MRI Interventions Consolidates their Lead in Brain Operations and Drug Delivery

Context

MRI Interventions “ClearPoint” system is well-known in the neurosurgery space as the most accurate, least invasive way to perform brain surgery. It’s frequently used for deep brain stimulation, laser ablation and to deliver drugs to tiny areas in the brain to treat conditions like Parkinson’s Disease.

The company has grown consistently over the years but it’s still small. Late in 2017 a new CEO, Joe Burnett, was recruited to begin the next phase of growth and expansion from the existing base.

We covered Joe Burnett’s background in our November report, but since that time we have continued to speak with people who know him and current investors in MRIC that have had a chance to spend some time with him. The feedback confirms our own view that he is a good fit to help the MRIC team get the company to the next level of growth and begin to realize the potential of ClearPoint.

The company has recently started to lay out the key strategic initiatives that will drive results for the next few years. We’ll go through them in more detail and highlight how they tie back to the foundations of the company as described in our November report.[1]

The four elements of the strategy are:

1. Use best practices to make surgical procedures with ClearPoint more efficient for current indications – deep brain stimulation, laser ablation and tumor biopsy.
2. Increase penetration into drug delivery market.
3. Launch new therapy products including an MRI-guided aspiration device for ClearPoint.
4. Scaling the business model globally, and with additional products and services that can be distributed via the existing therapy partners.

These initiatives share the characteristic of requiring only marginal variable expenses and investments. They leverage the existing assets, technology and expertise of the company and should generate high returns on invested capital (ROIC) for shareholders.

[1] Our November report can be downloaded via this link: MRI Interventions: Becoming a Surgical Platform. http://s3.amazonaws.com/Published_Research/MRI_Interventions_MRIC_SV_Report_FINAL_NOV_2017_DISC.pdf

Ramping the Base

Availability of MRI system time has been a major governing factor for surgeons to use ClearPoint. It is steadily getting better but not at a rapid rate. MRI Interventions has worked extensively with leading centers and has developed an inventory of “best practices” that can be applied to their entire installed base.

For example, by ensuring that a procedure can be completed in under four hours means that a surgeon can schedule two surgeries during the same day of MRI time. Today in many centers surgeons don’t have that clarity. By shifting from one to two procedures a day, MRIC can accelerate their growth rate without adding a single center. Improved efficiency also makes each additional MRI machine or time slot worth more revenue. It also means that new system placements can ramp faster and reach a higher run rate.

This will also increase the profitability of MRI time to the hospital which is becoming a greater focus within the industry as healthcare providers begin to invest in improving profitability through better asset utilization. By doing two procedures in one day, the total revenue related to the MRI use for the hospital would increase to approximately $80,000 depending on the procedure.

In 2017, the company completed 629 procedures which generated “disposable product sales” of $5.3M. That works out to an average of one procedure per month per center. If surgeons can get two procedures in during one session and get one full session every other week (on average), it would work out to 24 days of MRI time per center per year x 2 procedures per day x 52 centers for a total of 2,496 procedures and $25M in disposable sales.

This isn’t going to happen overnight. But it’s a reasonable working expectation considering a viable surgical practice would tend to schedule procedures for every other week (excluding holiday weeks). The question is really when, not if.

One consideration that’s beyond the scope of this update is the advent of much better “yield management software” for healthcare systems in general and MRI rooms in particular. These systems are being deployed in some markets now and will continue to spread. As they do, it’s likely that MRI availability to high-value procedures like surgery will increase.

Drug Delivery has Huge Potential

Management is now breaking out “biologics and drug delivery systems” revenue separately and expects to garner additional drug delivery customers in the future. It will also help investors appreciate the growing importance of this area on the enterprise value of MRIC.

This year we will have existing customers like Voyager ramping their clinical trials and the prospect of additional drug companies beginning to use ClearPoint for their future trials.

To appreciate the potential for MRIC in terms of drug delivery you should refer to that section of our November Report. In summary, we took a probability-weighted estimate for each drug trial and applied that to the revenue potential for MRIC. For example, this chart shows the probabilities for drugs moving through clinical trials.

ClearPoint is already being used in a number of ongoing trials and they also have a number of undisclosed drugs that are using ClearPoint but in pre-clinical work. As these move into Phase, we will learn more about them and be able to include them in our drug delivery analysis.

New Products for Neurology

In this section, the potential for ClearPoint as a platform will become more apparent. First, let me oversimplify.

The ClearPoint system gets a doctor to a very specific area of the brain. At that point, it’s just a question of what “attachment” you need to perform the procedure – electrodes for deep brain stimulation, a laser for ablation and a catheter for drug delivery.

Many treatments require the surgeon to remove tissue via suction. By adding an aspiration attachment, the ClearPoint system can handle this function as well or better than existing methods. The ClearPoint system will always have an advantage in terms of control and accuracy. The Mayo Clinic is collaborating with MRIC in developing this technology for use in treating stroke and brain hemorrhage.

For example, in situations where there is an intra-cerebral hemorrhage, the aspiration capability would allow the ClearPoint system to treat it without requiring another system.

This isn’t in our model yet. It’s not yet clear if this will add to the number of procedures and/or increase the average disposable revenue per procedure. Once we know more we can factor it in.

Expanded Distribution

This is the most general of the four and fairly textbook in terms of business strategy. However, right now MRIC has very little presence outside the US and they could leverage their existing US-based channel to distribute additional products.

Given that MRI resources are not abundant in many economies, it’s not clear how much international expansion is possible in the near term. There may be products that can be added to the ClearPoint sales kit.

As long as they are truly adjacent and won’t disrupt or distract the channel, this can be another high-margin additive revenue stream. Our guess is that this is more of a long-term (2-3 year) component of the strategy.

Valuation and Investment Conclusion

Since we published our November 2017 report, the company has evolved to an improved focus and better operating plan.

More quantitatively, trials like Voyager’s have moved forward and are enrolling patients for the next phase, so there is better visibility on that.

All things considered, we now have a higher conviction level and believe that there is upside to our published model. Our Intrinsic Value (IV) target is now $16.65 after making a few modest tweaks to expenses, share count and the balance sheet.

If one applies the IV target, the capitalization of the company would be ~$185M. That’s still only a fraction of the total market potential. It’s also worth pointing out that increasing of ClearPoint drives greater demand for MRI equipment. A modest $100K ClearPoint system sale helps to drive additional sales of much more expensive scanners.

Furthermore, our forward estimates include quite a bit of the plan noted here but they under-represent any approved drugs that would be delivered with ClearPoint. These approved drugs are still years away so it’s reasonable to not fully include them from a five-year revenue analysis. Our probability-weighted model suggests an incremental $135M in potential revenue based on potential drug approvals in the next three to five years.

It’s unlikely that this potential drug delivery aspect of the MRIC stock story will forever remain unappreciated by the investment community, but the precise timing of when they will begin to be recognized for it is uncertain.

Please refer to the PDF of this report for additional disclosures.