ClearPoint Neuro Stock: Strong Recovery Play Once COVID Subsides (NASDAQ:CLPT)

This article is contributed by Jun Hao from the Superstocks Seekers team.

Overview

ClearPoint Neuro (NASDAQ:CLPT) is a neurological platform company that allows neurosurgeons to perform minimally invasive procedures for the most complex neurological diseases, under real-time MRI guidance. Today, the ClearPoint Neuro navigation platform is involved in biologics and drug delivery for gene therapy, laser ablation, and deep brain stimulation.

This past year has been challenging for investors, as the share price has declined from a high of $30s to a low of $7 today. There are numerous factors we can attribute it to, rising interest rates, Ukraine-Russia wars, etc, you name it, but how much of it is to the fundamentals? Has the investment thesis turned sour to warrant the share price we see today?

In this article, we will be analyzing the Q4’21 results. We have also previously written a deep dive article and a recap on Q3’21 results.

Functional Neuro Navigation (“FNN”)

Financial Performance

The total FNN revenue grew by 30% annually to $2.1 million. This was mainly driven by the disposable revenue which came in at $1.91 million, an 18% YoY increase from a year ago, and the rest is contributed by an 800% YoY increase in service revenue.

Recall that a year ago, many hospitals were impacted by COVID, causing elective procedures to be put on hold and it affected the FNN revenue. This 18% YoY increase in disposable revenue shows that hospitals are resuming their procedures.

However, if we look at the sequential growth from Q3’21, you can see that disposable revenue has slightly declined. This shows that the case volume has not fully recovered. Furthermore, there is uncertainty as to when the COVID will subside.

Case Volume

Diving deeper, ClearPoint completed 239 cases during the quarter, bringing its total cases to 929 for FY21. Compared to Q4’20 cases, we can see that case volume is coming back, but the impact from COVID is far from over.

The Omicron virus continues to persist in Q1’22 as cases in Jan and Feb are affected and pushed back into March and April, with March expected to hit a record number of cases. Therefore we should expect zero to little revenue growth for the next quarter. This is a concern as COVID has proved to be a longer than expected headwind for ClearPoint.

But compared to the previous year, the situation has slightly improved.

Hospitals today are not stopping their procedures entirely, but merely pushing back their procedures to a later date. If these procedures are completed according to the timeline, we may see higher case volume and increased revenue in the back half of 2022.

But we should not also underestimate the impact of the Omicron virus, and the potential birth of new variants, which can continue to put pressure on case volume. In our view, there is no clear visibility as to when the situation will improve.

Management’s Long-Term Goal

As many investors would have recalled back in the UBS Conference, CEO Joe Burnett spoke about getting to the goal of 100 centers doing 100 cases each by 2025. This is equivalent to a total of 10,000 cases, putting them at a $100 million revenue run rate.

A big question to ask ourselves is if this goal is still achievable?

Knowing that in 2021, the total FNN revenue was $8.07 million, this means that ClearPoint has to grow at a CAGR of 87% to achieve a $100 million revenue. In our view, we think that this goal is too far-fetched.

Why? You may ask.

Firstly, most of the products in development are yet to be proven and there are uncertainties as to how successful its commercialization will be. Furthermore, these products take time to be fully released into the market, therefore, the revenue is not immediate. Recall that the Operating Room (“OR”) market is the largest market for ClearPoint, any delays in product launches or slow product adoption will hinder its growth.

Secondly, this is taking into consideration that the COVID will fully subside and case volume will return to normal. Note that the COVID has impacted the last 2 years’ case volume, and it does not seem to be going away in 2022. Who’s to say that it will not persist till 2023 and beyond?

All in all, we think that achieving a $100 million revenue will require a blue-sky scenario, and as of now, there are still a lot of things that have to happen first before we can see a clear path to this goal.

Biologics and Drug Delivery (“B&DD”)

Financial Performance

Let’s move on to the B&DD segment.

The total B&DD revenue grew 23% annually to $1.7 million, driven by the 61% YoY increase in disposable revenue, while the service revenue declined 7% YoY. However, if we do a sequential comparison, the disposable revenue has declined.

Similar to FNN, COVID continues to be a short to medium-term headwind as their partners have not fully resumed their clinical trials.

According to this quarter’s earnings call, in the past 1 year, the management has been hiring aggressively to provide pre-clinical services to their biopharma partners. And now that they have these people in place, they expect B&DD to be the fastest-growing segment in 2022 with growth driven by service revenue.

Growing Partnerships

Diving deeper, we can see that the number of biopharma partners remains unchanged sequentially in the quarter.

Though it seems like there were no new partners sequentially from Q3 2021 to Q4 2021, if we zoom out, the number of partners has increased tremendously since a year ago, with ClearPoint adding an average of 3 partners every quarter. As the number of partners increases, the probability of having multiple successful commercialization in the long term becomes larger.

This is also a recognition of the technology that ClearPoint has and the increasing demand from biopharma companies to have ClearPoint in their therapies.

Most notably, in the latest investor presentation, the management has indicated milestone payments for its biopharma partners. This means that if a partner who is using ClearPoint’s products enters into a clinical trial, or progresses into the later stage of the clinical trials (e.g. Phase 1 to Phase 2), ClearPoint will be receiving milestone payments, which are incremental revenues.

With 40 partners and growing, this may be incredibly accretive to its revenue in the future.

And during the earnings call, CEO Joe talks about the massive opportunity they are seeing in Europe:

These markets, of course, will take time to develop, but the sheer number of partnerships and opportunities we have today has diversified ClearPoint in a way that many individual therapy technologies cannot. We have many ways to win and to positively impact a large number of patient lives.

