medical necessity. I think it was pointed out also last week on their call. You know, patients really need this treatment, and they are going and seeking the treatment, which is great, and they're just learning sort of this new normal of how to go, and I think our customers have been amazing about the way they have been really stepping up and allowing sort of these virtual or sorry, like touchless experiences of the way they're going into the clinics and getting the treatments completed.

35:23 So I think it shows really good progression. Okay. That's pretty helpful. Thanks. And also going back to Greenbrook, imagine how their turn is called, that they don't anticipate OCD, TMS, getting reimbursement in 2020. That's reasonable, obviously, but is that also your expectation? And I'm just wondering what kind of holding it back is COVID the main I saw Bill's comments around that. I think we could have, and again, I don't want to jump in front of myself here, but we could have some experiences with some insurance companies, but obviously widespread is going to take a little bit more time, people looking for additional data. But at the same time, we have centers that have had have worked with denials and have received reimbursement.

36:15 It's just an effort to get it there. We're hopeful. We're excited about the data getting published, and we'll continue to move forward with the number of insurance companies that we've been speaking with. Okay, that's fair. Then I have to keep the question on OCD. How many coils were placed in the quarter? Judy? Judy? So we're up to a total of 185 coils currently. All right, that's perfect. Thank you so much, guys. I'll leave it there. Thank you, Kyle. Appreciate it. Our next question is a follow-up from the line of Jeffrey Cohen with Ladenburg-Fellman. Oh, hey, I wanted to jump back on the OCD bandwagon as far as the MagVenture approval yesterday for OCD. Do you think that that helps the landscape as far as... Two corporations out there now presumably deriving data and pressing on the payers.

37:17 Yeah, Jeff, thanks for that. Yeah, we saw that announcement yesterday. And, you know, it's obviously too soon to really kind of understand what MegVenture did. But, of course, if there are several companies that have it, it always helps with insurance companies. But again, I'm looking forward to kind of seeing sort of the data that they have with their OCD approval. Okay, got it. Thanks for questioning. Thanks, Jeff. Thank you. At this time, we've reached the end of our allotted time for question and answers, and I'll turn the floor back to management for closing remarks. Thanks so much. In conclusion, I'd like to thank all the investors and the other participants for the interest in Brain's Way. And with that, please enjoy the rest of your day.

38:09 This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.