Commercialization Of Therapies

One of the main investment thesis for investors is the potential commercialization of therapies. Knowing that ClearPoint has over 40 biopharma partners, the probability of having one or more successful commercialization is high.

Similarly, we are also incredibly excited to see ClearPoint at the forefront of these therapies and looking at today’s valuation, we think that the market has yet to fully appreciate the massive value that these therapies can generate in the future.

What you see in the table above are the therapies that are in the later stages of the clinical trials, and this means that based on their progression, they have a higher probability of being commercialized.

One of the most anticipated is PTC-AADC. According to PTC Therapeutics (PTCT) Q4’21 earnings call, they are expecting CHMP (Europe FDA approval) and BLA (U.S. FDA approval) approval in Q2’22, which is once again delayed from the past quarters. However, PTC has included the projected revenue of PTC-AADC in FY22 guidance, suggesting that it may be approved this year.

This is just the start of the many therapies they are in today. While there are tons of optionalities, do recognize that these trials do take longer to be commercialized. For instance, PTC-AADC has been delayed for over 2 quarters.

Capital Equipment & Software

This quarter’s capital sales declined by 29% annually as ClearPoint was not able to place any new systems on hospitals’ sites due to the impact of both Delta Variant and Omicron Virus.

However, they are expected to hit a record number of system placements in 2022 as they were not able to do so in the last 2 years. Again, if the Omicron Virus continues to persist, it may hinder its ability to do more installations.

Reinvestment For The Future

Operating Expenses

Now, let us turn into the Operating Expenses.

During the quarter, we have observed several marketing initiatives such as Clear Education targeting neurosurgical fellows and ClearPoint Champions showcasing success stories of how patients have recovered from surgeries using ClearPoint’s technology.

Why is this important?

In over a decade, there have been limited improvements in today’s medical devices, such as the stereotactic frames that are huge and bulky. So, neurosurgeons are accustomed to using these tools, and therefore, it is challenging to get them to switch over. Having these marketing initiatives helps to drive more interest in ClearPoint’s technology, and helps to increase patient adoption as well.

Looking at the chart above, we can see that the Operating Expenses (“OPEX”) on a percentage basis are trending upwards. According to the earnings call, the management alluded these to investments in product developments, increasing headcounts to service their partners, and various marketing initiatives we had observed.

Profitability

Driven by these increased investments, Operating Losses and Operating margins continue to widen.

While we believe that these are necessary investments for the future, it is important to note that these product developments and clinical trials are still pending market releases or approvals, so there is no certainty as to how successful they will turn out or perform.

If OPEX continues to comprise a larger percentage of the revenue, this may be a growing concern for investors as it shows that the management is spending more money in return for lower revenue. This may accelerate their cash burn. Moving forward, we hope to see improving operational efficiency, and therefore, improving Operating Margins.

With that being said, CEO Joe Burnett does not anticipate raising additional capital:

Our cash balance at the start of the year was in excess of $54 million, and we do not plan to raise additional capital this year. We believe that we have ample cash on hand to continue our programs and to achieve a number of important value-creating milestones this year alone.

Valuation

With all that being said, we are currently in a dilemma of assigning a fair valuation to the company.

CEO Burnett has guided to about $20 million in revenue for FY 2022, which is about a 27% YoY growth. Based on how they are performing now, we think that this is reasonable. However, beyond that, There are lots of unknowns that could change the valuation of the company.

For instance, if any therapies were to be approved, this would accelerate the revenue and there will be a positive step-up in terms of valuation. However, any delays can continue to hinder its growth.

Coupled with the fact that it requires time for its new products to gather market acceptance, and the unpredictable nature of the COVID virus, there is limited visibility on what can happen in the next few years.

Thus, we find it incredibly challenging to come up with a fair estimate, and instead, we like to leave it to the floors to have a discussion.

Risks

Omicron

• The rise of the Omicron virus may continue to put pressure on procedure volumes in 2022 and beyond, therefore, functional neuro navigation (“FNN”) may continue to exhibit slower revenue growth as hospitals prioritize COVID patients. And there is also no telling if new variants will appear. Furthermore, COVID may continue to delay the timeline of the FDA approval.

Lack of Operating Efficiency

• The lack of Operating Efficiency over time tells us that investments are not translating into revenue growth. Currently, FY21’s Operating Expenses make up 151% of the total revenue versus 120% in FY20. This may grow larger over time as they allocate more capital to hire more headcounts, develop new products and add more partners. This poor operational efficiency can hurt shareholders’ value in the long run.

The Unpredictability of Future Commercialization

• There are uncertainties as to how successful these product developments and clinical trials will be. Therefore, it may hinder its revenue growth since one of its main investment thesis lies in successfully penetrating the Operating Room (“OR”) market and achieving multiple successful commercialization.

• Moreover, these products will take time to be fully released in the market before meaningful revenue can be realized, and therapies may take longer than expected to approve.

Conclusion

Like many companies, ClearPoint was not spared from the market drawdown, as its price multiple contracted from a high of 30x to 11x today. This was the main culprit of its share price decline.

Fundamentally, ClearPoint continues to face multiple short to long-term headwinds, but the long-term prospects are extremely promising.

Despite the tough environment, ClearPoint continues its expansion into the U.S. and Europe, and they are partnering up with 40 biopharma partners today, making this segment the largest and most exciting opportunity of the business, which we believe the market is not fully appreciative of.

CEO Burnett continues to take a long-term approach to reinvest its capital to grab hold of talents, accelerate its product development, and drive more marketing initiatives.

However, like any other business, there are multiple risks that investors should be wary of, which we have spoken about in the article above.

Nonetheless, we do not think that ClearPoint’s investment thesis has turned sour, but it may take a longer time to execute.

What are your thoughts on the quarter? Let us know in the comments below!